Few people passing through Dublin airport could criticise the impressive look of the new Pascall + Watson-designed second terminal. Built at a cost of €1.2bn (when other improvements at the airport are thrown in), T2 will see its first flight land this Friday and full services beginning in the coming weeks.

Anyone who remembers the nightmare queues checking in and passing through security at the existing terminal will welcome the opening of the 75,000sq m building. The new terminal, which will create 400 new jobs in its retail outlets, can handle about 15 million travellers very comfortably, bringing overall passenger capacity at the airport to 35 million.

The problem for the Dublin Airport Authority (DAA) is that its capacity is doubling at time when tourism numbers into Ireland have slumped and the recession has curbed outward travel, hitting its income. Traffic at the airport collapsed by 13% to 20.5 million last year – the first decline in passenger numbers in almost two decades – and will fall further this year. Traffic was down 10% in the first 10 months of the year (though the decline would be lower if the effects of the volcanic ash disruption in April and May were excluded).

According to figures released by the Central Statistics Office last week, the number of visitors to Ireland was down 8.3% in the third quarter from a year ago and has dropped nearly 16% in the year so far.

The expansion plan for the airport, which includes a new passenger pier (Pier D) at the existing terminal and an upgrade of other facilities, has saddled the DAA with massive debts and a hefty annual interest bill. When it opens, T2 will cater for all Aer Lingus flights, those of Middle East carrier Etihad and the four American airlines operating out of Dublin. Still, when all their traffic is combined, the terminal will be operating at just over half of its capacity.

So will the DAA, which recorded losses in 2009, be able to recoup the outlay on the new terminal?

"Terminal 2 is a 40-year investment, and like all long-term infrastructural projects, it has a long payback period," a DAA spokesman said. "The DAA's liquidity is strong. We had €635m in cash and €560m worth of undrawn borrowing facilities at the end of our last financial year and based on our current expectations we are fully funded until 2014."

While business groups and passengers will welcome the new terminal, the DAA's biggest customer, Ryanair, claims the project is a mistake. The airline's chief executive, Michael O'Leary, said the borrowing needed to pay for the terminal will be recouped only by upping charges for passengers and that is damaging his business and that of other airlines using the airport. He claims it is unfair for passengers not using T2 to pay to recover the DAA's costs. O'Leary had been in favour of a second terminal but says the cost of the building has exceeded what is needed given the declines in passenger numbers.

"What they have is a beautiful building in the same way as the Taj Mahal is beautiful. It's just pretty much useless. It is 60% too large and it never needed to be built that big," O'Leary said in an interview. "It will never pay for itself. The only way out of the mess the DAA is now in is to sell Shannon [airport], sell Cork [airport], sell T2 and sell terminal one and let them compete to drive traffic growth. Leave the DAA to run the shared services, which is the runways, carparks and ramps," O'Leary said.

O'Leary wants the terminal mothballed as passenger numbers are unlikely to recover for some time. Ryanair has cut back on its capacity from Dublin and will continue to do so until O'Leary gets passenger charges reduced and the €10 travel tax scrapped.

"Anyone who has gone through terminal one knows it's empty because traffic has fallen. But instead of doing the sensible thing that any developer would do – mothball the one you don't need – [they won't] because it would embarrass the government," he added.

That is a charge rejected by the DAA, which believes Dublin has an edge over other major European airports. The terminal has pre-clearance for US customs, meaning those passengers who get on a flight out of Dublin can travel like domestic US passengers. As Dublin is the only one in Europe with the pre-clearance, the authority believes it will attract new airlines that do not currently serve the airport.

"Growth will come from both additional capacity on existing routes and new routes from existing players as well as from new entrants. We are in talks with airlines in Europe, the Middle East, the Far East and China about starting new services to Dublin. We are also still in negotiations with Air India about possibly relocating its European hub to Dublin," the DAA said.

It also believes passenger numbers will recover in the near term. Internationally, airlines are seeing an improvement, and while overall passenger numbers here this year were down there was a 1% increase in October.

"Traffic growth is linked to economic performance domestically and in the markets of our major trading partners. A recovery is already under way in some of our key trading partners and the Irish economy will return to growth," the DAA said.