"BAA battles to hold on to its airports"

Sunday, April 1, 2007

BAA battles to hold on to its airports
Heathrow’s Terminal Five opens in a year’s time, but its owner BAA faces
threats to its dominance of Britain’s airports. Dominic O’Connell reports
United Kingdom - The Times of London


IN a cavernous basement in west London, a couple of hundred suitcases sit in
little blue carts whizzing round what looks like the world’s biggest
Scalextric set. 

Welcome to the behind-the-scenes testing at Terminal Five, the gigantic
addition to Heathrow airport that will open for business in a year. 

Everything about T5 invites superlatives — including the 20-mile baggage
system already running in the basement. 

It is Britain’s biggest free-standing building. The public inquiry that gave
it planning permission was Britain’s longest. Its construction — it was
Europe’s largest building site — burnt up £4.2 billion. When it opens next
March, it will in one gulp swallow half of Heathrow’s 68m passengers a year.


The smooth introduction of T5 would be enough of a management headache for
most company bosses, but for Stephen Nelson, chief executive of the airports
operator BAA, the mammoth undertaking is the least of his worries. 

Nelson, who has been in the job for eight months, may have the most
challenging to-do list of any British executive. 

Item 1: Get rid of the queues Last year BAA had an annus hor-ribilis, with
new security measures in August and fog at Christmas bringing its airports
to a halt. BAA was ridiculed for its response to the crisis, with Willie
Walsh, British Airways’ chief executive, accusing the company of not having
proper contingency plans. 

While improvements have been made, progress through airports is still slow
at peak times, with next week’s Easter getaway promising to be a real
challenge. Nelson has recruited 1,400 extra security staff, and set a tough
goal of processing 95% of passengers within five minutes — excluding,
however, peak traffic periods. 

Item 2: Keep on building One month after T5 opens, the bulldozers will move
in to demolish Terminal 2, one of the ageing buildings that have given the
airport such a bad name. “It will give me more pleasure to press the plunger
to get rid of the place than it will to cut the ribbon to open T5,” said
Tony Douglas, Heathrow’s chief executive. 

In its place, BAA plans to build Heathrow East, a new terminal even larger
than T5. The plan goes before the local council next week, and to Ken
Livingstone’s Greater London Authority in a fortnight. 

The timing is crucial. The opening of T5 creates some once-in-a-lifetime
breathing space at Heathrow, with spare terminal capacity allowing work to
be undertaken without disrupting passengers. Lose the opportunity, and the
growth in passenger numbers and clamour from airlines for terminal space
might mean it quickly becomes too difficult to do. 

To give Livingstone some incentive to say yes, BAA said Heathrow East would
be open in June 2012 — just in time for the Olympic Games. 

Item 3: Deal with a potentially nasty Competition Commission inquiry On
Friday the Civil Aviation Authority (CAA), which sets the prices BAA can
charge its customers, referred the company to the commission. It is an
automatic referral, one that happens every five years. 

But this one will be anything but run-of-the-mill. The CAA wants to set
BAA’s prices so that it will earn a 6.2% return on its assets, rather than
the 7.75% it wants. Nelson said it was not enough to justify the £9 billion
investment planned over the next 10 years, and could derail the Heathrow
East development. 

BAA left the stock market last year after it was bought for £16 billion by a
consortium led by Spain’s Ferrovial in the world’s largest infrastructure
deal to date. “Ferrovial shareholders could invest, for example, in an
electricity utility and receive a greater return for much less risk,” said
Nelson. 

His problem is that BAA has said similar things at each previous review —
only for the CAA to be made to look foolish when the Spanish saw so much
value in the company that they bought it at almost a 50% premium to its
share price. If the Competition Commission backs the CAA’s judgment and
thinks Nelson is crying wolf, it will be back to the drawing board for BAA’s
big investment plans. 

Item 4: Deal with the other Competition Commission inquiry BAA finds itself
in the rare position of having two Competition Commission inquiries into its
activities at the same time. The second, expected to be confirmed within a
fortnight, questions not BAA’s prices, but the very basis of its existence.
It will decide whether the company’s dominant position in Britain is
anticompetitive — it owns seven of the biggest airports, including the three
London hubs, Heathrow, Gatwick and Stansted, as well as both big Scottish
airports at Glasgow and Edinburgh. 

Nelson bristles at the idea that BAA might be broken up. “The issue is not
about ownership, it is about having the right kind of incentives,” he said. 

His airline customers disagree. Just about every airline that responded to
an Office of Fair Trading questionnaire on the issue urged the break-up of
BAA, with British Airways, its biggest single customer, particularly eager
to separate the ownership of Heathrow and Stansted, the two airports in
southeast England where new runways are planned. “We consider it vital that,
where there is new capacity coming on line, there should be competition
between its owners,” said a senior BA executive. 

The likelihood of a break-up has led some analysts to speculate that
Ferrovial might see which way the wind is blowing and decide to break up the
company itself. But Luis Sánchez Salmerón, Nelson’s deputy and the man
responsible for liaising between the company and its shareholders, said
Ferrovial wanted to retain its British assets. 

Asked if the Spanish were committed to holding on to the three London
airports, Salmerón said: “We are committed to all seven [airports in the
UK].” 

Item 5: Build more runways As well as rebuilding terminals at Heathrow,
Nelson has an additional construction task, and one that will prove much
more controversial. He plans to build two new runways in the southeast, the
first in the region for 30 years. According to government wishes, the first
will be at Stansted, the second at Heathrow. 

Despite government backing, the planning hurdles will be enormous. The
public inquiry into T5 took four years — and that did not involve any more
flights into the airport, just more terminal space. The antirunway campaign
at Stansted is already in full stride, and the scale of opposition at
Heathrow, which is close to the centre of London, can only be imagined. 

The plan — at the moment — is for the Stansted runway to open around 2013,
with Heathrow coming into the frame only after 2015. But there are subtle
signs the timetable might be shifting, with Nelson himself referring to
“twin-tracking” the two projects. Proof of the government’s — and BAA’s —
desire to press ahead with development at Heathrow may come this summer,
when a consultation paper from the Department for Transport on the future of
the airport is expected. 

The consultation document was expected to be mainly about “mixed mode”, a
way of increasing the throughput of Heathrow’s two existing runways. But
senior sources at BAA, British Airways and London business groups now say
they hope — and expect — there will be a full consultation on a third
Heathrow runway at the same time. 

Bringing forward a new runway at Heathrow could prove to be the biggest
challenge of Nelson’s reign — and it would of course, require the
construction of yet another terminal, T6.

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