BAA has the making of a Southern Rock


(From left): Virgin’s Paul Charles, easyJet’s Andy Harrison, Virgin’s Steve Ridgway, bmi’s Nigel Turner, Ryanair’s Michael Cawley

There were four pretty angry airline bosses in the room last week as an unprecedented alliance of carriers reacted with fury to the UK Civil Aviation Authority’s decision to impose huge price rises at Heathrow and Gatwick.

And indeed the numbers do look quite startling. At Heathrow, BAA can charge £12.80 ($25.75) per passenger in 2008/09, an increase of £2.44 or 23.5% from last year’s cap. After that it can subsequently raise the charge by retail price index (RPI) plus 7.5% per year until 2013. Gatwick is not quite as steep but is nonetheless noteworthy with a £6.79 per passenger charge this year, up £1.18 or 21%, with raises of RPI plus 2% permitted each year afterwards.

The language was quite vitriolic from easyJet chief executive Andy Harrison – “BAA has the making of a Southern Rock,” Virgin’s CEO Steve Ridgway – “We need an umbrella of protection,” to bmi chief executive Nigel Turner – “This will make the UK aviation industry squirm.”

Strong stuff indeed and the media was out in force to report on a) what was a very good story (when was the last time you saw easyJet and Ryanair in the same room?) and b) came in the same week that huge speculation centred on BAA Spanish owners Ferrovial’s significant debt that sees it having to service £800m of interest alone this year.

But maybe, just maybe, BAA will be able to have the last laugh. Despite brave talk of boycotting the increases, the very idea was firmly slapped down by Ryanair deputy CEO Michael Cawley with a: “We are all law-abiding citizens,” riposte.

For what seems like a lifetime now UK airports – and those in the south east in particular – have endured withering criticism from a rag, tag and bobtail grouping of assorted politicians, greens, passengers, suppliers and yes airlines.

But BAA can rightfully reply that in order to overcome those – legitimate – concerns it needs a massive cash injection to fund what will clearly be a vast system of improvements. Airlines, passengers and BAA all want that, so why are the carriers so angry?

The gang of four is convinced that at the heart of these staggering rises are the twin issues of BAA ownership and the role of the CAA as regulator. They collectively argue that Ferrovial’s “highly leveraged speculative acquisition” of BAA using nearly £9bn of borrowing is forcing the operator’s hand to raise cash through the blunt instrument of airport charges.

Secondly, they maintain that the problem lies with the CAA in the form of its Economic Regulation Group, which uses the “no longer fit for purpose” Airports Act of 1986. The four insist that the only way to address their worries is to break up the BAA airport monopoly – accompanied by a price control regime – while at the same time as allowing competitors to BAA to build and operate terminals.

But if BAA says it is to spend a cool £5bn in the next five years upgrading Britain’s creaking airports, where do the airlines think the money will come from? Even if their wish list came true, it would take some considerable time before the monopoly break-up and any concomitant trickle effect could work its way through.

In short, what is the short-term solution? BAA argues – much to the incredulity of the four airlines that it actually needs more cash: “The review does not recognise sufficiently the scale of the task we are embarked on, the pressures of handling such large infrastructure projects and the impact of the credit crunch.”

The last one appears to becoming a sort of template for all and sundry with any economic woe, but BAA does not say how many more billions it actually needs.

Ferrovial must rue the day it took on such a leviathan and there has been widespread talk that it is looking to divest some airports to raise some money – a view flatly denied by BAA commercial director Dr Duncan Garrood at last week’s Aviation Club lunch. There has nonetheless been considerable chatter that Gatwick is being fattened up as a first sale, while last week’s disposal of World Duty Free Europe for £500m+ to Autogrill – surely that won’t become WDF’s new moniker? – has also temporarily eased the pressure.

To add to this heady cocktail is the thunderously contentious mooted addition of runway capacity in the South East. Stansted has formally submitted its application for a second runway, while the endless debate about a third one for Heathrow is bogged down in argument and counter-argument.

And all the while that these shenanigans go on, Frankfurt, Amsterdam, Paris et al, quietly go about their business of attracting jobs and investment – not to mention disgruntled UK passengers – through their shiny new doors.

And it’s not just airlines operating into the main UK domestic airports that are spitting feathers either. Take this from Flybe chief commercial officer Mike Rutter, on the Gatwick situation:

“In any marketplace where the airlines are exceptionally competitive, to award what are essentially monopolistic profits and a licence to print money to an unproductive and uncompetitive company is nothing short of a national disgrace. We always knew that the CAA cared little about the UK regions but this announcement proves it, as they reward BAA for years of failure and profligacy with a fat cat rise.”

The Queen formally opened T5 last week to a huge, collective sigh of relief from British Airways and just before the bizarre march to Waterside planned by the massed legions of militant pilots.

Is the rest of the UK aviation industry having to fork out for the mightily impressive glass and steel structure now open at Heathrow? Or are in fact, they putting their hands in their pockets to fund a Spanish company’s extraordinary mountain of debt?

Simon Warburton
Editor, ABTN

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