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The break-up of BAA Limited October 2008 Download PDF

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Faced with a critical Competition Commission (CC) report, BAA has gone for a pre–emptive sale of Gatwick.

The next couple of years could be very busy for airport transactions, what with the partial sale of AENA’s airports in Spain, the sale of Prague airport and now the biggest prize of all, the sale of Gatwick. BAA announced its intentions on September 17 with a process expected to take 12 months. If that timetable is adhered to, it is likely that the sales process proper will start early in the new year, with a three month bidding process in the spring followed by three months to completion.

UK airports are uniquely attractive, with a 20–year history of private sector investment and a thriving after sales market in airports due to the use of 100% freehold sales backed by a regulatory system designed to ensure service delivery at a reasonable price.

Ironically, the proposed sale of Gatwick is due to the CC’s ruling that BAA has failed to invest and has not dealt with service failings. This was precisely what regulation was supposed to prevent. The forced sale is, of course, the ultimate sanction in the regulatory process.

While the CC points the finger of blame almost entirely at BAA, other observers might suggest that at least some of the blame lies with the UK Department for Transport and the UK Civil Aviation Authority for their role in the lack of investment in new runways in the South East and the consequent decline in service, which in part can be attributed to the systematic over use of runway capacity leading to a situation where delays are endemic and terminals undersized.

Summary of report findings

So what has happened and what are the opportunities arising?The Competition Commission has published its findings on whether or not BAA — the owner of seven UK airports including the three main London airports — should be broken up. The report is damning in its tone, even if the evidence does not necessarily point that way. To quote the chairman of the inquiry group, Christopher Clarke: "We have provisionally found that there are significant competition problems arising from BAA’s common ownership of seven UK airports (Heathrow, Gatwick, Stansted and Southampton in England, and Edinburgh, Glasgow and Aberdeen in Scotland). This is evident from a large number of factors including its lack of responsiveness to the needs of its airline customers and a lack of initiative in planning capacity. This has resulted in investment that is not tailored to the requirements of airport users and lower levels and quality of service for both airlines and passengers.

We have also provisionally found that there are competition problems arising from the planning system, aspects of government policy and the system of regulation."

As for remedies, the proposals are for the forced disposal of two out of the three London airports and one of Edinburgh and Glasgow. To quote Christopher Clarke again: "We are seeking views on which two of BAA’s three London airports should be sold and similarly which of Edinburgh or Glasgow airports should be sold. We do not expect to require the sale of either Southampton or Aberdeen airports. The problems at Southampton would be remedied by the sale of either Heathrow or Gatwick. At Aberdeen, we are seeking views on whether there is a need for behavioural remedies or some form of regulation. Additionally, we are seeking views on the need for additional behavioural remedies or some form of enhanced regulation at Heathrow, whether or not there is a change in ownership, to address the competition problems arising from it being the only hub airport in the South East."

Clarke then warns that regulation will also need to adjust: "Changes in ownership would only be a first step in freeing up the market and providing greater scope for more flexible development. Changes to regulation may similarly be important and there could be benefits available from a less prescriptive government policy on airport capacity development though we recognise decisions on such policies, which are wholly for government, will be taken in a broader decision framework."

If this report were adopted largely unchanged then it would seem inevitable that BAA will be broken up. BAA has gone for a pre–emptive sale of Gatwick, but that might not be enough. The CC has set out its preferred option of disposal of three out of the seven airports. However, this is not necessarily the final outcome; the UK government — and in particular the Department for Transport — will be very conscious of the political dimension. Indeed the DfT, and its antecedents, are also identified as being part of the cause of the problem. So the favoured option is probably:

  • Sale of Gatwick
  • Sale of Stansted
  • Sale of one of Edinburgh or Glasgow

However, it is possible that the BAA shareholders, led by Ferrovial, will take the view that with three prime assets sold, the benefit of keeping Heathrow with one of Edinburgh and Glasgow plus two smaller airports is not the most efficient solution, and may therefore prefer to own just Heathrow.

In the well–developed UK airport market, all of the BAA’s airports would be attractive in their own right as they are 100% freehold sales — an opportunity that rarely comes available in the global market for airports.

Indeed combining BAA’s airports into groups (for example, Aberdeen and Glasgow) could well reduce the total sales proceeds, as bidders would prefer to concentrate on airports that fit their investment criteria without having to take on another airport that is perhaps not such a good fit.

The three South East issues Assuming that the process of disposal is in line with the CC recommendations, then the key issues for bidders are as follows:

  • What regulatory regime will be in place?
  • What is likelihood of developing additional runways in the South East?
  • How will the aviation market react to differing runway development options?
  • What will be the regulatory regime post break–up?

To network carriers, Heathrow is generally viewed as the only airport they want to serve. Apart from services to City airport, network carriers other than BA and Virgin have only served Gatwick under sufferance and would prefer to fly from Heathrow.

Hence Heathrow is — and probably always will be — an airport with significant market power requiring regulation on fees and service delivery.

So the regulatory regime at Heathrow is likely to be an enhanced version of what is already in place:

  • A price cap per passenger based on a target return on regulated assets;
  • A service delivery contract with airlines with penalties for failure to delivery; and
  • A specific set of investments agreed at each regulatory review.

Although Gatwick and Stansted have less market power than Heathrow, in the medium–term it seems unlikely that these airports will be subject to lower levels of regulation as there is an ever increasing shortage of capacity in the South East until one or more runways are built. Although dates as early as 2015 have been mentioned for a new runway, a more realistic date is probably 2020 given the degree of public and political opposition to any of the options and the need to go through a lengthy planning process. The likelihood of a general election in the UK during this timeframe (with the strong possibility of a change in power) also adds to the uncertainty.

However, in the medium–term, given an increase in runway capacity, it is possible to imagine a reduction in the regulatory burden, perhaps towards a high cap on price and possibly based on benchmarking against equivalent airports in Europe. Experience at Stansted has already shown that BAA has found it hard to raise its fees to the level of the cap, and its two main customers — Ryanair and easyJet — have shown themselves as highly capable negotiators prepared to cut capacity if they feel prices are too high.

If there continues to be a gap between the allowable fees cap based on return on assets, there would be an argument for removing Stansted — at least from a formal price cap to the fallback system used at UK regional airports where airports have a duty to provide pricing information to users, and users can take the airport to the regulator if they feel the fees are not cost justified or discriminate against them.

The fallback system of regulation has existed for 20 years in the UK. The result has been the development of a unique market based pricing system at UK regional airports, which enables charges to be negotiated between airline and airport with both parties comfortable that competitive pressures ensure an acceptable outcome. Significantly, under the fallback system it can be argued that pricing is probably closer to being cost related than most formal systems of regulation, as those sectors that impose the highest costs in terms of investment or throughput (charter and network carriers) end up paying higher charges than those airlines that maximise the use of existing facilities and spread their loads efficiently (low cost carriers). Significantly, although market based pricing has been subject to a handful of challenges, none have been successful.

The likelihood of additional runways in the South East?

So the outlook for regulation in the South East is a continuation of the same system, tighter in terms of obligations at Heathrow and possibly a move towards lighter regulation eventually at Gatwick and Stansted should their market power be reduced by the provision of capacity elsewhere. Providing additional runway capacity in the crowded South East has been the stated aim of the British government since the 1960s. After examining many sites, it was decided to construct a new "Third London Airport" airport in the Thames Estuary (Maplin). However, the fuel crises brought an end to this plan on grounds of cost and environmental problems.

This left the government falling back on the development of Stansted as London’s new "Third Airport" and Stansted (then a very minor airport) was chosen to be developed using the existing single runway, with outline plans for a second parallel runway. The "new" Stansted opened in the 1990s, since when development in the South East has been limited to the North Terminal at Gatwick, Terminal 5 at Heathrow and London City airport.

Opposition to the provision of additional airport capacity is intense at all locations, so no major runway has been provided (apart from the limited use London City runway) since the end of the Second World Wa,r despite a chronic shortage of runway slots in the region. So the South East market has had to struggle with five major runways (two at Heathrow and one each at Gatwick, Stansted and Luton) plus the London City runway.

The inability to construct runways is largely due to an understanding between BAA plc and the transport department (currently the Department for Transport) over planning policy. These two parties had a tacit agreement only to advance one major capacity–enhancing project at a time in the South East. This was aimed at reducing problems with Britain’s time consuming and expensive public planning process.

Although the current planning process is seen as poor, only limited improvements in timing or cost are likely to be achieved for political reasons. Within this cumbersome planning process, there are three possible new runway sites:

  • A third parallel runway at Heathrow, to the north of the airport which will involve the demolition of residential properties and inject further traffic into an area that is already considered to be heavily congested. This is the industry’s preferred option and has a large economic benefit. However, the level of opposition cannot be overstated; it will be a brave politician who proceeds with this option. Indeed, Conservative party leader David Cameron, likely to be the next British prime minister, has already stated his opposition.
  • A second parallel runway at Gatwick to the south and west of the current runway. Again, some residential properties will have to be demolished and there will be local opposition. There is also an agreement between BAA plc and the local government authority not to start construction of a new runway until 2019. Although this agreement could be overturned by central government, that measure would run into intense political opposition in the UK parliament. The industry prefers Heathrow to be built first, but will probably support a second runway at Gatwick in the long–term.
  • A second parallel runway at Stansted to the south and east of the current runway. This is the politicians’ favourite option as there will be less opposition at national level (even though local opposition exists). However this option is opposed by the industry as it is in the wrong location. It is also opposed by the airlines based at Stansted (principally Ryanair and easyJet) as they are concerned about increases in landing fees that may be necessary to support such an investment.

In order of demand, the choice backed by the Treasury and airlines is straightforward:

  • Heathrow;
  • Gatwick; and, lastly, if ever:
  • Stansted.

However, driven by environmental and local opposition the politically–preferred answer supported by the government of the day and Department for Transport is:

  • Stansted;
  • Heathrow; and, lastly, if ever:
  • Gatwick.

A separately owned Stansted may well find the economics of developing a second runway unattractive for a very long time, in which case Gatwick becomes a more attractive option. However, the case for Heathrow will always be put forward by the airlines based there ahead of the case for Gatwick. So choosing the location of a new runway for London remains one of the trickiest decisions in the aviation industry.

Just to add to the complexity of choosing runway locations, the mayor of London — Boris Johnson — has said he favours a Thames Estuary site off the Isle of Sheppey (conveniently some distance from any of his constituents). Given the enormous cost of an offshore airport and associated transport infrastructure, this is viewed as a low probability option that has been raised and dismissed in the past on various occasions. How will the airline industry respond to differing options? Given the constrained nature of the current South East airport system, any new runway capacity will experience a rapid take–up of capacity. A third runway at Heathrow will experience a "land–grab" as airlines try and capture market share:

  • BA will look to build a proper wave pattern of traffic, predominantly east–west in orientation. It will add secondary destinations in Europe (many currently served from Gatwick) and move the remainder of its transatlantic operations (except possibly its leisure–orientated services) out of Gatwick to Heathrow. It will also add frequencies on major routes where these are low compared with competing hubs in Europe. The increase in BA traffic will largely be transfer traffic — something that has not escaped the attentions of the environmental lobby.
  • bmi and Virgin will both participate in the land grab in order to protect the value of their operations and to try and build an improved competitive position. Their role in a land grab will become stronger if they are owned or co–owned by members of global alliances. bmi already is already 30% owned by Lufthansa. Virgin Atlantic may find itself in a similar position if Singapore Airlines sells its stake, possibly to Lufthansa or a Middle East carrier.
  • Many other airlines will want to add capacity at a Heathrow with a third runway; US carriers will look to move almost all their flights from Gatwick (as indeed has happened with Continental this winter). Also interested will be those airlines that sold their slots at Heathrow and moved to Gatwick.

So in the short–term there will be a rapid filling up of available capacity at Heathrow, some at the expense of Gatwick and some through reduction in average aircraft size. Given that any third runway at Heathrow will be subject to stringent noise and environmental constraints, it is likely that additional capacity will be phased in. There is also the possibility that runway capacity will be limited to a lower level of utilisation (say 80%) compared with that currently achieved in order to reduce the number of delays that occur at Heathrow. If a limit of about 80% were introduced, that would limit movements to an increase of about 25%, not the 50% in the minds of many. There is a further constraint in that the third runway will not be a full length runway but about 2,500m, limited to short- to medium–haul flights only.

A second runway at Gatwick would also see a land–grab by airlines for slots, partly to meet pent–up demand and partly to deny slots to competitors. Whether British Airways is interested in adding flights at Gatwick largely depends on what is happening at Heathrow. The major airline to seek more slots is likely to be easyJet, looking to consolidate its role as Gatwick’s largest airline. In the medium–term it is possible that Ryanair would also look to add capacity at Gatwick, seeking a greater share of the low–cost market south of the river Thames.

• No additional runways

• Second runway at Stansted

• Third runway at Heathrow

• Second runway at Gatwick

Based on the above analysis and long term forecasts (in part based on the CAA’s November 2007 long–term forecasts), it is possible to produce a number of scenarios for traffic in the South East.With no additional runways (but mixed mode at Heathrow, see chart above) this is the sort of scenario that would have competing hubs in Europe rubbing their hands with glee. The London system cannot sustain the sort of growth it has seen in the past. As a result, transfer traffic would spill to other hubs in Europe, air fares would rise, the number of routes would diminish and delays continue to increase, damaging the economic health of London and the UK as a whole. This scenario illustrates why the UK treasury and airlines are pushing so hard for extra capacity to be provided.This is the government’s preferred option as it will be easier to pass through the planning system. Most airlines are not in favour as they prefer expansion at Heathrow and to a lesser extent Gatwick. Almost all the growth would occur on LCCs at Stansted, and Heathrow airlines would surrender some short–haul market share to make room for more long–haul traffic.This is the preferred option of industry and the Treasury, and it is easy to see why, as it generates the most traffic with the addition of one runway. As soon as the runway opens it is possible to anticipate a rapid build up of traffic only limited by ATC limits on movements. Some of this traffic would come from Gatwick and London City; the remainder would come from a mix of increased transfer traffic (given a more efficient transfer product) and pent up demand stimulated by lower fares.The fact that this option was not even mentioned in the CAA November 2007 forecast (due to the agreement between BAA and the local authorities not to develop a runway until after 2019) illustrates how elements in Whitehall and BAA have sought to maintain a single planning path with no room for alternate options.

• Third runway at Heathrow and second runway at Gatwick

The opportunities arising from the break-up of BAA

A second runway at Gatwick has a slower build up than the Stansted option due to an assumed opening date of 2022. The capacity would mainly be taken up by a mix of LCCs. One long–term possibility is the emergence of a full–scale hub operation if Heathrow was heavily constrained, either by British Airways or by another airline grouping, possibly built around Virgin Atlantic (which has expressed an interest in having its own dedicated terminal at Gatwick).This maximises traffic in the system. For the first time it is possible to see growth rates in the South East that are in line with the sorts of growth rates one would expect to see if traffic was largely unconstrained. However, it still does not resolve the constraints in the early years; only a radically improved planning system can achieve that. As the final option illustrates, London really needs not just one but two runways.• Heathrow

Heathrow is the airport least likely to be sold by its current owners due to its premium position in the market as London’s global hub and the busiest international airport in the world.

Apart from its role as the main airport for London, Heathrow also serves as a long–haul hub dominating the transatlantic market and with a strong market presence to all long–haul markets with the exception of South America.

The main hub airline is British Airways, which operates from the new Terminal 5 and from Terminal 3 (once terminal reallocation is complete). British Airways is a founding partner of the one world alliance and works closely with partners including American, Qantas, Cathay Pacific, Iberia and Japan Airlines. Due to the lack of slots at Heathrow, BA’s hub is not efficient in that there are no effective connecting complexes. BA also has to operate flights out of Gatwick to serve some destinations that it would prefer to serve from Heathrow. All or some of the Gatwick flights might move to Heathrow if a third runway was built.

A second hubbing operation is provided by bmi in partnership with Star alliance members. bmi has an extensive short–haul operation to UK regional destinations and major destinations in Europe, the FSU and the Middle East. However, the airline has found it difficult to sustain profitability and has recently altered its strategy by moving to medium–haul routes and purchasing BMed (another medium–haul operator formerly operating as a BA franchisee) in a bid to improve profitability.

The other Heathrow–based airline is Virgin Atlantic, operating long–haul services across the Atlantic and to other major long–haul destinations, using bmi to provide some feeder traffic.

Apart from the three based carriers, Heathrow is served by all major European and long–haul airlines. For most long–haul airlines, serving Heathrow still remains one of the most sought after routes, given the size of the London market for air travel.

The role of Heathrow as a hub has diminished with the emergence of global alliances and the shortage of runway slots. With the Open Skies agreement between the EU and the US coming into force in spring 2008, slots were changing hands for in excess of US$50m a pair (Continental paid a total of US$209 for four pairs of slots). As a result, airlines apart from the based airlines are increasingly serving Heathrow as a terminating point rather than as a hub. Star alliance airlines hub at Frankfurt and SkyTeam airlines hub as Paris CDG; both airports having effective connections and a wider range of flight destinations (if not frequencies).

A third runway would significantly enhance Heathrow’s competitive position in Europe with the ability to add new frequencies or destinations. In the absence of a third runway, Heathrow’s airlines will concentrate on longhaul and high–yielding short–haul business routes, with secondary routes moved to Gatwick (and some to London City) or dropped altogether. Overall, if there is no third runway Heathrow is likely to become increasingly a long–haul airport.

  • Gatwick

Gatwick is the world’s busiest single runway airport, and Gatwick’s role in the London system is complex:

  • The biggest scheduled operator is now easyJet, which has built its largest base at the airport serving a wide range of destinations in the UK and the rest of Europe, a position consolidated with its purchase of GB Airways, a former BA franchisee.
  • British Airways operates a wide range of scheduled flights serving the local market (having about 20% of the South East market) and a wider range of leisure–dominated routes.

Up until March 2008, Gatwick also benefited from traffic distribution rules contained in the US–UK Bermuda II bilateral agreement, which meant that a large number of US routes were forced to use Gatwick rather than the preferred option of Heathrow. As a consequence, since March 2008 many US services have now moved to Heathrow and, in time, it may be expected that the US carriers will probably withdraw from Gatwick in their entirety.

The airport is also the primary charter airport for the South East, serving a wide range of destinations in the Mediterranean basin, the Caribbean and beyond, many of which are not served by scheduled airlines.

A second runway at Gatwick would lead to a land–grab similar to that at Heathrow, with the main participants being UK–based airlines led by easyJet and possibly Virgin Atlantic, British Airways and Ryanair. The announcement by Richard Branson — Virgin Atlantic’s chairman — that he would be interested in being part of a consortium to bid for Gatwick does open up the possibility that Gatwick’s role could evolve into one similar to Newark in the New York system, whereby Gatwick becomes the hubbing airport while Heathrow becomes the main O and D airport. Branson has suggested that he is interested in Gatwick if he can obtain a dedicated terminal. Logic suggests that in order to make this project worthwhile Branson would need to develop a feeder network, as currently the only airline offering feed at Gatwick is British Airways.

A new terminal complex would need to be constructed to handle traffic from a second runway.

Conversely, what happens if there is a third runway at Heathrow but no second runway at Gatwick? As soon as a third runway at Heathrow opens, there will be a land grab for all the available slots, led by British Airways. In theory, some 500 slots per day could become available (it might be less if the introduction was phased or capacity capped).

If short–haul took 400 slots, that would equate to 130 short–haul aircraft plus 100 long–haul aircraft being added at Heathrow. For British Airways, some of that capacity would have to come from Gatwick; say 15 long–haul aircraft plus 40 short–haul aircraft with more capacity being provided by new aircraft. That would mean BA’s entire Gatwick operation being moved to Heathrow virtually overnight. Virgin Atlantic and other scheduled airlines could also look to move their flights from Gatwick to Heathrow. However, that would leave the Gatwick market unserved by scheduled carriers, other than the LCCs — a situation which would leave BA vulnerable. So in practice, it is likely that BA might maintain some short–haul services at the airport to prevent this happening.

Meanwhile, the low–cost carriers would look to replace any short–haul routes abandoned at Gatwick, as will any long–haul low cost carriers should they exist at the time.

  • Stansted

Stansted’s role is three–fold: First, it is the London base for Ryanair (the dominant airline) and easyJet (a smaller base inherited from the purchase of Go). Both airlines operate extensive low–cost services to points in the UK and other parts of Europe.

Second, Stansted plays the part of a regional airport serving the North East quadrant of the South East market with a limited network of charter services and some failed attempts to serve as an alternate long–haul airport to London. The presence of Ryanair and easyJet acts as a strong deterrent to any network carrier to operate short–haul flights at the airport; as a consequence, these carriers prefer to serve this market in a limited way from London City airport.

Third, Stansted acts as a specialist cargo airport for London, having the advantage of 24–hour operation and a 3,048 metre runway.

Currently, Stansted is the government’s preferred option for a new runway for the South East. However, there is currently no pent–up demand for additional capacity at Stansted, as Ryanair and easyJet are objecting to the increases in fees necessary to construct the new runway and associated terminal and access projects while Heathrow- and Gatwick–based airlines have shown no enthusiasm for using Stansted as a third London airport (short–haul airlines prefer to use London City).

Should a third runway be provided at Heathrow or a second runway at Gatwick, there may be some moving of capacity to Gatwick, as flights from Gatwick achieve higher yields.

If no runways are provided elsewhere then the case for a second runway at Stansted improves as time goes on, simply due to lack of capacity elsewhere. So in the longer–term the project may well become viable, but it will rely on a significant shortage of capacity elsewhere in the South East and a willingness of Stansted airlines to pay significantly higher fees than they do at present.

  • Southampton

Southampton is a regional airport handling some 2m passengers at present. The site is heavily constrained as it is hemmed in by roads and rail lines limiting significant further development. The airport currently serves the catchment area in its immediate vicinity. but it is linked by rail to London Waterloo on a fast line taking about one hour, and so does have potential to capture some overflow traffic. The runway is some 1,650 metres in length, limiting operations to turboprops and some jet aircraft flying to medium–haul destinations. The main operator is flybe, a low–cost airline flying Dash 8–Q400s and Embraer ER100s. flybe operates to a wide range of domestic destinations and specialises in services to the Channel Islands. In addition, flybe provides services to a number of nearby European destinations as well as to some low–cost destinations, including niche French regional destinations. Although flybe is a low–cost operator, its fleet means that its costs are slightly higher than conventional low–cost airlines, so it is subject to competition from Bournemouth and Gatwick airports. In addition to these scheduled flights, there are a small number of charter flights that can operate from the runway to destinations in Spain.

  • Scotland

BAA owns three airports in Scotland, Edinburgh Glasgow and Aberdeen.

The main competition issue concerns the two Lowlands airports, Glasgow and Edinburgh. Until recently, Glasgow was the largest airport, serving the largest city. For historic reasons Glasgow — as well as serving its local market — also acted as the preferred choice for long–haul airlines and charter flights.

However, in recent years a combination of competition from Prestwick (Glasgow’s second airport) and the growth of Edinburgh in its roles as capital city, financial centre and short–break destination has meant that Edinburgh is now Scotland’s busiest airport — a lead that will be further boosted by the opening of a Ryanair base (delayed until November 2008).

This active competition, led by the rapid development of low–cost flights at all three Lowlands airports, has a resulted in a very healthy growth of 6.5% AAGR over the last 10 years. Glasgow airport (3.8% AAGR) has lost market share as a result of competition from Prestwick (15.6% AAGR) and Edinburgh (8.1% AAGR).

Despite some evidence of competition existing, there has always been a feeling that common ownership of the Lowlands airports by BAA plc has somehow limited the development of new services, with very similar fees structures and a common marketing programme.

Therefore, the Competition Commission has recommended the sale of either Glasgow or Edinburgh, leaving two airports, one of which is Aberdeen. As has been suggested elsewhere, shareholders may decide to sell all three airports, or two airports including Aberdeen.

Historically, BAA’s Scottish airports have been very centralised with legal and commercial activities provided from a Scottish airports head office based at Glasgow. For that reason alone, Edinburgh could be the easiest airport to sell off.

In view of Edinburgh’s track record of faster growth and a lack of a nearby low–cost competitor, Edinburgh is also likely to be the most attractive to the market.

Aberdeen serves the North East of Scotland, with a heavy dependence on oil exploration and technology. In recent years, Inverness — the airport serving the capital of the Highlands — has had growth (6.4% AAGR) and is providing some effective competition to Aberdeen.

Because of Aberdeen’s low growth rate (3.0% AAGR over the last 10 years), the growth rate of the two airports combined is just 3.6% AAGR; in part reflecting the diversion of some traffic through the Lowlands airports due to the greater availability of low–cost flights and in part due to the long–term decline in oil exploration activities based at Aberdeen.

Separate ownership of terminals?

Because of the structural decline of the oil industry, Aberdeen is likely to continue growing slowly and hence is a different proposition to both Edinburgh and Glasgow to investors. So to include Aberdeen as a bundle with one of the other BAA–owned Scottish airports is not likely to maximise the value as it does not have the usual growth story favoured by many investors. An alternate and/or parallel option to the enhanced regulatory package above for Heathrow and possibly other London airports would be to consider separate ownership of one or more terminals.

With Heathrow terminals moving towards a split along alliance lines, it is conceivable to consider separating out three terminals. Terminal 5 (100% BA occupied) is one obvious target for separate ownership and management as — to a lesser extent — are Terminal 4 (SkyTeam) and Terminal 1/Heathrow East (Star). That leaves Terminal 3, shared between one world and other mainly nonaligned airlines as a common use terminal best suited to management and operation by the airport operator. However, given that Heathrow will always be a very constrained airport, a degree of regulation and co–ordination covering access to terminal capacity would still be required even if price regulation were relaxed to allow for differential charging.

Separate terminal ownership does have four drawbacks:

  • The possibility of less efficient use of scarce terminal capacity;
  • Impediments to new entrants wanting to introduce services at Heathrow;
  • A lack of reasonable alternatives for airlines in alliances as they can only choose between the alliance terminal and Terminal 3; and
  • Increased financing costs reflecting the risk of more variable income for each terminal operator.

So even under this scenario regulation is still likely even if the fee levels between terminals could differ depending on the levels of service sought. In practice, despite some airlines arguing for separation on the grounds of increased efficiency, tariffs are more likely to go up as airlines compete for premium passengers on service rather than go down due to increased throughput and cost efficiencies. Airline or specialist terminal management companies do provide some excellent terminals:

  • Munich 2 (a 50:50 joint venture between Munich Airport and Lufthansa);
  • Sydney Terminal 3, run by Qantas as its domestic terminal; and
  • New York JFK Terminal 4 (run by a consortium of Schiphol, LCOR and Lehman Brothers).

So it is not beyond the realms of possibility, not just at Heathrow but also at Gatwick, where the North Terminal is a possible separation candidate — as would be any new terminals at both Gatwick and Stansted. Indeed, it may be a way of making the low cost carriers — in particular Ryanair and easyJet — put their money where their mouths are. Both these carriers rightly point out that current terminal designs are far from the simple no–frills terminals they seek, as current designs were built to handle transfer traffic and not optimised for point–to–point traffic.

A busy time ahead

So far, the only airline that has emerged to show an interest in a dedicated terminal is Virgin Atlantic, which has expressed an interest in having a dedicated terminal at Gatwick. British Airways has remained silent, despite having 100% of Terminal 5 at Heathrow. So it looks as though the political will exists for BAA to be broken up, and BAA itself has accepted that reality. At the very least Gatwick will come to market in 2009. More likely, if the CC achieves its aims, three attractive airports will come to market: Gatwick, Stansted and one of Edinburgh and Glasgow. The process could lead to the voluntary sale of the remaining airports, including the other of Edinburgh/Glasgow and Aberdeen and Southampton.

Depending on how the South East runway debate runs, the new owners could either end up with a business built around optimising throughput off existing runways or have the option at Gatwick to build a plausible competitor to Heathrow. At Stansted, the key consideration will be how to handle Ryanair and easyJet should a new runway be possible.

Both the major Scottish airports are attractive, especially Edinburgh. As the current sales process for Belfast City has shown, even smaller regional airports in the UK have a ready supply of buyers keen to access 100%-owned airports in stable markets.

All in all, the BAA airports should have no problems finding buyers, with the key considerations coming down to understanding the technicalities of UK regulation and also the political framework that supports and controls it. A secondary issue is dealing with the real issues of competition, price and service.

No additional runways
No additional runways
Pax (m) 2007 2010 2015 2020 2025 2030
Heathrow 68 70 75 80 85 85
Gatwick 35 35 40 40 45 45
Stansted 24 25 30 35 35 35
Luton 10 11 15 15 15 20
London City 3 4 5 5 5 5
Total 140 145 165 175 185 190
AAGR   1.2% 2.6% 1.2% 1.1% 0.5%
Second runway at Stansted
Second runway at Stansted
Pax (m) 2007 2010 2015 2020 2025 2030
Heathrow 68 70 75 80 85 85
Gatwick 35 35 40 40 40 40
Stansted 24 25 30 40 55 65
Luton 10 11 15 15 15 20
London City 3 4 5 5 5 5
Total 140 145 165 180 200 215
AAGR   1.2% 2.6% 1.8% 2.1% 1.5%
Third runway at Heathrow
Third runway at Heathrow
Pax (m) 2007 2010 2015 2020 2025 2030
Heathrow 68 70 75 100 120 135
Gatwick 35 35 40 40 40 40
Stansted 24 25 30 35 35 35
Luton 10 11 15 15 15 20
London City 3 4 5 5 5 5
Total 140 145 165 195 215 235
AAGR   1.2% 2.6% 3.4% 2.0% 1.8%
Second runway at Gatwick
Second runway at Gatwick
Pax (m) 2007 2010 2015 2020 2025 2030
Heathrow 68 70 75 80 85 85
Gatwick 35 35 40 40 60 70
Stansted 24 25 30 35 35 35
Luton 10 11 15 15 15 20
London City 3 4 5 5 5 5
Total 140 145 165 175 200 215
AAGR   1.2% 2.6% 1.2% 2.7% 1.5%
Third runway at Heathrow and second runway at Gatwick
Third runway at Heathrow and second runway at Gatwick
Pax (m) 2007 2010 2015 2020 2025 2030
Heathrow 68 70 75 100 120 135
Gatwick 35 35 40 40 50 60
Stansted 24 25 30 35 35 35
Luton 10 11 15 15 15 20
London City 3 4 5 5 5 5
Total 140 145 165 195 225 255
AAGR   1.2% 2.6% 3.4% 2.9% 2.5%
Heathrow 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Pax (m) 57.8 60.4 62.0 64.3 60.5 63.0 63.2 67.1 67.7 67.3 67.9
Growth YoY   4.3% 2.7% 3.7% -5.9% 4.3% 0.3% 6.2% 0.9% -0.5% 0.8%
Market share 61% 59% 57% 55% 53% 54% 53% 52% 51% 49% 49%
Note: Market share of all five London airports (Heathrow, Gatwick, London City, Luton and Stansted      
$m         Financial Year to: Mar-04 Mar-05 Mar-06 Dec-06 Dec-07
Revenues             1,684 1,987 1,913 1,732 2,551
Operating result             680 825 794 615 877
Margin             40% 42% 42% 36% 34%
Gatwick 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007  
Pax (m) 26.8 29.0 30.4 31.9 31.1 29.5 29.9 31.4 32.7 34.1 35.2  
Growth YoY   8.4% 4.7% 5.1% -2.7% -5.1% 1.3% 5.0% 4.1% 4.2% 3.2%  
Market share 28% 29% 28% 28% 27% 25% 25% 24% 24% 25% 25%  
Note: Market share of all five London airports (Heathrow, Gatwick, London City, Luton and Stansted      
$m           Financial Year to: Mar-04 Mar-05 Mar-06 Dec-06 Dec-07  
Revenues               527 572 579 533 815  
Operating result               170 185 178 135 196  
Margin               32% 32% 31% 25% 24%  
Stansted 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Pax (m) 5.4 6.8 9.4 11.9 13.7 16.0 18.7 20.9 22.0 23.7 23.8
Growth YoY   27.3% 37.8% 26.0% 15.1% 17.5% 16.6% 11.7% 5.2% 7.7% 0.3%
Market share 6% 7% 9% 10% 12% 14% 16% 16% 16% 17% 17%
Note: Market share of all five London airports (Heathrow, Gatwick, London City, Luton and Stansted      
$m         Financial Year to: Mar-04 Mar-05 Mar-06 Dec-06 Dec-07
Revenues             259 281 297 279 485
Operating result             70 76 87 79 172
Margin             27% 27% 29% 28% 36%
Southampton 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Pax (m) 0.6 0.7 0.7 0.9 0.9 0.8 1.2 1.5 1.8 1.9 2.0
Growth YoY   17.9% 3.9% 14.0% 0.3% -8.0% 54.5% 25.7% 19.9% 4.2% 2.8%
$m         Financial Year to: Mar-04 Mar-05 Mar-06 Dec-06 Dec-07
Revenues             29 31 37 32 48
Operating result             12 13 16 11 14
Margin             41% 41% 43% 35% 29%
Edinburgh 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Pax (m) 4.2 4.5 5.1 5.5 6.0 6.9 7.5 8.0 8.4 8.6 9.0
Growth YoY   9.2% 11.9% 8.0% 9.9% 14.5% 8.2% 6.9% 5.7% 1.9% 5.0%
Market share 39% 39% 41% 41% 42% 43% 43% 43% 43% 43% 45%
Note: Marketshare of all three Lowlands airports (Edinburgh, Glasgow and Prestwick        
$m         Financial Year to: Mar-04 Mar-05 Mar-06 Dec-06 Dec-07
Revenues             117 127 133 120 174
Operating result             49 54 55 51 76
Margin             42% 42% 41% 42% 44%
Glasgow 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Pax (m) 6.0 6.5 6.8 6.9 7.2 7.8 8.1 8.6 8.8 8.8 8.7
Growth YoY   7.8% 4.3% 2.4% 4.7% 7.3% 4.5% 5.4% 2.6% 0.5% -1.1%
Market share 56% 56% 54% 52% 50% 48% 47% 46% 45% 44% 43%
Note: Marketshare of all three Lowlands airports (Edinburgh, Glasgow and Prestwick        
$m         Financial Year to: Mar-04 Mar-05 Mar-06 Dec-06 Dec-07
Revenues             124 135 137 125 172
Operating result             43 46 48 49 58
Margin             34% 34% 35% 39% 34%
Aberdeen 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Pax (m) 4.2 4.5 5.1 5.5 6.0 6.9 7.5 8.0 8.4 8.6 9.0
Growth YoY   9.2% 11.9% 8.0% 9.9% 14.5% 8.2% 6.9% 5.7% 1.9% 5.0%
$m         Financial Year to: Mar-04 Mar-05 Mar-06 Dec-06 Dec-07
Revenues             48 54 59 120 82
Operating result             15 19 20 51 32
Margin             32% 35% 33% 42% 39%

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