For anyone who’s had the pleasure of circling Heathrow at 13,000 feet for two hours (capacity-restrictions) or queuing in line at security for 40 minutes (new anti-terror rules), today’s report on the BAA monopoly from the UK Competition Commission will be welcomed.
The CC pulls no punches, lambasting BAA’s “lack of responsiveness to the needs of its airline customers and a lack of initiative in planning capacity.” It recommends BAA-owner Ferrovial be forced to sell two London airports (likely Stansted and Gatwick) and one Scottish airport (likely Glasgow, in Alphaville’s opinion), to remedy a lack of competition.
Spanish builder Ferrovial bought BAA, the owner of seven UK airports, for some £10bn in 2006 and has since struggled to refinance its debt – having only just completed a £13.3bn rollover, helping it avoid junk status. The bonds are backed by income from its London airports, but flexible enough to allow the sale of one or two airports, using the proceeds to pay down the debt, according to BAA.
The CC is still not impressed, however:
On 18 August, just before this report was published, it announced that its refinancing had been completed. However, in our view, the reliance of all seven airports-which account for two-thirds of UK air traffic, and 80 to 90 per cent of air traffic in south-east England and Scotland-on a single group parent company with a highly geared balance sheet and which has taken almost two years to complete has exposed them to significant financial risk and to the risk of their investment in facilities and services being constrained.
The Commission will now consult on its proposals, inviting responses from BAA, airlines and consumers, with a final decision to be made by the first quarter of 2009. An actual sale is likely to be a long drawn-out process however, with talk from the CC of appointing an independent trustee to oversee divestment. There’s also little sympathy for Ferrovial:
In order to provide a timely and effective divestiture process we invite views on the structure of the process. In particular, we welcome views on whether a divestiture trustee should be appointed from the outset of the process to secure effective divesti-ture within a specified period or whether BAA should be given an initial period in which to achieve effective divestiture, but subject to appointment of a divestiture trustee if BAA appears unlikely to achieve divestiture within the initial period. We also invite views on the appropriate length of periods for achieving divestiture by (1) BAA or (2) a divestiture trustee.
In considering alternative divestiture options, we welcome views concerning the costs of divestiture. However, we note that in acquiring BAA, the Ferrovial consortium (ADI) took over a business subject to regulation without any commitments from the Government or the CAA regarding the acceptability of continuing common ownership of these airports. ADI also completed the acquisition after the OFT announced a market study of BAA in which continuing common ownership of BAA’s regulated airports was flagged as an issue. In deciding to proceed with the acquisition of BAA, ADI took on the regulatory risk of potential divestiture and the CC is therefore not currently minded to place any significant weight on the one-off costs of divestiture of airports in deciding upon appropriate divestiture businesses. We seek views on this issue.
As noted before on Alphaville, infrastructure companies including Macquarie, Fraport, Hochtief and London City (Manchester Airport Group has been added to the list by the Sunday Times) may be looking at acquiring selected BAA assets.
Today’s report hints that potential buyers will need to be experienced operators, with the know-how and financial resources to improve and expand London’s overcrowded airports (BAA is planning to pour £9.3bn of capital investment into its London airports over the next 11 years). There’s talk as well of overhauling the regulatory regime which has allowed BAA above-inflation passenger fee increases for years.
Caveat emptor. The BAA-buy has proved a bit of a damp squib for Ferrovial. Will others fare better?
Related links:
Heathrow Terminal 5: The Bagpuss Theory – Youtube
Breaking up BAA: what price an airport? – FT Alphaville
We face tough choices on British airports – FT