BAA, owner of London’s Heathrow airport, has just released its first-quarter results. They are not pretty.
The debt-laden airport-operator, currently under regulatory orders to dispose of its two other London airports, suffered not just from the global downturn in the period, but also the heavy snowfall in February and a late Easter (April 2009 instead of March 2008), making the post-tax loss widen from £37.8m in Q1 2008 to £228.8m in 2009. Passenger numbers, meanwhile, dropped a solid 6.4 per cent at Heathrow and a staggering 14.6 per cent at Gatwick and Stansted.
But BAA’s Regulatory Asset Base, or RAB, actually increased in the period. From their statement:
Now the Regulatory Asset Base is an important thing for BAA, since the fees the company is allowed to charge for using its biggest British airports are regulated by the UK’s Civil Aviation Authority and the Competition Commission. The RAB is basically a proxy value of the airport operator’s operating assets (airports, obviously), upon which BAA earns a return. Put simply, the higher the RAB, the greater the level of airport fees that BAA is allowed to charge.
Since RAB is a measure of the value of BAA’s investments in its airports (the “capital expenditure” mentioned above) there have been accusations that the regulatory regime effectively allows BAA to game the system by inflating that investment. The International Air Transport Association, which represents airlines, for instance, “suggested that the Regulatory Asset Base approach to regulation could encourage BAA to make inappropriate investment decisions” in a submission to the Competition Commission.
Between 2001 and 2006, BAA’s RAB increased by over 75 per cent, according to a company presentation. In the same presentation, BAA explained “The more we grow our asset base, the greater the return to shareholders”.
Little wonder, then, that the UK Department for Transport is reviewing that regulatory framework, putting a big question mark on the operator’s future. This from S&P infrastructure analyst Alexandre de Lestrange in March, when he put BAA Funding Ltd.’s debt on a negative outlook:
“The negative outlook reflects our view of the uncertainty arising from the changes proposed in the consultation paper to the insolvency and security regime applicable to certain airport companies which, if enacted and implemented, could lead to a different rating approach and, all other things being equal, to potentially lower ratings on BAA Funding’s notes,” said Standard & Poor’s credit analyst Alexandre de Lestrange. Changes to the security regime and/or the introduction of a special administration regime may impair our ability to rate, through default/insolvency of the borrower.
Related links:
Breaking up BAA: What price an airport? – FT Alphaville
BAA schadenfreude – FT Alphaville
(Another) deal of the day: London Gatwick – FT Alphaville
London Gatwick, the saga continues – FT Alphaville
BAA faces smaller bids for Gatwick - FT