BAA is running out of options

BAA and its owners Grupo Ferrovial of Spain have got themselves into a tricky situation. This week’s blast from the UK’s Competition Commission has dealt a body blow to its prospects and is a public relations disaster. 



Coming so soon after the fumbled opening of Heathrow’s T5, the company is very much in the government’s and public’s eye as not being able to manage the country’s main airports. BA can take some of the blame for T5, but the buck stops at BAA. 



Failure is politically unthinkable

And that’s a political problem, because airports lie at the centre of the British economy and can’t be allowed to fail. The prospect of BAA being taken into public ownership after the debacle of troubled mortgage bank Northern Rock is unthinkable in the present economic climate. Action will be taken before this happens.

BAA is facing the prospect of having to divest itself of one of its main UK airports. Earlier in the year that was thought to be Stansted, but the frontrunner for disposal now appears to be Gatwick. Or perhaps both.

BAA however needs the cashflow from its seven airports to pay its debt refinancing and the cash generated from a sale of Gatwick - thought to be in the region of £3 billion - would not significantly aid its financial position. If Stansted is sold, then just £1.5 billion is expected to raised.

Just two years ago Ferrovial borrowed £10 billion to buy its slice of BAA and the authority is now running close to the wind in terms of financial stability. In 2007, BAA paid more than £824 million in interest alone, which ate up more than 80% of its operating cashflow. Selling Stansted would cut its operating income by about 7%, and the loss of Gatwick would be substantially more.

Servicing debt rather than passengers

The sale of even one airport could wreck its ability to refinance its debt.
 So what went wrong?
The failure is essentially one of management of individual airports. Ferrovial was too optimistic that it could generate cash from a large number of assets. Very quickly it found BAA was a difficult beast with all its management time focused on the debt problem rather than providing better services and more efficiency at each of its individual airports. 



It also had little experience of British regulatory bodies, which took a dim view of airport owners taking on huge debt that could crimp further investment in airport facilities. Throw in the perception that quality of service delivery has simultaneously fallen and the mix becomes heady.

Unfortunately for Ferrovial and BAA it appears there is worse to come, since the credit crunch has made debt servicing even more problematic just at the time when what looks like global recession will cut passenger numbers and income.

The International Air Transport Association estimates that international growth in passenger traffic may slow to 5% in 2008. Business passengers are already being forced to fly economy due travel expenses cuts. Airlines are also merging and becoming more powerful in their ability to squeeze a better deal out of airports in landing fees and other concessions.

Chorus of disapproval

The upshot is that BAA may be broken up and airlines such as British Airways, bmi, easyJet, Virgin Airways and Ryanair are already openly calling for this as the best solution rather than a halfway house of carving off individual airports. 

Nigel Turner, bmi chief executive, says, “The only option facing the regulators is the dismantling of BAA’s monopolistic grip over the UK’s busiest airports in the South-East (Heathrow, Gatwick and Stansted) and in Scotland (Edinburgh and Glasgow). Only with separate airport ownership can the UK guarantee a healthy and competitive aviation industry to serve the wider consumer interest.”

Andy Harrison, easyJet chief executive says, “Breaking up BAA alone is not enough or even the first step. We need a fundamental overhaul of UK airport regulation, which will introduce more competition and tougher regulation. Transferring ownership of our major airports from one highly indebted monopolist to another will benefit no one apart from the City deal-makers.”

Mike Rutter, Flybe’s commercial officer says, “It’s high time the sell-off began and in a spirit of cooperation, can we suggest they begin by disposing of Southampton, London Gatwick and Glasgow.”

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