Wednesday, August 20, 2008

Will a BAA Breakup Fix London's Airports?

Will a BAA Breakup Fix London's Airports?


Ed. Note: This is an updated version of a story originally published Aug. 19.

You might think these would be happy days for BAA—formerly the British Airports Authority—the private operator of seven major airports in Britain, including London's Heathrow and Gatwick. The embarrassing snafus that soured the opening (BusinessWeek.com, 3/27/08) of the gleaming Terminal 5 at Heathrow are getting worked out, and on Aug. 18, BAA completed a huge $25 billion debt restructuring that should ease concerns over its financial situation.

But there's no time for celebration. As soon as Aug. 20, Britain's Competition Commission is expected to announce the results of a 16-month investigation into BAA that could call for the operator to be broken up. To encourage competition, BAA may be forced to divest as many as three of its airports, including either or both of London's Stansted and Gatwick, as well as perhaps Glasgow or Edinburgh in Scotland. Some analysts believe that the sale of Gatwick alone could fetch as much as $6 billion. Update: The commission moved as expected on Aug. 20, ordering the sale of two London airports and either Glasgow or Edinburgh.

Although the benefit to airlines and consumers wouldn't be felt immediately, many believe nevertheless that busting up BAA's airport monopoly is the best way to lower costs and improve service. "Separating the ownership of Gatwick and Heathrow makes a great deal of sense," says Howard Wheeldon, a senior strategist at brokerage BGC Partners (BGCP) in London. "It will put pressure on Heathrow's owner, BAA, to get its act together."

Ferrovial Forced to Unload Assets

It wasn't supposed to work out this way for Grupo Ferrovial (FER.F), the Spanish construction and infrastructure giant that bought BAA two years ago for $19 billion (BusinessWeek.com, 6/27/06). But almost from the beginning, BAA has turned out to be an albatross. Earlier this year, Ferrovial conceded it might have to unload assets to pay for the acquisition (BusinessWeek.com, 2/27/08).

Less than a month later, BAA won the right to sharply raise landing fees at Heathrow and Gatwick to pay for overdue improvements. The move set off howls of protest from airlines and passengers (BusinessWeek.com, 3/11/08). Yet higher charges alone weren't enough to make the numbers add up. Hence the big refinancing, which should permit BAA to pay down debt and improve its airports. The funds will be used to "deliver our ambitious investment program to expand airport capacity, build new facilities, and provide a better service to passengers and airlines," Chief Executive Colin Matthews said in an Aug. 18 statement.

It may be too little, too late. Airlines complain loudly that the landing fees at BAA's London airports, which already top $25 per passenger, are excessive. In a written submission to the Competition Commission during its BAA investigation, American Airlines (AMR) claimed that "BAA's mismanagement of London's airports" has cost it millions of dollars in "higher landing fees, reduced operational performance, and lost revenue as passengers choose to connect through other European hubs."



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