Are you sure?

BAA airport assets face possible breakup, UK probe

Grupo Ferrovial SA's BAA unit, the world's biggest airport operator, faces a possible breakup by the UK's antitrust regulator after airlines complained about fee increases and a lack of competition.

BAA, the owner of London's Heathrow, Gatwick and Stansted airports, handles 90% of airline passengers in southeast England and 80% in Scotland, the Office of Fair Trading said in a statement. BAA will be referred to the UK Competition Commission after the office completed an initial probe. British Airways Plc, Ryanair Holdings Plc and EasyJet Plc have demanded the breakup of BAA, the London-based company Ferrovial bought in August for £10.1 billion ($19.9 billion), citing rising charges and expansion costs.

Heathrow has almost completed a £4.3 billion fifth terminal, and BAA last year proposed a £2.7 billion second runway at Stansted. „There is an incentive for them to blow billions building over-specified airport facilities” to maximize returns on investments, Ryanair CEO Michael O'Leary said in an interview yesterday. „What we need is much more efficient investment, building airport facilities that the airlines and their users want, at a much lower cost” than in the past.

BAA's seven UK airports handle about 63% of flights to and from Britain. London Heathrow is Europe's busiest airport, handling 67.7 million passengers in 2005, and its biggest customer is British Airways, the region's third-biggest airline. Stansted is the largest base for Ryanair, which has its headquarters in Dublin and is Europe's biggest low-cost carrier. Other UK airports owned by BAA include Glasgow, Edinburgh and Aberdeen in Scotland; Southampton, England.
The company also controls airports in Naples, Italy, and Budapest, and holds minority stakes in six Australian airports including Melbourne and Perth. Hochtief AG, Germany's biggest construction company, plans to buy Budapest airport. BAA manages Indianapolis International airport and operates retail concessions in Boston, Pittsburgh and Baltimore, according to the annual report for the year through March 2006. The UK Transportation Department's 30-year national air-traffic plan, published in December 2003, called for a new runway and terminal at Heathrow by 2020, following construction of a runway at Stansted.
Madrid-based Ferrovial plans to spend about £1 billion annually through 2016 on upgrading terminals at the three BAA airports serving the UK capital, CEO Joaquin Ayuso said July 3. „The London airports need a lot of investment and it is not clear that a high level of investment in aviation assets would result from the breakup of BAA,” said Nick van den Brul, an aviation analyst at Exane BNP Paribas in London. Shares of Ferrovial fell €1, or 1.3%, to €74 in Madrid. The stock is up 27% this year, valuing the company at about €10.4 billion ($13.8 billion).

Ferrovial said July 6 that it may apply to build a less costly Stansted runway in mid-2007. Ryanair said yesterday that the second runway and associated infrastructure at Stansted should cost less than £1 billion to develop. Heathrow's Terminal 5 project is 90% complete, and is scheduled to open March 30 2008. Consultation and budgeting for a separate project, a third runway at Heathrow, will take place in 2007, said Mary Kearney, a press officer at Heathrow, in a telephone interview yesterday.

The antitrust probe is „very good news, and it is what we've called for,” Paul Charles, a spokesman for Virgin Atlantic Airways Ltd., said in a telephone interview. „A breakup of BAA would be in the best interests of customers: it works well in the US, where terminals compete with each other within airports.” The Office of Fair Trading, which studies antitrust issues for possible referral to the Competition Commission, said consultations on the BAA case will last until February 8. „We welcome this and it is what we've been asking for,” Paul Marston, a spokesman for London-based British Airways, said in a telephone interview. „We don't think it is sensible for two airports undergoing development to have the same owner.”

The airport operator retains „a persistent monopolistic market structure,” Office of Fair Trading CEO John Fingleton said in an interview yesterday. „We are very concerned.” BAA said yesterday that regulators were too hasty in seeking an antitrust probe and that it hasn't abused its monopoly. „Lack of capacity is a complex issue, therefore it would be wrong to jump to quick and simplistic conclusions about structure,” Stephen Nelson, BAA's chief, said in a statement. BAA is subject to a separate review by the UK Civil Aviation Authority, which regulates the prices the company can charge airlines.

The authority proposed a new fee schedule December 5 that would allow Heathrow as of April 2008 to raise prices by the retail-price index inflation rate plus a range of 4% to 8% and Gatwick to keep prices within plus or minus 2% of the index. Stansted's fees would be deregulated. The plan would limit Heathrow's charges to airlines to an average 6.2% return on capital and set Gatwick's return at 6.7%, compared with 7.75% for both airports today, the authority said. Heathrow is currently allowed to raise prices by the index plus 6.5%. Fees at both Stansted and Gatwick are restricted to increasing in line with the index.
„All the BAA's London airports are local monopolies which need much more stringent price regulation,” EasyJet CEO Andy Harrison said in an e-mailed response to questions. „Changing the ownership of BAA will not alter this fundamental structural problem.” Airport and air navigation charges make up 11% of carriers' operating costs, according to the International Air Transport Association. „BAA is fast becoming a nightmare,” as charges will increase 50% between 2003 and 2008, and the next five-year proposal is for another 50% gain, IATA Director General Giovanni Bisignani told journalists yesterday at the group's Geneva headquarters. „The regulator is not doing its job.” (Bloomberg)