20 YEARS OF BLOODY AWFUL AIRPORTS OPINION
24 August 2008
The report on UK airport competition has revealed the full extent of failings at BAA. Report by Dominic O'Connell
Early on April 11, Nigel Turner was sitting in his office at Donington Hall, the Midlands stately home that serves as the headquarters of BMI British Midland, Britain's second-largest airline.
Turner, BMI's chief executive, was in the final stages of planning a big shift. For years BMI and its partner airlines, Lufthansa and SAS, operated out of separate terminals at Heathrow. Now, thanks to British Airways' move to the new Terminal Five, they were all going to be housed under the same roof. The revamp, years in the planning, was going to make life much easier for passengers and - BMI hoped - generate millions in extra sales.
It took one phone call to shatter Turner's reverie. Colin Matthews, chief executive of BAA, the airports group that owns Heathrow, was on the line. Matthews, who had been in the job only a few weeks, said he was sorry, but the chaotic opening of T5 meant BA wasn't completing its move after all. The big shift would have to be put on hold.
Turner was furious. A fellow BMI executive said: "He was ... let's just say he was pretty excited."
Tim Bye, Turner's deputy, said: "BAA has always been difficult to deal with, but that occasion sticks out in my mind. Even though that decision affected nearly all of Heathrow's 90 or so airlines, it was taken without consultation."
Incidents like this are scattered throughout the report of an inquiry into BAA by the Competition Commission published last week. It concluded that the group, which owns seven airports and handles 60% of passengers in the UK, and 90% in southeast England, should be broken up by the forced sale of two of the three big London airports, and one in Scotland. An end to BAA's 40-year-old near-monopoly, the commission said, would promote more competition and eventually improve the lot of the 200m people a year who fly from the UK.
The report's 300 pages provide a detailed and damning back story to the conclusions. It portrays a company that ignored its customers, may have manipulated its regulator and was timid in developing airports vital to Britain's economy.
The inquiry, led by Christopher Clarke, a former head of investment banking at HSBC who is now the commission's deputy chairman, did not stop with BAA. It also questioned government policy on runway development, identifying that it, as well as BAA's near-monopoly, was an impediment to competition. The Civil Aviation Authority, which for the past 20 years has regulated BAA and been charged with curbing monopolistic behaviour, was also found wanting.
As air travellers queued for a bank holiday getaway this weekend, industry executives and politicians were still coming to terms with the inquiry's long term effects, and how they would respond.
As well as changing a structure that has been in place since 1965 - BAA was created as a government agency and privatised in 1987 - the recommendations will upset plans for how and when airports in southeast England will be expanded. The timing and location of new runways, whose construction will affect millions, has been plunged into uncertainty.
One senior airline executive said: "They have put some big question marks over what happens next. I think everyone is uncertain as to how it will pan out."
WHILE Matthews' call to Turner is not recorded in the Competition Commission's report, similar events are revealed. Over five pages, the inquiry dissects how BAA planned for a new Stansted runway "without engaging with the airlines".
In January 2005, airport managers set up a meeting to discuss the options. A few days before the meeting, however, they called airline bosses - among them Michael O'Leary, chief executive of Ryanair - to tell them BAA's choice would be announced anyway. The airlines told Competition Commission officials the consultation had been a "sham".
At Heathrow, the planning of the next new terminal, Heathrow East, has been equally fraught. The new complex will eventually replace all the old central terminals. The construction has been made possible by BA's move to T5 which creates some much-needed space at the congested hub.
BAA, however, was slow to spot the opportunity. "It currently appears to us that the scheme was identified only in November 2005, five years after the building of T5 had started," the report said.
The new building was to have been open in July 2012, in time for the London Olympics. In December 2007, BAA decided "with little or no consultation" the opening would be delayed by six months. One airline told the commission "that we appear to have been misled over the previous two years".
The report shows that even now airlines have serious misgivings about the Heathrow East plan. It will have to use the existing baggage system for nine years, there will initially be no transit system for passengers, and "the vertical circulation of passengers will be external to the building because of the retail space inside".
There are other criticisms. The commission said BAA:
* Lacked a corporate strategic plan; * Made substantial last-minute increases to its spending plans when negotiating for price increases, "which suggested to us ... a degree of regulatory gaming"; * May have overestimated the costs of a new runway and terminal at Stansted by 20%; * Adds 25% to the cost of projects to cover contingencies, but with "the scope to spend it all, and be remunerated for it, with neither the CAA nor the airlines having any control"; * Did not regard T5 as an opportunity to cut costs by introducing new working practices - "instead it resulted in an increase in unit costs"; * Was slow to bring forward schemes that would have increased capacity in southeast England, particularly at Gatwick, where it agreed to curbs on expansion.
Matthews, who was brought in this year by Ferrovial, the Spanish infrastructure group that is the controlling shareholder in BAA, said the company did not agree with many criticisms made in the report, and would address them in its official reply.
He said he did not want to "look back" but improve present and future performance. "We will be a lot more responsive to our customers in future," he added.
Although BAA may yet appeal against the findings, Matthews was resigned to having to sell at least one airport. "We have to be realistic," he said. "It's not just the Competition Commission, there is a weight of public opinion behind this," he said.
There is support for Matthews from some airline executives. "There is no point in bashing the current management," said BMI's Bye. "It is unfair to blame Ferrovial (which led the consortium that bought BAA in 2006) for 20-year-old problems."
Clarke, from the Competition Commission, was asked last week whether BAA had been timid in promoting new capacity because the status quo would make it more money. "That is the classic position of someone who controls a market," he said. "They benefit from restricting capacity."
THE next few months are likely to see a fierce tussle between BAA and the commission over the timing of the sell-offs, and who will control the process. The commission's final findings are due in the first quarter of next year. Clarke said the disposals could be made within six months of the final report: "It's not that complicated."
A quick sale might be bad news for BAA. The persistence of the credit crisis means bidders will not be able to pump up their offers with cheap debt, as Ferrovial was able to do when it swooped on BAA in 2006. An appeal against the findings might delay the sale while the credit market improves.
The commission, however, has wide powers. It is contemplating the appointment of a special trustee to handle the sale, rather than leave it to BAA. It could also order BAA to relinquish management control while the appeal is decided.
Some bankers believe, however, that Ferrovial may decide it is better to go for a quick break. "They have Heathrow, which is the real jewel, and a speedy resolution of this could be best," one said.
The longer-term effects are more difficult to judge. The call for a review of the white paper on new runways, which wanted new ones at Stansted and Heathrow in that order, has been condemned by both BAA and the airlines.
"There are well-advanced plans for both Stansted and Heathrow. I don't think it is possible to execute either of them faster, but it is possible to slow them down," said Matthews. "This is a red herring. Like many of the other arguments against new runways, it is distracting us from the difficult decisions that need to be made."
A senior airline executive said a review would be pointless. "We expect the big decision on a Heathrow runway before the end of the year, and to interfere with it now on the grounds of promoting capacity seems wrong-headed. Even if you accept the point about Gatwick, we are not far away from the end of restrictions on development there in 2019 anyway."
The commission could yet retreat. It is "minded" to recommend a review, but said it would be open to arguments.
Even if it were to drop the requirement for a policy review, the changes in ownership might radically alter how and when the runways are built. A new owner at Stansted, for example, might conclude that the economics of the project don't stack up, or scrap the current plans in favour of cheaper ones, perhaps drawn up by Ryanair or Easyjet.
Right now, the future of London's airports is up in the air.
(C) Times Newspapers Ltd, 2008
The Sunday Times
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