BAA, Stansted and the concept of separate terminal development

The issue of divestiture of BAA's airports contains a lot of matters of principle that are relevant to airport operations across the world, even apart from the direct relevance to the share price of Ferrovial.

One of the many issues covered by the CC will probably slip under the radar. But it will be of interest to many regulators - and, indeed, to many airports.

It concerns the value of competition between airport terminals and how that can be melded into a policy planning framework. The CC calls it "separate terminal operation and development" and awards it the acronym STOD. The STOD issue was raised in the context of Stansted.

And, as the CC notes, many governments, particularly in the developing world, have looked at using variants of STOD as a form of partial privatisation of their airport infrastructure assets. One advantage it clearly has is that it allows the government owner/regulator to dip a toe in the water, where there are either commercial or political risks perceived in full privatisation.

The concept

According to the CC, easyJet, supported by a paper produced by Frontier Economics, suggested that the building and operation of the second terminal at Stansted should be put out to tender by the CAA - which wins another acronym: TDT, or Terminal Development Tendering.

As put forward by easyJet, the proposal has several elements:

1. "Bottlenecks" still regulated: So called Bottleneck facilities (access to the airport and terminals) would continue to be regulated by the Civil Aviation Authority (CAA) through a price control framework;
2. Terminals put out to tender: the right to build and operate terminal facilities (non-bottleneck facilities) would be opened up to competitive tender by the CAA.
3. Lease with the airport owner; regulator to determine conditions: the selected terminal provider would have a fixed-term lease contract with BAA and the CAA would set the general rules on what would be included in the lease contract. Frontier Economics noted that the lease contract could alternatively be agreed by BAA;
4. Tender to provide competition cross-check: The tendering process for terminal capacity would provide a cross-check on the market demand for the runway capacity; and
5. Terminal competitors negate need for regulation: Inter-terminal competition would arise as a result of the tendering process and would remove the need for regulation of terminal services.
   Thus there would be a clear separation between the provision of "monopoly access" facilities such as runways and taxiways on the one hand and the independent terminal on the other.

From that basic proposition, therefore the following would flow, in order to ensure a viable platform for a TDT:

• available land adjacent to the monopoly facilities;
• the likelihood of obtaining planning permission;
• regulatory oversight of the monopoly facilities and masterplan; and
• the very practical issue that the airport is likely to grow - so that the terminal will be financially viable.

The CC conclusion: a good idea - in principle

The CC basically considers the concept to be a good one - but probably not of immediate value in the immediate context.
As it concluded, "STOD seems to offer some advantages over separately-owned airports with no competition, if those airports possess sufficient market power to be price controlled.

"There is also at least some evidence from international experience that separate ownership and operation of airports is possible."

But it then goes on to add a belief that additional costs are incurred in this way:

"However, the claimed benefits resulting from separate terminal operation are uncertain, while additional costs would almost certainly be incurred under such a model." This would however seem to ignore the fact that part of these costs could be absorbed by a willing buyer, whose profit margin would be narrowed - rather than passing the cost directly on to consumers of services.

And - for the present purposes: "In addition, the legal framework is currently a major impediment to the implementation of STOD at any BAA airports."

The STOD/TDT concept is however a line well worth pursuing, especially as there are other examples and variations on this theme. It appears to offer a valid alternative in many cases for the fainthearted.