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London hokey-cokey: Gatwick sold (?) Estuary in, Heathrow out (?) UK govt shakes it all about

19-Oct-2009
CAPA Regional Manager UK, David Bentley
CAPA Regional Manager UK, David Bentley
  • Gatwick Airport may now be sold to GIP;
  • Other bidders remain hopeful as price increases;
  • Ferrovial to invest in Brazil?;
  • Future UK government hints at cancellation of third Heathrow runway; BAA rejects the claim;
  • BA threatens to expand at Madrid;
  • Estuary airport project gains more gravitas;
  • Regional airports could be sold to pay down government debt;
  • Airport special administration scheme is scrapped;
  • London gains yet another airport.

Confusion abounds as the main British airports are thrust back into the spotlight. Depending on who you believe, London Gatwick Airport has all but been sold to one of the bidding consortia, or it has not; BAA has abandoned plans for a third runway at Heathrow in deference to the desires of a ‘future government’, or it has not. Meanwhile a senior government minister hints that the few remaining British airports that are still partly or wholly in the public sector should be sold to help pay off the gargantuan national financial deficit. Or did he? And that is only part of the story, as the political shenanigans surrounding Britain’s airport infrastructure deepen. We try to make sense of it all.

Race to beat a 19-Oct-2009 deadline

Beginning with London’s Gatwick Airport, where traffic figures have improved a little lately (-0.5% passenger and -21.7% cargo volume in Sep-09). In the first week of Oct-2009, it was reported that BAA was close to finalising a deal with the consortium led by Global Infrastructure Partners (GIP), the company that owns and operates London City Airport, for the sale of the facility for EUR1.65-1.8 billion (USD2.4 – USD2.65 billion) and pretty much in line with the airport’s Regulated Asset Base (RAB) (a CAA calculation) of GBP1.6 billion.

That is quite an increase on the GBP1.2-GBP1.3 billion offer on which previous talks collapsed, even allowing for the recent deterioration of the value of the GBP against the EUR, virtually to parity. BAA’s owner, Grupo Ferrovial was thought to wish to finalise the deal before a UK Competition Commission (CC) hearing on BAA’s airport ownership on 19-Oct-09. BAA has denied there is a specific deadline for the agreement, stating talks with a number of bidders are ongoing.

It was earlier first stage recommendations by the CC that prompted BAA to try to offload Gatwick quickly, before it was pushed, but during what is not exactly the best time to sell any infrastructure asset. The CC has since ordered BAA to sell London Stansted (-11.6% passengers in Sep-09) and either Edinburgh or Glasgow airports in Scotland. BAA had appealed against this decision.

BAA had also received offers for Gatwick from a group comprising Manchester Airports Group (MAG), Canada's Borealis pension fund, and the Greater Manchester Pension Fund, as well as the Citi Infrastructure Investors-led team. Neither had proved to be financially adequate but it seems that GIP has since come back with a better offer.

A major hurdle in bidders meeting the RAB value has been raising the required debt financing in light of the economic downturn that has made banks wary of airport traffic projections. But sources say GIP, founded by Credit Suisse and General Electric, has now firmed up its bank support, a positive indicator for other actual and potential airport deals, suggesting that tough market condition are easing.

Fat lady still to flex her vocal chords over Gatwick as Ferrovial looks to Brazil for its next investment

However, it isn’t over until the fat lady sings and that lady could still be MAG, even though the Citi consortium appears out of it. A BAA spokesman subsequently denied stated it was close to selling Gatwick and that talks were continuing with "several bidders. No transactions have been agreed” and there was "no specific deadline."

Parent Ferrovial then pitched in, stating that although talks for the sale of Gatwick are at an advanced stage, a completion is not imminent, with a final agreement likely to take over a month (ie beyond the CC meeting date). Ferrovial also confirmed the interest of more than a single bidder and added that BAA is likely to launch a bond issue of over GBP1 billion in 2010, following the sale of the airport. As an aside, Ferrovial mentioned it plans to continue expanding its airport management services, and is looking into entering the Brazilian market once the country finalises plans to privatise public assets – a saga in its own right.

(One might reasonably conclude that if Ferrovial found it difficult to operate airports in the UK then it will struggle in Brazil, where the desire to privatise the airports is not yet truly established (unlike the UK, where the original floatation of BAA, 23 years ago, was drooled over by both government and investors and heavily oversubscribed). The only thing in Ferrovial’s favour is that the language is fairly similar in Brazil. Against it would be a host of factors led by the need to enhance infrastructure dramatically and quickly at Rio in advance of the 2014 soccer World Cup and 2016 Olympics, even if Infraero is to invest USD600 million there, as it claims).

Uncertainties over LHR runway 3, as Labour government’s days draw to a close

Matters are no clearer 30 miles away at Heathrow, the world’s busiest international airport (passenger traffic -0.3% in Sep-2009). Earlier this year the current (Labour) government decided to proceed with the construction of a third runway on economic grounds, in return for much improved surface transport connections and against an avalanche of criticism from environment protection groups.

But the Labour government’s days, barring a miracle, are numbered. An election must take place on or before Jun-10 and civil servants are already planning for a Conservative administration. The Conservatives are traditionally the party of business but they have been shifting their stance more towards one of ‘the people’s party’, adopting quite liberal positions on issues like this and promising to include a commitment to scrap plans for a third runway at Heathrow in their general election manifesto as well as continuing to oppose expansion at Gatwick and Stansted. Instead, the party would focus on improving capacity at regional airports and building more high-speed trains.

The Shadow (opposition) Transport Minister, Julian Brazier recently stated that the Conservative Party remains committed in its opposition to plans to develop a third runway at Heathrow, due to environmental concerns. This led to an extraordinary claim that BAA had abandoned plans to submit a planning application for a third runway and that the Conservative Party had reportedly been advised by BAA that it would respect the views of the party should they be elected into government, and would not sign contracts for the development of the runway. The airport operator would not submit a planning application ahead of the general election in Jun-2010.

BA management throws a tantrum, threatens to focus on Madrid

This brought an immediate response from British Airways, which stated that it plans to expand operations at Spain's Madrid Airport (where it covets a merger with Iberia) if a third runway is not committed to, stating it is currently too constrained at Heathrow. This is not an unusual tactic by BA, which conveniently forgets as a matter of course that there are other airports in the UK with unused capacity (the ones the Conservatives wish to improve further), and evokes the hollow threats made by a previous CEO and Chairman, Lord King, in the 1980s to shift BA’s operations lock stock and barrel to Stansted airport in an earlier row over Heathrow capacity.

BAA insisted that it had not “axed” the expansion plans, saying in a statement, “We remain convinced that a third runway is the only viable, costed and thought through way of meeting the need for extra runway capacity to maintain this country’s global connections to the rest of the world, particularly in an era where long haul links to markets such as China and India are increasingly important. The process was always going to take until after the general election. We continue to work on the application and will take as long as is necessary to prepare a proper submission.”

“The Conservatives don’t get aviation policy”

Indeed it went so far as to argue that businesses in the country would be negatively affected and that Heathrow would not be able to maintain its hub status if the third runway is not constructed.

The airport owner cited research from the British Chamber of Commerce which found the country is “losing GBP1 billion per annum by not expanding Heathrow“, and that "the Tory [Conservative] party simply doesn't get aviation policy. We're trying to engage with them but it's hard. The message we're getting is that they've made up their minds. But we're going to keep pressing them and trying to discuss it with them. If we don't expand Heathrow we will end up with a country effectively on an airline branch line rather than a main station in Europe. Businesses would relocate to growing European hubs like Paris Charles de Gaulle, Amsterdam Schiphol and Frankfurt. It would be a disaster."

Estuary airport scheme gains gravitas

This impasse over Heathrow has once again opened the door to the (Conservative) Mayor of London, Boris Johnson, and his GBP40 billion plan to build an airport on platforms in the Thames estuary as an alternative to the third Heathrow runway. In a nutshell, the Estuary Airport is planned to be constructed in a region of southeast England, to the east of London itself, where population growth (mainly from immigration) is anticipated to be greatest in forthcoming decades – the so-called Thames Gateway.

It is a vague plan that has focused more on the technical achievability rather than economic reality. For example, what is the point of building an initial one or two runway airport, that could be expanded later “if required”, when London already has plenty of airports where that could happen?

Boris Johnson’s plan for a new airport in the Thames Estuary

Putting aside the economic issues the plan has yet adequately to answer genuine concerns about the instability of previous offshore or floating airport models (e.g. Kansai, Japan); the tens of thousands of migrating birds that use the estuary; the impact on and from nearby shipping lanes; and the very real potential for the Thames river to flood. The existing flood barrier is already deemed inadequate.

Nevertheless, this scheme, referred to as ‘Boris Island’ and (by the Labour government) as ‘Fantasy Island’ seems to edge closure to fruition every week and is now reported to be backed by funding from several countries in the Gulf, with Kuwait, Qatar and the UAE specifically mentioned, also China. Intriguingly, Mr Johnson believes that to continue to expand Heathrow would be “to entrench planning errors of the 1960s” (with one of the 2000s?).

Realistically, so many jobs would be at risk if Heathrow were to close that the scheme is a non-starter from that standpoint alone. But it should not be underestimated for two reasons:

  1. Firstly, the propensity for Gulf states to buy up the assets of, and invest heavily in, ‘UK plc’. Already, they own large slices of the British soccer Premier League with reputedly another 12 offers on the way for clubs
  2. Secondly, the maverick Mr Johnson enjoys huge support in some parts of the Conservative Party. Earlier in October, at the Conservative Party conference, Mr Johnson upstaged party leader David Cameron when he called for a referendum to be held on the European Union’s Lisbon Treaty (by which more sovereign power is ceded from the UK to Brussels). Many see him as future contender for party leader and, ergo, Prime Minister. As such his views on air transport need to be given credibility.

As if he needed any further encouragement, Heathrow Airport has been voted the worst airport in the world for the second year running in a poll of 14,500 frequent fliers.

UK regional airports could gain from runway 3 cancellation, but some might find themselves up for sale

Meanwhile, UK regional airports responded to the implied termination of the third runway scheme and the Conservative’s support for regional airport growth as an alternative, with glee. The closest primary airport outside the Greater London area, Birmingham, welcomed the Conservative Party’s plans, stating, strangely, that the airport is able to act as an additional runway for London, rather than promoting the benefits of its own region. Birmingham has spare capacity and is on an existing high-speed rail line but the future of its runway extension, let alone the provision of a second runway, remains in doubt. Manchester Airport, further to the north, has even more unused capacity, with two runways already in operation since the mid-1990s.

But there is a complication affecting both Manchester Airport and the MAG group, which remain wholly in the public sector, and Birmingham, which is partly publicly owned. That complication involves the horrendous UK national debt, which is currently GBP800 billion and expected to stretch to GBP1.3 trillion before it levels out.

The government is trying desperately to sell off ‘state assets’ to pay down debt before the general election, as an alternative to widespread job losses in the public sector (over one million public sector jobs have been created since 1997). It sees this as a way of beating the Conservatives (‘buying votes’ if you will). There are approximately GBP200 billion of such assets remaining to be sold, much of it already having gone, such as the gold reserves that were sold off several years ago at a quarter of the price that could be obtained for them now.

From airports to the bookies...they’re selling out to the bare walls

In the latest round of state asset sales, airports were bundled in as potential sales targets along with the Channel Tunnel, the Dartford Tunnel (a Thames river crossing close to where the Estuary airport would be built), the Uranium enrichment company (Iran please note), business parks, leisure centres and even the nationalised betting and gaming organisation, the Tote. In all, the sales would barely raise GBP16 billion but for the beleaguered government it is all grist to the mill.

But airports are local government assets, not national ones, and there would inevitably be stout resistance. Birmingham City Council has already stated categorically that it will not sell its stake in Birmingham International Airport.

And in any case there are very few public sector airports left in the UK. It is possible the Business Secretary did not even know this. The ones that might be affected, apart from Manchester and Birmingham, are Newcastle Airport (51% public sector), also Newquay Airport (southwest England), Highlands and Islands Airports (Scotland) and Derry in Northern Ireland – which are all public sector limited companies. Derry Airport is already slated for private operation and/or sale.

A Department for Business, Innovation and Skills (BIS) spokesman quickly backtracked when asked to clarify the airport sales, stating, “the Business Secretary was not referring to any airport in particular. He raised a number of issues that can be looked at. "There is no list, as such, of assets and clearly the overriding message is that market conditions will have to dictate the sale of any assets.”

Manchester Airport was worth up to GBP3 billion, now it might be worthless to the city

That is the point, and it is made very clear at Manchester, where, only three years ago, the Manchester Airports Group (Manchester, Bournemouth, East Midlands and Humberside airports) might have fetched as much as GBP3 billion; money needed desperately for essential surface transport improvements. Instead, the city authorities opted for a motor vehicle congestion charge, which was rejected in a referendum in Nov-08 by a ratio of four to one.

Since then, judging by the price offered for Gatwick as a rough guide, the value of MAG has probably fallen to GBP1 billion or even less. Interestingly, one of the reasons Manchester City Council gave at a public meeting two years ago for its refusal to sell MAG or Manchester Airport (it owns 55%) was that it was saving it ‘for a rainy day’. Well, the monsoon just arrived, but not in the way they might have envisaged and if it has to be sold now they will get nothing out of it.

The Prince of Darkness could remain in government - airports beware

The Business Secretary referred to is Lord Mandelson, one of the government’s primary movers and shakers, a member of 35 out of 43 cabinet committees, and the de facto Deputy Prime Minister. The Labour equivalent of Boris Johnson in many ways, the ‘Prince of Darkness’ as he is known is one of the more slippery politicians to be found anywhere, having twice had to resign and having made his way back to Westminster by way of a spell as European Commissioner for Trade. Now, faced with the impending defeat of the Labour government and a decade or more in the political wilderness, Lord Mandelson has recently (27-Sep-09) let it be known that he “is ready to accept a job under a future Conservative government”. Outlandish as that might appear to be, anything is now possible in UK politics and airport owners should not assume they will automatically see the back of the Green-leaning Mandelson after the next election.

Some good news for BAA - special administration scheme is scrapped

In the midst of this land of confusion is one piece of solid news for airports. The UK's Department for Transport announced, on 13-Oct-09, plans to introduce measures to improve the resilience of its major airports, after publishing its consultation on reforming the economic regulation of airports plan. These comprise:

  • A new duty on the Civil Aviation Authority (CAA) to ensure airports can finance their licensed activities;
  • A package of licence conditions to introduce financial ring-fencing;
  • A licence condition requiring airport operators maintain a minimum creditworthiness.

The department added it will also consult further before the end of year on the following additional measures:

  • Possible introduction of a licence condition requiring airport operators produce and maintain a Continuity of Service plan;
  • A mechanism for CAA to 'switch on' and ‘switch off’ ring-fencing provisions. The regulator might decide to switch on ring fencing if circumstances were to change and where the benefits outweigh the costs, for example because an operator had moved from a secured to an unsecured financing structure.

These measures replace the introduction of a Special Administration regime proposed in the consultation document, which would have ensured airports stayed open even if their owners went bankrupt. Industry members were opposed to the original regime as they believed investors in airport development projects would have requested higher returns, increasing development costs.

BAA welcomed the decision, stating the changes will remove uncertainties for the airport owner and its creditors, and ensure airport operators will have the necessary resources to complete development plans and invest in airports.  The move is certainly a boost for BAA, whose bond ratings were at risk of a downgrade if the original plan had been introduced. BAA still owes lenders some GBP10 billion pounds (USD15.9 billion), and stated the change would make it easier to complete the planned refurbishment of Heathrow airport. So even if there is to be no third runway at Heathrow at least there should now be the completion of the Heathrow East project, the re-engineering of terminals 1 and 2, a necessary prerequisite for any government in advance of the 2012 Olympic Games.

Eighth London airport attracts first international service

While all this is going on, London has acquired yet another airport to add to Heathrow, Gatwick, Stansted, Luton, City, Southend, Ashford and Manston. The privately owned (by the Reubens brothers since Jul-07, when it was bought for GBP40 million) ‘London Oxford’ airport (60 miles from London) has secured its first international commercial air service. The Swiss LCC Baboo (a.k.a. FlyBaboo) announced in Oct-09 that it would begin a weekly Saturday service from London Oxford to Geneva from 19-Dec-09 aimed at skiers. There is already a weekly domestic seasonal charter service to Jersey and a short-lived air shuttle service to and from England’s other well-known university city, Cambridge, operated in 2006.

Otherwise, London Oxford is best known for general aviation and for having become the second British airport (after Coventry) to be approved as a UK entry point for domestic pets, under the Pet Travel Scheme!


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