BAA again forced to sell two airports

BAA had previously appealed to the Competition Appeal Tribunal (CAT) in Dec-2009 on the basis of alleged apparent bias, due to the participation of Professor Peter Moizer, an academic at Leeds University, in the CC's panel to assess if an adverse effect on competition existed in BAA's ownership of UK airports. Professor Moizer was also an external advisor to the Greater Manchester Pension Fund, which was co-opted by Manchester Airports Group (MAG) to join forces with Canada's Borealis fund to bid for London Gatwick Airport, a transaction that was ultimately decided in favour of Global Infrastructure Partners (GIP) at a price of GBP1.5 billion.

The CC has since " tightened" its procedures and in Jan-2010 commissioned a comprehensive, independent, review chaired by Dr Brian Woods-Scawen of its rules and procedures on conflicts of interest.

Appeals heaped on appeals

However, the Court of Appeal overturned the CAT's decision, stating it was "wrong to find apparent bias" as Professor Moizer's involvement was too late in the process to have affected the CC's original decision. The Competition Commission welcomed the decision but BAA announced plans to appeal the decision again, this time to the Supreme Court, stating the Court of Appeal did accept that apparent bias existed during part of the Commission's investigation. The potential exists for even more appeals, involving the European Courts, which have ultimate precedence over British courts in many cases. As Airport Investor Monthly has stated many times in the past, this story is expected to run and run as BAA tries to buy more time.

The main reason is that while economic circumstances have improved in many parts of the world, notably in the Middle East (where they barely worsened in the first place) and Asia Pacific, that is not really the case in Europe, and most certainly not the UK, where growth is sluggish at best and where the threat of a second ('double-dip') recession has not gone away. By the end of Oct-2010 the government's spending review will have been made public, one that threatens up to 40% cuts in public sector departments with a disastrous knock-on effect on the entire economy. To add insult to injury the incoming (May-2010) coalition government has been described as 'the most anti-aviation in history' for stopping virtually all airport expansion and continuing to hike up aviation taxes. Hardly surprising that BA's Willie Walsh continues to threaten to shift aircraft to Madrid once the merger with Iberia is complete and to warn forcibly about the dangers of Middle East hubs dominating world aviation at the expense of Europe (and especially his beloved Heathrow).

Only significant UK acquisition this year not looking too promising

So the economic conditions appropriate to the sale of an airport have not improved sufficiently to justify the procedure and do not look as if they will do so in the near future. The only significant activity in the UK this year has been the acquisition of 65% of the equity of Peel Airports by Canada's YVRAS, a brave decision for which YVRAS is to be applauded. Since then the jewel in that crown, Liverpool John Lennon Airport, has reported its biggest pre-tax loss, of GBP8.8 million on revenue of GBP31.1 million for the 12 months ended 31-Mar-2010, while the 'Big White Hope' for the Group, Doncaster-Sheffield Airport, saw easyJet announce it would withdraw all services in Jan-2011, just five months after shifting operations there from East Midlands Airport. At least the aircraft will be going to Liverpool.

BAA's latest passenger traffic figures themselves do not inspire much confidence. In Sep-2010 traffic actually grew by 3.3% but the vast majority of the growth came at Heathrow (+7.6%) and on BAA's own admission was the result of the increasing utilisation of larger aircraft like the A380, the reinstatement of flights previously removed from schedules, a late summer vacation surge brought on by poor weather and in response to the volcanic ash disruption in the earlier part of the year. There is no certainty this level of growth will be repeated and October's figures will be awaited with much interest. Meanwhile, Stansted continues to see its traffic in decline (-4.3% in Sep-2010) while Glasgow lost 5.7% in the same month. Only Edinburgh, surprisingly perhaps while it charges visitors in cars merely to drop off passengers, reported an improvement, of +2.2%. The ray of hope comes from air cargo volume, which grew by 11.8% overall. These statistics are improving but hardly setting the world on fire.

Divestment more popular than investment

In fact, BAA is once again ordered to sell the two airports at a time when voluntary divestment of interest in airport estate, rather than acquisition, seems to be the more popular option in the UK. Within the last month Copenhagen Airports, which is majority owned by MAp Airports Ltd, has entered negotiations to sell its 49% stake in Newcastle Airport, (it also completed the sale of its similarly sized stake in Mexico's ASUR), while Highstar Capital, an infrastructure fund manager and 25% investor in London City Airport, is reported to be seeking to offload that stake just two years after buying it from GIP. It is really only in countries like Indonesia and the Philippines in the Southeast Asia region, where there is a growing clamour to privatise airports. In North Asia, South Korea's Incheon Airport's privatisation is delayed until 2011 (in this instance for legal/regulatory reasons) and the Mayor of Chicago has clearly got cold feet over the lease of Midway Airport, choosing to defer the decision until his successor is in place and thereby placing the onus on him.

As if to emphasise the point BAA has just sold its 65% stake in Gesac SpA, which controls Naples Airport, to F2i to complete its contraction right back to its basic core.

Shortly thereafter Ferrovial revealed it plans to sell a 10% stake in BAA to pay down debt and fund other projects. The stake in BAA may be worth EUR400 million (USD558 million) and bidders are expected to include infrastructure funds. Ferrovial is disposing widely of stakes in assets to pare net debt of EUR24 billion, and recently agreed to sell 10% of a Toronto toll road for CAD894 million. Ferrovial stated in Feb-2009 that the company might sell a stake in BAA if it received a "reasonable offer".

Few attractions at Stansted and Glasgow; Edinburgh a little better

Under these circumstances is there any realistic prospect of BAA finding buyers for these two airports? It got much less for Gatwick Airport than it bargained for (though a little more than the worse-case scenario six months before the completion) and there were never more than three committed buyers there. On the face of it, Stansted does not offer much attraction; quite the reverse of the situation only two or three years ago. Over the past three years, traffic there has declined from a high of 24 million passengers to just 18 million passengers in 2010. An additional runway and terminal are both off the agenda for the foreseeable future grace á the coalition government. The airport's main tenant, Ryanair, has been laying up aircraft during the last three winters and is - at least we are led to believe - well down the road to conversion in favour of primary airports, which attract more business passengers. Stansted may be only 30 miles (48 km) northeast of central London but access and egress, unless you live close to the M11 motorway, is not that easy and public transport takes an eternity; the so-called 'Stansted Express' (or Stansted Slow as its regular users call it) making two or more stops en route Central London. There is no prospect of Stansted being assimilated into the government's much vaunted 'high-speed rail network' (which will consist of one line running northwest out of London then branching into two after Birmingham).

In the period Jan to Aug-2010, and stripping out April because of the effects of the Ash Cloud, Stansted has averaged monthly traffic falls of 4.87%, pretty much on a par with most UK airports, but what will be of concern to BAA is that those falls have started to increase in the last three months, rather than reduce, while Stansted's rival for the coveted 'third UK airport' slot, Manchester, has seen its figures, which were dire, improve considerably.

Surprise package

Edinburgh was the surprise package in BAA's stable in 2009, with growth in every month from March until November and an end of year passenger traffic total of 9.044 million (+0.6%). Edinburgh's traffic figures have not been quite so hot this year with just three months of growth (Feb, Jul and Sep) but with distinct signs of improvement in the negative results latterly. Much of the growth last year is down to the establishment of a base by Ryanair, which, unlike the case of Glasgow, does not have an appropriate 'secondary airport' to operate at in the Edinburgh vicinity (though it has investigated at least one). Ryanair now operates on 42 routes from Edinburgh (less one, Marseille, that will close), and is the biggest carrier, followed by Flybe, easyJet and Jet2.com, which opened its own base there in 2009, the first not in England. The future looks quite promising even though the airport is getting involved in a legal dispute with the City council over its GBP1 drop off charge.

Rail link no more

Not so Glasgow International (GIA), where Ryanair does not operate at all, preferring instead the more distant Glasgow Prestwick Airport, on the coast. GIA's overall traffic loss in 2009 was -11.3%, taking its traffic total for the year to 7,214,000, much less than Edinburgh's even though the Strathclyde urban conurbation is much bigger than that of the Scottish capital. 2010 has been even worse with heavy passenger losses in every month. Glasgow is starting to gear up for the next Commonwealth Games in 2014 but like Delhi it will not be 'ready' in at least one sense - it has been denied a rail link to and from the airport.

The price is right - come on down

Who would buy into these airports? Of the three Gatwick bidders, MAG has gone very quiet on investment since losing out there and since a change of CEO recently is possibly more likely to become involved with disposals rather than acquisitions though it has in the past shown an interest in both Glasgow and Edinburgh airports. Little has been heard since of the Citi Infrastructure consortium which was undoubtedly 'damaged' psychologically by the twin failures at Gatwick and Chicago. Fraport has also looked at Edinburgh in the past. Macquarie and Vinci have reappeared on the scene, but only in respect of the proposed privatisations of French regional airports. With credit still tight there won't exactly be a queue forming.

Ryanair again demands the end of the DAA

Ryanair was, not unnaturally, quick to applaud the Appeal Court's ruling, describing it as "a great result for competition, consumer choice and passengers" and calling, yet again, for the early disposal of Stansted and Glasgow airports.

But the Irish LCC went a step further, again using the BAA issue as a catalyst to attack the Irish government over its airports policy.

Ryanair believes the UK findings apply equally to the Dublin Airport Authority (DAA) and called on the Irish Government to follow the UK CC and break up "the DAA airport monopoly". Ryanair stated it hopes the Government will sell off Shannon and Cork airports, sell T1 and the new T2 at Dublin Airport to competing terminal operators, and sell non-core DAA assets including Aer Rianta International. Ryanair claims that Ireland, "a peripheral island on the edge of Europe", has the most expensive airports in Europe, and a tourism industry facing two years of record traffic declines.

Breaking News

BAA revenue climbed by 4% in the nine months ended 30-Sep-2010 and EBITDA increased by 73.9%, though it made a loss of GBP158.3 million, itself well down on the -GBP636 million in the p-c-p. The surprisingly robust result, similar in nature to British Airways' surprise profit in the six months to Sep-2010, and in the wake of the ash cloud incident and a series of strikes at BA, was attributed by both airport operator and airline alike to robust passenger traffic as business travellers began to return, prompted by economic recovery in other parts of the world rather than the UK, and combined with ongoing strong retail performance and cost control.
Passenger numbers at Heathrow rose 7.6% to 6.2 million in Sep-2010, making it the busiest September ever. The group now expects adjusted EBITDA for 2010 to at least match the GBP956 million original guidance for the year issued in Dec-2009.

Table 1: BAA financial/traffic highlights, nine months ended 30-Sep-2010 (all financial figures in GBP million)

Measure	Amount GBP million	Variation %
Revenue	1546	+4.4
(Aeronautical)	837	+1.7
(London Heathrow)	742.1	+2.5
(London Stansted)	95.4	-4.3
Retail	350.1	+6.0
Other	357.9	+9.7
Adjusted EBITDA **	719.0	+8.4
EBITDA	803.9	+73.9
Profit (loss) after tax	(158.3)	compared with a loss of GBP636.3 million in p-c-p
Net assets	702.8	+48.2
Cash at bank/in hand	7.9	+38.6
Net debt	9,740	+13.5
Net capital expenditure	609.6	-18.6
Passenger numbers	64.0 million	-2.1
(London Heathrow)	49.6	-0.6
(London Stansted)	14.4	-7.0

** Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation and exceptional items

Ferrovial's financial results for the same period, and issued at the same tiome, reveal an 11.1% fall in airport revenues overall and EBITDA loss of -7.8%.

Table 2: Ferrovial financial/traffic highlights, nine months ended 30-Sep-2010 (all financial figures in EUR million)

Measure	Amount GBP million	Variation %
Revenue	9107	+0.3
(Airports)	2091	-11.1
(BAA)	2084	-11.2
(Swissport)	960.7	+14.8
EBITDA	1973	-0.5
(Airport)	952.9	-7.8
(BAA)	960.3	-8.2
(Swissport)	79.0	+58.3
Net profit	314.6	compared with a loss of EUR191.3 million in p-c-p
Net financial debt	20,512	-7.9
Total assets	45,003	+1.9 when compared with the period ended 31-Dec-2009;
Total liabilities	40,348	+2.4% when compared with the period ended 31-Dec-2009.

Meanwhile, BAA's bête noire, the Mayor of London, Boris Johnson, will not go away. He is reportedly considering the construction of a new major airport at Cliffe on the Hoo peninsula in north Kent, to expand flight capacity to and from London without expanding Heathrow Airport.. The mayor has also been considering the construction of an airport in the city's Thames Estuary. The airport in Cliffe was previously considered by the UK Government in 2002, but the idea was scrapped in Dec-2003. The latest proposal for the airport has been put forward by former Cathay Pacific British head, John Olsen. A spokesperson for Mayor Johnson stated "it is vital a location for additional runway capacity be identified to allow London to remain one of the world's leading cities."