GIP selling off Gatwick by the pound – is that what the airlines expected?

During negotiations for the enforced sale of London’s Gatwick Airport during 2009, the resident airlines there, and especially those with extensive operations like easyJet, let it be known that what they really wanted next was a ‘real’ airport operator that had the interests of airlines and passengers at its heart. While GIP’s experience at London City Airport – albeit only with short-haul airlines apart from BA’s New York flight – would have been comforting to those airlines, its surprisingly quick decision to offer equity to a pension fund and a sovereign wealth fund may be cause for some concern to the airlines.

NB: This analysis is from the upcoming Mar-2010 edition of CAPA's Airport Investor Monthly - your guide to global airport privatisation, investment and development news and analysis.

The attitude taken by some of Gatwick’s airlines during the Ferrovial to Global Infrastructure Partners (GIP) sale procedure appeared to be that Ferrovial, despite its huge size and scope, was not first and foremost an airport operator; rather a construction company whose exposure to airport sector management had been minimal prior to the successful BAA takeover. It had a minority stake in Sydney Airport, ownership of the small Bristol and Belfast George Best airports (UK) – both since sold - and the operating concession at Chile’s Antofagasta Airport. After the lengthy examination and scrutiny of BAA’s airports in 2008 (especially Heathrow) by governments, business and the general public alike, which collectively branded it as unfit for purpose and which prompted a Competition Commission enquiry, it was felt that a return to ‘the good old days’ was called for.

A monopoly in its own right

While the majority of Gatwick’s airlines welcomed the sale to GIP, some pointed to the fact that it remained a monopoly in its own right - just smaller than the previous one - and that it needed properly to be regulated to protect airline passengers from the new owners exploiting their market power. Virgin Atlantic went out of its way to urge GIP not to become “another BAA”.

Apart from GIP, which is a USD5.64 billion infrastructure investment fund sponsored by Credit Suisse and General Electric, the other Gatwick bidders had airport operators at their heart even if they were by necessity backed up by pension funds or other investors (ie Borealis, Greater Manchester Pension Fund, Citi Infrastructure Group). That is not to suggest that GIP is not meeting the challenge at London City Airport (LCA), where it has been in charge for over three years since buying it from entrepreneur Dermot Desmond for what now seems an eye watering GBP750 million (half what GIP paid for Gatwick). In 2009 LCA experienced a loss of 14.2% passenger traffic, twice the European average of 7%, but at least 75% of that traffic is generated typically from the City of London and one might have expected a bigger loss. LCA is possibly the most business-oriented airport on earth.

The airport management, headed up by long-serving CEO Richard Gooding, has been innovative; attracting BA to its A318-operated New York route, ensuring the airport is certificated for other jet aircraft such as Embraer’s E170 and E190 which are preferred by large operators like BA, Air France-KLM and Lufthansa over the turboprops that were the airport’s mainstay, providing top class business jet facilities and expanding the terminal building.

And GIP went about the task in much the same way at Gatwick immediately after the takeover, which was formalised in Dec-2009. GIP declared that it would upgrade and modernise Gatwick Airport to “transform the experience for both business and leisure passengers. We plan to work closely with the airlines to improve performance, as we have done successfully at London City Airport.” GIP also indicated that ‘head-to-head’ competition with Heathrow would be limited but that a ‘more focused approach’ on Gatwick would help to attract passengers.

Gatwick starts to justify GIP’s investment

It did so just as Gatwick started to show improved results and justify GIP’s investment. Having recorded some truly shocking results in the first half of 2009, the airport handled 2.12 million travellers in the final month of the year, 1.5% more than in Dec-2008. In fact Dec-2009 was the third consecutive month of increasing passenger numbers at the airport although for the year as a whole traffic did decrease by 5.3% compared to 2008, to 32.37 million passengers.

A much improved result was also seen in the cargo segment, which had been recording month-on-month losses of 50% or more for over a year. The annual result was still –30.6% but the management will have been heartened by a gain of +19.2% in Dec-2009.

London Gatwick Airport traffic highlights: Dec-2009



Variation %

Passenger numbers

2.1 million

+1.5% year-on-year

Cargo volume

8,154 tonnes


Aircraft movements



London Gatwick Airport traffic highlights: F/y 2009



Variation %

Passenger numbers

32.4 million

-5.3% year-on-year

Cargo volume

74,779 tonnes


Aircraft movements



As 2010 has unfolded so far GIP’s tactics have become clearer. Newly appointed CEO, Stewart Wingate, stated the airport plans to "poach" airlines away from London Heathrow and Stansted airports by making improvements to the airport's check in areas and security and baggage handling – operational areas that come under most scrutiny at Heathrow and Stansted.

The airport also plans to consult with airlines on development projects.

It is reported that GIP discovered several hitherto unknown problems shortly after the takeover, of the sort which often arise when a heavily indebted company has to balance day-to-day operation with cost control. These problems had to be tackled before it could turn its attention to the business of retaining the existing client base and attracting new airlines.

Worst rail station on the planet

Mindful of the British government’s current obsession with rail travel one of the biggest hurdles GIP faces is improving what has been described as the worst major rail gateway on the planet – Gatwick’s own station, home to the ‘Gatwick Express’ that runs to and from downtown London Victoria rail station in 30 minutes. A major investment is required. One important enhancement that will be completed, within five years, is the upgrade to the Thameslink rail line, which runs north through the capital, via the (Eurostar) St Pancras/Kings Cross downtown station area and into Hertfordshire and Bedfordshire – established territories of Stansted (BAA) and Luton (Abertis) airports. Completion of that project will undoubtedly broaden its appeal and add passengers from north of the capital.

The future of the Gatwick Express itself is in doubt. While it is really an express service, like the Heathrow Express (non-stop to and from Paddington Station)) and unlike the Stansted Express (at least two stops to and from Liverpool Street station) the current franchise holder since Sep-2009, Southern Trains (all Britain’s rail operating companies are franchises), is reported to be planning to discontinue use of dedicated rolling stock and instead employ commuter-type carriages. For Southern Trains, which like most of the other operators relies on government subsidy, it is just another service and the indications are that it will turn the service into a slow stopper.

This would not have been of consequence when BAA offered three gateways into London, but in order to compete with Heathrow and even Stansted, GIP needs fast, dedicated trains to Central London with baggage storage facilities, multi-lingual announcements, onboard ticket sales, and sympathetic staff - not a commuter operation.

However, Andrew Sharp, Director General of the International Air-Rail Organisation (IARO), a body that promotes the benefits of rail links to and from airports, insists that while the dedicated stock currently in use on the Gatwick Express is to be re-deployed, it will be replaced by refurbished ‘inter-city’ trains rather than commuter trains with Gatwick Express branding multi-lingual announcements, high capacity luggage stacks and greater seating capacity. He also points out that the franchise agreement between government and train operator states specifically that four non-stop trains are to be operated each hour, in response to previous consultations that involved IARO. He suggests that additional stops would be restricted to peak hour halts at Clapham Junction, a very busy commuter interchange station in south London, which does introduce a degree of uncertainty.

Other commentators have argued that it is not really up to Southern Trains to decide where the Gatwick Express stops anyway, as the DfT specifies services as well as subsidising them. It has noticed that loading on these trains is relatively light, while other services on the line are overcrowded so it could make better use of the service, possibly by extending it to Brighton on the south coast and stopping at Croydon, a large borough in south London.

GIP would almost certainly prefer a frequent non-stop service but may be caught up in the need to satisfy local timetable demands. A similar situation arose at Manchester after the rail link was completed there, with many trains calling at small suburban stations mainly just to pick or let down airport employees.

US-Europe open skies still ‘up in the air’

Back in the air another pressing issue is whether or not the EU-US Open Skies agreement will reach a successful conclusion this year, or whether it will flounder over disagreements on cabotage rights for European airlines in the US and over foreign ownership of US airlines. As things stand it could go either way, with Virgin Atlantic, an important airline for Gatwick and which gained little from the first stage agreement in 2008, loudly protesting to the British government that US carriers should lose access to Heathrow Airport and the right to fly between European cities unless their home market is opened to competition. The EU retained a right of ‘automatic termination’ in the event of the US failing to open up its domestic market by the end of 2010.

Should the final agreement not be ratified, or if it somehow managed to stagger on but without the UK on board, then the effect on Gatwick would be complex.

Gatwick lost some long haul services to Heathrow when the first stage agreement began, as horse trading of slots was ratcheted up a few gears. The biggest capacity hike came from US airlines, which prefer Heathrow to Gatwick because of its mass of alliance (especially oneworld and Star) connection potential there. Those airlines could be tempted back to Gatwick by GIP if they are no longer to be permitted the breadth of operations at Heathrow that they recently gained.

It might also tempt Virgin Atlantic to reappraise where it stands in the Heathrow vs Gatwick debate, if it no longer had to compete with US airlines at Heathrow to the same degree and if GIP was able to offer sufficiently preferential terms. Virgin has recently stated there is “definitely scope” for carriers to relocate to an upgraded Gatwick, adding it was still unlikely many would relocate from Heathrow, due to better global connections.

Dead man walking BA could still influence Gatwick’s future

Then there is British Airways (BA), which has eschewed Gatwick in favour of Heathrow consistently for a decade, just as it has with just about every other British airport, except perhaps London City. The future of BA, which will probably lose between GBP500 million and GBP750 million this financial year (to 31-Mar-2009), is predicated momentarily on mergers with Iberia and American Airlines (both oneworld movers and shakers), a successful refinancing of its pension fund nightmare, a long and steady truce with its unions and the construction of a third runway at home-sweet-home Heathrow.

If none of these happen (and that is entirely possible) then it may well be a completely new and much thinner BA that survives into 2011 (if it survives at all) and one that, after running out of merger options, seeks a ‘low cost’ role for itself in the future, one that could just mean expanded operations at Gatwick. (There are plenty of observers already who claim that CEO Willie Walsh’s policy is to ‘Ryanairise’ BA.) This outcome is especially true with regard to the Heathrow runway, which the Conservative Party has said it will cancel if elected. Despite slipping in the polls it still seems most likely it will be the largest party after the next election, probably on 06-May-2009.

For the first time in decades, the odds are slightly more on a new runway for Gatwick before one for Heathrow, or for Stansted where the opposition is fearsome. Residents close to Gatwick can be vocal too, and the legal covenant preventing a second runway from being built until 2019 at the earliest is still in place, but towns like Crawley, Horley and Reigate have come to rely on the airport too much for employment, actually recording the lowest unemployment rate in the country during the last economic boom. They would not want to lose that employment opportunity.

BA would not wish to operate excessively with route duplication across two airports that are only 30 miles apart, let alone three (with London City) but it may be a case of desperate means to desperate ends with Gatwick steadily growing in importance.

As for the LCCs, including easyJet, which has its largest base at Gatwick, they are heavily reliant on the fast turnarounds that a single runway operation doesn’t really help. This may be at least part of the reason why Ryanair, the fastest airline on the draw in the west, has never made Gatwick a base and continues to operate 14 times as many flights from Stansted as it does from Gatwick; airports that are roughly equi-distant from London, and despite Gatwick’s catchment area being considerably more heavily populated.

More high-speed rail equals less Gatwick air travel

Yet another factor in the equation is the continuing growth of high speed rail services under the English Channel. During bad weather in Dec-2009, Eurostar, which operates between London and Paris/Brussels, with onward high-speed connections in mainland Europe, got some very bad publicity when some of its trains broke down in the tunnel, trapping thousands of passengers for hours. But that was the only blip in a relentless period of growth and generally positive publicity that has seen rail travel usurp air as the number one choice for short journeys to the near continent in Gatwick’s catchment area. The fact that other rail operators such as Germany’s Deutsche Bahn are now looking closely at introducing their own services on the line and that Ashford Station in Kent is accessible from much of Gatwick’s catchment area, does not bode well for short haul air service prospects in a 500-600km range from Gatwick. The Eurostar service had such an effect at Gatwick that for several years there was no direct air service to and from any Paris airport.

So there are many factors in play for the new owner to juggle with and uncertainty remains as to whether or not it can really turn things round and give Heathrow and Gatwick some real competition. But why has it chosen to make a sizeable chunk of its equity available so soon after the takeover?

One clue is in the sheer scale and diversity of the deal that resulted in a syndication of 12 banks financing GIP’s purchase of Gatwick, for which it borrowed GBP740 million. They were BayernLB, Banco Espirito Santo, Calyon, Credit Suisse (a co-owner of GIP together with General Electric), HSBC, JP Morgan, Royal Bank of Canada, Royal Bank of Scotland, Santander, SMBC, Societe Generale and WestLB; jointly cobbling together GBP1.125 billion in loan finance. This was no simple deal to glue together.

It was as early as Dec-2009 that GIP indicated it would commence an equity syndication programme, while remaining the majority shareholder and it took only until 01-Feb-2010 for the news to leak that South Korea’s National Pension Service (SKNPS) intended to take a 12% equity stake, for just under GBP100 million (USD159.6 million), a figure that indicates a valuation slippage already and one that is more in line with the GBP1.1-GBP1.3 billion bids originally made by the three contenders for Gatwick.

Global presence

SKNPS, the world’s fifth largest pension fund, indicated its decision was made in order to increase investment in ‘alternative assets’ such as real estate, infrastructure and private equity funds to 6.4% this year from 4.5% as of the end of Nov-2009. It has been building a global presence during the last year and bought HSBC's landmark European headquarters in London's Canary Wharf for GBP772.5 million in Nov-2009 in what was one of the world's biggest property transactions of the year.

SKNPS’s rationale is that it expects passenger numbers at Gatwick Airport to increase in the mid- to long-term, aided by the London 2012 Olympics, (which will last for three weeks and take place 40 miles away) and generate stable cash flow in the long-term “through efficient management of the airport”.

Only four days later came the news that Abu Dhabi Investment Authority (ADIA), a sovereign wealth fund, had bought a 15% stake in the airport for approximately GBP125 million (a valuation drop of around GBP100 million on the Dec-2009 sale price). Not just a sovereign wealth fund, mind - the world’s biggest, with assets of between USD500 billion and USD700 billion.

Established in 1976, ADIA is a global institutional investor, declaring its mission to be one of “securing and maintaining the current and future prosperity of the Emirate of Abu Dhabi through the prudent management of the Emirate’s investment assets.” That in itself is an endorsement of Gatwick’s credentials. Even allowing for the current travails in Dubai, and the suggestion that Abu Dhabi might once again have to ‘bail it out’, this is one serious investment institute that does not take decisions lightly, even if GBP125 million (USD198 million) is no more than pocket change. It manages a substantial global diversified portfolio of holdings across sectors, geographies and asset classes including public listed equities, fixed income, real estate, and private equity and decisions are based solely on its economic objectives of delivering sustained long-term financial returns. ADIA does not seek active management of the companies it invests in.

The Manchester City of airports

As things stand, Gatwick has just become the Manchester City Football Club (MCFC) of airports (MCFC being the institution that became the world’s richest soccer club when it was bought by interests in Abu Dhabi, the inappropriately-named Abu Dhabi United Group headed up by Sheikh Mansour bin Zayed al-Nahyan).

From a financial viewpoint, taking the combined might of GIP, SKNPS and ADIA into account, the airport need never worry again about investment as long as it can be justified, just as MCFC is now able to offer astronomical sums for players (e.g. GBP100 million for the Brazilian Kaka) and equally ridiculous wages that even Major League Baseball players would swoon over, having previously been restricted to what were by comparison flea market-level trades.

The ‘what ifs?’ mount up

But, as the opening paragraph of this article hinted, there are always the ‘what ifs?’ to consider.

Airports are best managed privately when the owners have a ‘hands on’ relationship, taking an active interest in the day-to-day operations, and being prepared to take the rough with the smooth. MAp has been good at that. These new shareholders have a sizeable financial input. If Gatwick was a listed company this (combined 27% stake) is preciously close to the equity limit (30%) at which a single shareholder would have to declare its hand according to London Stock Exchange rules.

But ADIA, at least, declares that it does not seek active management of the companies it invests in. Might that lead to complacency amongst the owners collectively; might they take their eye off the ball, to use an idiom with another soccer reference, and allow the airport to ‘drift’ then wake up one day to find that Heathrow has in fact been permitted a third runway, or even that London Mayor Johnson’s plans for a Thames Estuary airport have been nodded through? Alternatively, what if they set up so many committees, (and there could be more investors yet according to GIP) each with its own preferred ideas, that nothing actually gets done at all? A camel, after all, is but a horse designed by a committee.

None of the above is likely but at the same time this investment by global entities is most assuredly not what the airlines at Gatwick had in mind when they learned that Ferrovial was to be shown the door. Could Ferrovial even turn out ultimately to be the lesser of two evils?

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