Liverpool Airport's struggles to compete with a powerful Manchester neighbour; new airlines needed

Liverpool’s airport is famous as a perennial loss maker since it first opened eight decades ago and under a series of public, public-private and private sector ownership guises (though it did achieve profitability at the EBITDA level in recent years).

With steadily declining passenger numbers, a foreign investor that arrived on the scene a handful of years ago with big ambitions has now sold its stake back to the original owners, who are fundamentally land and property developers. What’s more, its debts have urgently to be rescheduled. To say the outlook for the airport is not encouraging would be an understatement though the old/new owners remain bullish about its prospects. 

Many battles, notably with Manchester

Just how Liverpool Airport really got going at the end of the 1990s then lost its way more recently has been chronicled in other CAPA reports over the years. Fundamentally the battle has been between Liverpool and Manchester just as it is on the soccer field and as it has been since Manchester built the 40-mile long Ship Canal in the 19^th century to avoid the high taxes charged on cotton imports through the Liverpool port that were stifling its trade. The animosity between the two cities is tangible.

From the 1970s onwards Manchester Airport gained pre-eminence over its rival as it was designated a UK intercontinental gateway, one of only two outside London (the other was Glasgow Prestwick). Liverpool was considered for the role but the propensity for political and economic inertia prevalent there at the time counted against it.

Then Manchester was connected to the national motorway network via the M56 motorway and the spur road to the airport, making access easier than at any other airport in the north of England. Passenger travel developed quickly. As Manchester approached the 15 million ppa mark Liverpool was languishing with a tiny proportion of that total.

That situation then prevailed until the end of the 1990s when a change of management at Liverpool and a change of owner prompted a more aggressive commercial outlook. Before the (Manchester-based) Peel Group took over Liverpool Airport was managed by a public-private joint venture involving local municipalities and British Aerospace. While BAe had written and distributed a fanciful document that proposed a 40 million ppa airport at Liverpool, in reality a more likely outlook was for the aerospace company-cum-motor vehicle manufacturer (BAe had bought the Rover Group) to use the land to park cars.

Liverpool was quicker to adopt LCCs - but permanency has been lacking

But the new Liverpool management was quicker to react to the arrival of the low cost airlines than was the management at Manchester, which for many years was far more concerned with keeping British Airways on board and encouraging charter operators. It would not be too far off the mark to say that Manchester looked somewhat disdainfully on the LCCs, which it apparently considered a passing fad.

Liverpool saw the matter quite differently and actively courted the LCCs, starting with easyJet, moving later to Ryanair, the two carriers that are dominant there today. While the number of routes operated by each has varied, currently they total 19 regular and 11 seasonal for easyJet and 24 regular and 10 seasonal for Ryanair.

Liverpool Airport seat capacity 28-Apr to 04-May-2014

Source: CAPA - Centre for Aviation and OAG

But one of the problems that Liverpool has had is that it has not been well supported by other airlines, whether LCCs or full service/network carriers. Momentarily it only has Wizz Air, with three routes and Flybe (which once had a larger base at Liverpool than at Manchester) with just one. A potential saviour, Norwegian, cancelled its twice weekly Copenhagen service at the end of Mar-2014 though it might start other services. That is pretty much it. The potential for either or both of the two main LCCs to shift all their operations to Manchester – as unlikely as it seems – remains of concern.

Full service carriers have not seen fit to support Liverpool

The failure of both full service carriers and some LCCs to support Liverpool is historic. Numbered amongst them are British Airways (Heathrow), British Midland (Heathrow), easyJet (Stansted), VLM (London City), Aer Lingus (Dublin), and KLM (Amsterdam), all of which have operated at Liverpool but failed to do so for any length of time.

The latest to try was KLM, which found itself unable to sustain a three times daily service to its home base, one of the world’s leading hub airports. It is understood the Liverpool management has spoken to Lufthansa about a Frankfurt or other routes (and to Pegasus) though it is difficult to imagine how German routes would perform any better than Amsterdam. In most of the cases mentioned the Liverpool route was pitched against a plethora of services at Manchester. An improved rail service between Liverpool and London also imposed on the prospects for any carrier hoping to make a fist of a London route. For connecting traffic there are ample BA and Virgin Little Red services at Manchester.

Long haul routes such as New York and Hamilton, Ontario have also been tried, without any success.

So Liverpool was forced to build a business model around a finite number of short haul budget flights, whose operators invariably demand more advantageous charging conditions as well as employing many methods to alleviate passengers of ‘ancillary income’ usually at the expense of the airport operator.

Liverpool might still have managed to prosper under such a regime but a change of management in 2010 at Manchester led to an acceptance of the value of no-frills airlines there for the first time, the introduction of a new charging regime that was friendlier to LCCs and the relatively small number of services operated by carriers such as Jet2.com and bmibaby were quickly augmented by those of easyJet and Ryanair. easyJet currently operates 27 regular and eight seasonal routes and Ryanair 24 regular and 10 seasonal routes, making easyJet a bigger carrier there than at Liverpool while Ryanair is on par.

There is some route overlap but easyJet’s Manchester route network is more oriented towards business routes and Ryanair’s looks set to follow suit as that airline also increasingly targets business travellers. So the difficulty Liverpool faces is in convincing those airlines to operate on ‘business routes’ there.

For a variety of reasons including those mentioned above passenger throughput dipped alarmingly in 2012 by 12% year-on-year to 4.46 million and then again by 6.2% in 2013 to 4.187 million. Traffic had peaked in 2007 at 5.47 million. In what is a peak/trough environment for many UK airports Liverpool was unable to build on gains of 2.7% and 4.7% in 2010 and 2011 respectively.

Ad-hoc charters can only be a temporary solution for Liverpool

With little on the horizon in terms of sustainable new routes, with the still declining charter market locked into Manchester and with carriers preferring to look to Leeds Bradford airport for new and unserved routes in the north of England, Liverpool began to attract ad-hoc and short series charters from the beginning of 2014. Most of them are leisure travel oriented and based on Liverpool’s tourist attractions (The Beatles, various festivals, UNESCO World Heritage Site, soccer etc) for inward travel together with the attractions at the other end of the route for outbound travel.

A recent example is a service initiated between Valladolid and Liverpool by Iberia in May and Jun-2014 to take students on an exchange programme.

But the overall picture remains bleak and it is perhaps of no surprise that Canada’s Vantage Group, which took a 65% stake in Liverpool Airport in 2010 for around GBP175 million, should have decided that it was time to cut its losses.

Vantage invested at a strange time, after the boom years for aviation in Europe were over but also after the crutch that was offered to Peel Group by the European Union through its support packages for economically disadvantaged areas (as Merseyside was and still is) had run their course.

The Vantage Group must have had confidence in the prospects for Liverpool Airport and they were probably founded on four strands:

• Its track record of operation of airports of a similar size, scope and calibre;
• The UK economy would recover quickly;
• The fact that most post Sep-2001 route growth in Europe had come from the low cost segment and that segment was in situ at Liverpool already;
• Manchester’s comparative ineptitude in dealing with the low cost segment. The incoming CEO at Liverpool (who is now Group CEO and responsible for deciding to sell the Liverpool equity) even went so far as to challenge Manchester openly, indicating he would be looking for long haul routes to compete with it.

In fact there is widespread acceptance that operationally Vantage did a good job at Liverpool, turning it into one of the country’s better performers in that area. But it presumably did not envisage that the economic recession in the UK and Europe would last as long as it did, or, crucially, that it had awoken a slumbering giant when it went on the offensive against Manchester. Manchester Airport Group and its municipal owners will have been only too aware that at the height of its growth period Peel Group was letting it be known that it wanted to take over Manchester Airport and that it thought it could run it better.

Vantage has refocussed on North America

Vantage has declared it is refocusing on North America. This could be interpreted as an admission that its foray into Europe generally has not been a success, including its participation in the Hermes Airports consortium that operates Larnaca and Paphos airports in Cyprus.

It has already relinquished its shareholding in Durham Tees Valley and Doncaster-Sheffield airports in the UK, again to the Peel Group. That equity was originally acquired from Peel also in 2010 at the same time as the Liverpool Airport transaction. Both of those airports were in a less sustainable situation than Liverpool, which had been considered the jewel in Vantage Group’s UK airport investment.

The change of ownership at Liverpool is effective immediately and Peel will now become the sole owner of the Airport Company.

As far as Peel Holdings is concerned it believes that by (re-)investing in Liverpool Airport, “the business can be taken to the next level, attracting new airlines and new services by capitalising on the excellent operational and commercial performance.”

Peel looks to be a better option for the airport in the sense that as a major property developer the airport will be part of one of the biggest projects anywhere in Europe right now, Peel’s Ocean gateway programme that stretches from Liverpool to Manchester via parts of North Cheshire and along the banks of the aforementioned Manchester Ship Canal, which it owns in addition to the (also aforementioned) Port of Liverpool.

Peel’s Ocean Gateway Project

Source: Ocean Gateway website

Or is it? The airport has been a poor performer financially during the entire period in which Peel Holdings has wholly or partly owned it and there is little prospect of any imminent substantial change. There was a GBP7.1 million loss for the 12 months ended 31-Mar-2014, up from GBP6.5 million in the previous corresponding period. During the period, the airport paid almost GBP10 million in interest payments while its property assets declined by GBP3 million.

Land and property development are brutal businesses

Land and property development is a brutal business and we have come full circle from the late 1990s when property developers like TBI were eschewing commercial developments like offices and homes in favour of airports. If Peel were to decide that the value of the land on which Liverpool Airport is built has greater value as an industrial estate or as trendy apartments, and that Manchester Airport is too big and powerful a beast to continue to challenge, it would be a surprise if the runway remained in use for any significant length of time.

In the immediate future though the pressing problem is the airport’s finances. During the year to Mar-2013 group turnover slipped 17% to GBP38.2 million and the business was left with a pre-tax loss of GBP24.7 million; at least it was down from GBP29 million on the previous occasion.

Accounts filed in Jan-2014 for Vantage Airports UK Limited showed it agreed a standstill deal until Mar-2014 on debts of GBP78.9 million, due to HSH Nordbank and Export Development Canada. The directors said new facilities would require a partial repayment, involving a cash injection from both shareholders. The airport’s auditors KPMG warned in the annual report of “material uncertainty which may cast significant doubt on the company's ability to continue as a going concern”.

New banking facilities were to have been arranged by the end of Mar-2014 but deadlines were extended and the target now is for talks with the airport’s banks to be successfully concluded within the next two months (i.e. by the end of Jun-2014). In the interim the main focus is concentrating on working with Peel on growing passenger numbers and adding more airlines and routes to the airport, which will obviously be beneficial in discussions with the banks.

The management appears to be confident about the future; in particular that Peel Group is “big on investment” (which it certainly is) and that it can coalesce the various stakeholders in Liverpool into action, which it probably can.

However, when CEO Matthew Thomas says the airport is talking to airlines and that “what is not going unnoticed is just how well the airport is doing” it isn’t clear exactly what he means. Passenger numbers are growing again certainly (by an average of 1.13% in the first three months of 2014, about half the rate at Manchester) but there is a long and painful road back to recovery in prospect.

Liverpool Airport's drive to attract new airlines has plenty of challenges

There are several factors influencing Liverpool’s ability, or lack of it, to attract the new airlines it so badly needs. One is the historical precedent mentioned earlier; its inability to retain critical routes appropriate to full service carriers for any substantial length of time, whether of the point-to-point or hub and spoke variety. This sends out an unfortunate message to aspiring airlines and is despite the fact that some important commercial towns such a Warrington lie well within Liverpool’s catchment area.

Secondly, low cost carriers are often unwilling to take on the ‘big 2’ of easyJet and Rynair when either (or both in the case of Liverpool) is so well established though there is some evidence this lack of ambition is diminishing.

Thirdly, a much more aggressive attitude concerning route development from Manchester Airports Group compared to when Vantage Group first invested at Liverpool.

Fourthly, the emergence of Leeds Bradford airport as the ‘new destination of first choice’ in northern England, as witnessed by the location of new services by Monarch Airlines, SAS and British Airways there.

Accordingly, “where next for Liverpool Airport?” is not an easy question to answer.