MAG-led consortium's purchase of Stansted Airport could point the direction for the future

The UK's Competition Commission (CC) approved the sale of Stansted Airport by Heathrow Airport Holdings (formerly BAA) to Manchester Airports Group (MAG) on 21-Jan-2013. The sale was announced late on 18-Jan-2013 and marks the completion of the three airport disposals which the CC ordered in its report into BAA's ownership of seven UK airports in 2009.

In total, the three airports serve over 60 million passengers per annum and their sale realised a disposal value in excess of GBP3.5 billion.

The CC, previously known as the Monopolies and Mergers Commission, had first published an interim document on 22-Apr-08, outlining its "emerging thinking" in its inquiry into monopoly practices at BAA and UK airports generally. One of the outcomes of the report was a recommendation to break up the then BAA's airport holdings, which were Edinburgh, Glasgow,Aberdeen (all in Scotland), London Stansted,London Gatwick, Southampton and the 'jewel' (as BAA saw it), London Heathrow, or require the operator to divest airports from its group. The report indicated that such an eventuality "is unlikely to take place soon."

MAG was always the favourite to win

MAG was always the favourite. Its core property, Manchester Airport (MAN) is much the same size and scope as Stansted and MAN has the fairly recent experience of constructing and implementing a second runway. There is a growing sense that the Davies Report, scheduled for 2015, will identify Stansted as at least one of the Southeast England airports where future growth - possibly expressed in the form of a second runway there - should be permitted. What's more, London Mayor Boris Johnson seems to be backing away from his big new 'estuary airport' proposal in favour of Stansted though it should be noted that Stansted is in Essex, not in Greater London (only London City Airport actually is in London), so his sphere of influence might not turn out to be as comprehensive as he thinks it is.

Mayor Johnson's new-found rationale seems to have been promoted by a report commissioned by the House of Commons Select Committee on Transport that found that constructing an additional hub airport instead of expanding an existing airport would not be financially viable and would weigh too heavily on the public purse; possibly to the tune of GBP30 million. The research suggested that under most scenarios, expected revenues from a new hub airport for London would be "less than the expected costs of construction". Mr Johnson's transport advisors subsequently stated that transforming Stansted into a four runway hub airport would solve the nation's aviation capacity constraint problems.

But MAG's CEO Charles Cornish thinks one runway is adequate.

MAG CCO Ken O'Toole could be the man for Stan

Another factor in this equation is that MAN has on board as its Chief Commercial Officer one Ken O'Toole, who was previously Route Development Director for Ryanair. Ryanair services at Manchester in particular and to a lesser degree at other MAG airports have multiplied since Mr O'Toole joined MAG and AIM has previously forecast that MAN could become the northern England equivalent of Stansted for Ryanair, which is its main base. Could Mr O'Toole have been recruited with STN in mind? It does seem quite feasible.

Ryanair went out of its way to influence thinking on who should be the new owner of STN and to impress on bidders what it expected of them. In the wake of the completion of the deal Ryanair said it "welcomed" the purchase and is "looking forward to working with MAG there as we do currently in Manchester, East Midlands, and Bournemouth to grow Stansted's low fare traffic back over 23 million, where it was in 2007 before the BAA monopoly doubled Stansted's fees". It sounds too cosy to be true but there almost seems to be a marriage made in heaven here, especially as MAG has declared that it wants to boost relationships with carriers like Emirates and Etihad Airways to expand at STN as it seeks to restore the airport to its 2007 traffic peak of 23.8 million passengers within a decade. MAN is already one of the busiest airports in Europe for the Gulf triumvirate of Emirates, Etihad and Qatar Airways.

Nothing was said about attracting carriers that are likely to compete with Ryanair like Flybe, or Jet2.com (which more than holds its own where it competes with the Irish carrier), or Monarch Airlines. Only airlines that might provide additional feed to and from Ryanair's extensive STN network through irregular, non-standard interlining.

Even if MAG was the favourite it was up against some strong opposition in this transaction. There was no opposition from GIP, which was the successful bidder for Gatwick and Edinburgh airports partly because even placing a bid would have shifted GIP into an alleged 'monopoly' category where it assuredly would not like to be. In any case it has enough on its plate with Gatwick and Edinburgh. MAG had been a bidder for Gatwick and at one time it was mooted it might even get together with GIP in the final phase.

Even so, organisations like the Morrison and Co consortium, including Infratil, the New Zealand Superannuation Fund, and Australia's Retail Employees Superannuation Trust; Macquarie; TPG; and Malaysia Airports Holdings Berhad (MAHB)/YTL Corp (possibly Khazanah Nasional) are not to be sniffed at. Apparently the Morrison consortium withdrew because it could not secure bank financing (hardly an unusual story these days) so it did not bid. Neither did TPG. The MAHB consortium might well simply have left it too late. The final bids were lined up in the region of GBP1 million and GBP1.5 million to win it does seem rather a lot when Gatwick went for much the same three years ago. That represents a 3.6 point increase in the respective Ebitda multiples (12x to 15.6x) though against that must be weighed the EM for Edinburgh (16.7x) and Portugal's ANA (15x); an average of 15.8. The conclusion is: (a) STN was not overpriced but (b) MAG was very keen to get its hands on it.

Is Manchester Airports Group looking for more 'quality airports'?

Interestingly, this might well not be the end of the story where further acquisitions by MAG are concerned. After shelving this sort of activity for well over a decade, MAG is now flush with funds as a result of the deal that saw the incredibly well cashed-up Industry Funds Management (IFM) acquire a 35.5% strategic stake in MAG and form, over 18 months of negotiation, a strong partnership. Already, MAG's CFO, Neil Thompson, is talking about "the need to look at acquisitions that enable us to leverage the skill-set we have across commercial and operational areas. Manchester has the largest global network of carriers outside Heathrow and a very broad spread of good relationships." MAG said it was seeking to purchase a "quality airport" (sic) following the agreement with IFM to bring new equity into the business.

Mr Thompson noted, "There aren't many airports that if they are appropriately managed can't have a broad mix of airlines across charter, low-cost, long-haul and so on". (That mix is something MAG handles very well). He added, "If we were to make any acquisition you'd expect MAG to be very well-organised and prepared, both in terms of the equity and debt requirements and the subsequent integration of the business. The shareholders will have a significant involvement. They are very supportive."

Could MAG become the new BAA? Might it eventually divide up the UK between itself and GIP?

The number of passengers the two organisations now account for runs to almost 88 million per annum (41.67 million at MAG and 46.02 million at GIP), which is around a quarter of all UK passengers and more than what is now left at BAA/Heathrow Airport Holdings (81.1 million). (All figures based on 2011 traffic totals). Would either or both of MAG and GIP prefer now to focus on non-UK investments? That is what BAA did shortly after privatisation but ultimately it had to regress all the way back to its UK core and then had some of that taken away from it. Both MAG and GIP will be wary not to make those mistakes. Or is this the measure of their investment for both organisations?

MAG needs to remain focused on MAN to keep the locals happy

Certainly there is a danger that MAG could take its eye off the ball where Manchester Airport is concerned, which would not please the local community. It is not that MAN cannot be expanded further. Apart from the Ryanair base there is also a large and growing one operated by easyJet.

(See associated article: easyJet expands services at Manchester Airport - the future is orange).

In the long haul segment MAN has one of the densest networks of Middle East flights by the 'big 3' Gulf carriers in Europe, an SIA service from Singapore, a fistful of daily North American flights and is actively courting airlines to fly key routes such as Los Angeles, Bangkok and several places in China.

But STN has the better overall prospects if the Davies Commission comes down in favour of it. It would be no great surprise if the resources of the MAG route development division were directed more towards enhancing Stansted's product rather than favouring Manchester's. Airport Investor Monthly has often employed analogies with the world of professional soccer and with two of the World's biggest clubs located in Manchester it is appropriate to use another one here.

There has long been a suspicion among ever suspicious Mancunians, that ever since Manchester United was taken over by US owners as part of their sporting 'franchise' that those owners could, if it suited their purpose, simply rename that UK franchise 'United' and move it to London to play at Wembley or in the Olympic Stadium, whose future use is under negotiation.

Just as, in fact, the owners of the Brooklyn Dodgers baseball franchise did when they shifted it to Los Angeles. An analogy too far? Perhaps. After all MAG remains headquartered in Manchester and has not actually been 'taken over' by anyone. Then again, once the GIP fund had started selling equity in Gatwick Airport, it was not long before it was the minority partner there. However you look at it MAG has now staked its claim to a substantial piece of air transport real estate in the rich half (the south) of the 'north-south' divide. Quite how it will respond will be fascinating to observe.

HS2 high speed rail to Manchester could be threat or opportunity

Another factor to bear in mind is how the UK coalition government is tackling that same 'divide', as it has committed to do. At the end of Jan-2013 it released its proposals for the second stage of HS2, the high-speed rail line that is already scheduled to operate between London and Birmingham by 2024.

The extended second stage will take the 225 mph line onto two branches beyond Birmingham, one to the east via the East Midlands and Sheffield to Leeds and one to the west via Crewe (a long established railway junction) and Manchester Airport to Manchester. The idea is that by connecting these metropolitan centres quickly to the capital they will benefit economically though the counter-argument is that it will merely focus even more commerce on London. The second stage is to be completed by 2033-34. A proposed link to London Heathrow is suspended until the Davies Commission reports on its future in 2015.

There are so many permutations arising from this HSR scheme (which might still never be implemented) that the mind boggles. It certainly seems to put Manchester at an advantage. Apparently the agreement to put a station at Manchester Airport, where it would feed directly into all three terminals, was very toughly negotiated and fought for locally by an unholy alliance of councillors, MPs and the business community. With the absence of a Heathrow link - at least for now - this means that both Birmingham and Manchester airports would be directly connected to the line, which runs close to half the population of England, while no London airport would be. That would go a long way towards 'rebalancing' the economy.

In spite of the enormous timescale involved here that must force MAG to wonder if, just as it seals the deal on Stansted, it should continue to concentrate on Manchester's potential. Could there be an offshoot of the track that would enable fast rail travel between Manchester and Stansted airports with a single change of train? The journey time presently is over five hours. Right now there is no air service between Manchester and Stansted, though it would be a reasonable bet that MAG will try to entice an airline like Flybe to operate the route, if only for the sake of its own management.

But what effect will the station at Birmingham Airport have? Journey times between that airport and central London will fall to around 40 minutes, less than Stansted-central London and about the same as Gatwick - central London. On that basis there is little prospect of MAN attracting passengers from southeast England by rail when those passengers would have to by-pass Birmingham Airport en route. One would assume that Birmingham's own route network will grow almost as big as Manchester's while the latter is waiting for the line to be extended.

HS2 seems to offer a greater incentive to Birmingham than to Manchester though there is a much greater prospect than there has ever been that these 'provincial' airports generally will be able to give the two big London airports a run for their money. It all depends on how the airlines interpret it. All three of these airports (a) have the infrastructure (Manchester); (b) are building it (Birmingham); or (c) have the physical capacity to expand (Stansted). That said, Stansted requires a vastly better and quicker rail line into London itself, as MAG must appreciate.

Yet another aspect is how MAG's GBP650 million Airport City project will fit into the equation.

Building high-speed rail lines often frees up existing lines for more freight services and this is presumably part of the plan. There are already several lines running into the airport's central station and there is at least the potential for additional tracks to be laid to take rail freight into a railhead to serve the World Freight Centre and (later) Airport City. Stansted of course also has a considerable share of the UK's airfreight and MAG's other possession, East Midlands Airport, is the biggest of all in this category.

A new and healthy era of airport competition could be emerging in the UK

There is certainly a synergy developing between these players - MAG, Birmingham Airport, and the government through the HS2 proposal - that is capable of breaking the mould of dominance in the air transport sector that London has previously enjoyed (and which CAPA's Airport Investor has tacitly campaigned against over the previous eight years).

Quite apart from the potential for Manchester and Birmingham to develop faster there should be some real competition now in the London & Southeast England market with the major airports owned by five different entities, if Southend Airport is included. This might encourage the proposal put forward by Stewart Wingate, the CEO at Gatwick Airport, that the Davies Commission should opt to support the concept of three competing primary London airports each with two runways, to be taken seriously. Unfortunately, Mr Wingate is not exactly 'flavour of the month' just now with his comment that aircraft should be forcibly diverted away from Heathrow in the winter, alleging that airport cannot handle snow.

That synergy is even represented in the traffic figures emanating from Manchester and Stansted airports.

For the second successive month Stansted's traffic was up again in Dec-2012, this time by 4%. That apparently modest achievement has to be weighed against the fact it went about three years without gaining any passengers at all. Manchester's passenger figures were up by 5.1% in Dec-2012, to an overall average of +4.6% for the year (19.7 million compared to 17.5 million at Stansted).

On the financial front MAG has also performed reasonably well latterly. In the six months ended 30-Sep-2012, it recorded a small increase in operating profit of 1%.

MAG financial highlights for six months ended 30-Sep-2012

Measure	Amount GBP million	% increase/decrease
Revenue	229.8	+7.1
(Aviation)	111.5	+9.1
(Retail)	43.5	+2.6
(Parking)	35.3	+7.3
(Property)	17.2	+6.2
Profit before tax	45.4	(+GBP400,000)
Operating profit	59.7	+1

Source: MEN Media

As high speed rail spreads its tentacles the length of the UK, there is a promise that the previously London-centric airport system will change in nature over this decade, fed by new ownership and new competitive dimensions.

MAG's move into Stansted will certainly ensure that it is close to the heart of all of these new developments.