Competition commotion

Am I alone in feeling a degree of sympathy for BAA and its Spanish parent Ferrovial? With the publication this week of the UK Competition Commission’s final report on BAA’s ownership of most of the country’s major airports (see: BAA ordered to sell three airports), it is clear that the airport operator has been unable to change the mind of the Commission, which is sticking to its interim recommendations issued in August last year (see: BAA told to sell two London airports).

BAA must now proceed with its sale of Gatwick, Stansted and either Edinburgh or Glasgow. When the Commission announced its interim report last year, the BAA was stung by the recommendation and initially considered fighting any sale. But as each of the past seven months have passed, the prospect of selling first Gatwick and now Stansted has become increasingly attractive to cash-strapped Ferrovial.

The Spanish infrastructure giant bought BAA for US$20 billion in 2006, borrowing much of the money to complete the acquisition. Even though it has been successful in refinancing some of the debt (see: BAA wins bondholder approval for refinancing), the task of raising money in these economically turbulent times is proving increasingly difficult.

What Ferrovial needs is cash, and the enforced sale of some of its BAA airport assets will certainly help. The question is: How much will it receive?

In 2006 the global economy was growing strongly and many investment funds were earmarking airports as infrastructure investments that offered strong returns. Timing is everything in business and the market was nearing a peak when Ferrovial made its winning bid for BAA. It paid handsomely for its high-profile acquisition, little realising the political and regulatory headaches ahead, let alone foreseeing the exodus of many senior executives from BAA to lucrative roles leading airports elsewhere in the world, including Dubai and Melbourne.

The loss of many senior figures undoubtedly contributed to the bungled opening of Heathrow Terminal 5 this time last year. BAA was already under fire for poor customer service before Terminal 5 was opened, but that particular mess made the operator an easy target for everyone from Ryanair to regulators. It was a public relations disaster that caused far more damage to BAA than to BA, the airline that operates exclusively from the new terminal.

BAA must now sell off the three airports in a hostile market, where potential suitors are seeking a bargain, knowing that the regulator will insist that ‘everything must go’.

Three potential bidders have already withdrawn from the Gatwick sale and few expect BAA to achieve the £2.02 billion (US$2.89 billion) it is seeking.

Looking back, though, I can’t help wondering why the UK government allowed so many key airports to be bought by a single company in the first place, even though a chorus of pundits and aviation experts warned against the move. The cynic in me suspects it was to generate the maximum possible purchase price. If so, then it is not only Ferrovial/BAA, but also the politicians and regulators involved in the BAA sale, that should bear the blame for poor levels of service at UK airports.

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