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BAA checks in for another summer of discontent

This article is more than 17 years old
Terrorism, a regulatory row and the annual prospect of industrial action all threaten to disrupt British airports' busy season. Oliver Morgan reports

The summer has not started well for travellers and the outlook is little better. Those who endured hours of queuing in the wake of the attack on Glasgow Airport last weekend may even have escaped lightly: security consultants warn that the real problems would come when English schools break up in the next fortnight. If there is a terror alert then, the chaos will be worse.

Another regular summer airline nasty reared its head last week when unions representing British Airways baggage handlers at Heathrow warned of serious discontent over current workloads and hinted at strikes.

Anything that makes the experience of navigating Britain's airports worse will touch a raw nerve with passengers, who in past weeks have filled newspaper letters columns with horror stories about getting through Heathrow.

Airport owner BAA has taken a PR hammering. It has been on the defensive ever since it was bought for £16bn last summer by Spanish group Ferrovial. Commentators at the time raised eyebrows at the creation of such a highly geared buyout structure for a group with heavy capital spending commitments - some £9.5bn is earmarked for BAA's three London airports in the next decade.

Ferrovial, like many private equity houses, rationalised the deal on low interest rates and its ability to manage the group. Almost a year on, however, amid the queues and increased security, Ferrovial chairman Rafael del Pino says BAA needs assistance. 'We're a bit concerned that we're not getting the help from everybody we wish we did,' he said in Madrid recently. 'We need help from the regulator, we need help from some of the government departments ...' His message, interpreted by a company spokesman, was that he needed the regulator to allow him more money from consumers in airport charges, and the Department for Transport (DfT) and Home Office to cut him some slack on the costs of security by helping him manage expectations.

The Civil Aviation Authority is currently looking at airport charges for the five years from April 2008, and del Pino's comments are, as ABN Amro analyst Christian Cowley says, just what you might expect to hear from the boss of a regulated company during such a review. 'It is not surprising that del Pino is complaining about not getting enough money. You would not expect otherwise,' he says.

In fact, BAA has tried to use the Glasgow attack to demonstrate what a good job it has done. In August last year, UK aviation was crippled by another terrorist alert over the alleged 'liquid bombs' plot. Since then, says a spokesman, it has spent £40m on measures including a net 1,400 additional staff and new security lanes.

The disruption last weekend, however, was on nothing like the scale of last August's, when thousands of flights were cancelled. Airlines reported cancellations in the dozens last weekend, and although there were evacuations at Stansted and Heathrow, the cost was measured in inconvenience rather than the £20m the August alert cost BAA and the £100m it cost British Airways.

The increased terror threat appears to be being taken into account by the Civil Aviation Authority in the form of proposals that will allow BAA to claim back more of the costs incurred in dealing with it. Currently, the airports operator is allowed to claim back 75 per cent of costs above a threshold of £13m.

Increased security has doubtless brought more problems, but that does not deflect another major gripe among travellers, which is that BAA fills terminals with shops rather than leaving space to allow people through more quickly. Last year, BAA made £616m in income from retail - an increase of nearly 5 per cent on the year before and nearly as much as the £898m it made from airport charges.

BAA says that, where it can, it has taken out shops to improve passenger flow. But the real issue, it insists, is not carving out space in existing terminals but increasing capacity, and that means investment - the £9.5bn standing by to be spent on London's airports.

Del Pino's point is that if the UK wants world-class airports, it must pay for them. He has warned that investment in Heathrow, Gatwick and Stansted will be jeopardised unless he reaches agreement with the CAA.

A BAA spokesman says that UK airports are increasingly having to compete with other European hubs and that the investment is crucial. 'Our regulatory system has been geared around delivering a cheap airport, but we are now losing passengers to Charles de Gaulle, Schiphol and Frankfurt.'

This is a slightly different explanation to the one offered in last year's annual report, which records a 2 per cent increase in passengers and says the reason this was lower than the 3.5 per cent target was due to terrorism, industrial disputes and economic conditions.

BAA is arguing that it must be given a generous settlement to guarantee investment in a new Terminal Two building at Heathrow and a refurbished Terminal Four, as well as £700m for Gatwick and enlargement at Stansted.

The CAA calculates the overall return it will allow BAA on its capital and works out airport charges from there. It currently allows a 7.7 per cent return. BAA insists this should be reduced to no less than 7.5 per cent. In its preliminary findings, published in December, the CAA said that for Heathrow - the most important airport - it should be in the range of 5.9 to 6.2 per cent. Airlines, who pay the charges, think it should be 5.5 per cent. A source at British Midland says: 'BAA has made enough profit over the years to fund whatever investment is needed now.' And a BA spokesman says: 'We think there is ample scope for BAA to be more efficient.'

Cowley says: 'I don't think they will get anything beyond what has been outlined. You could argue that that is all they are entitled to, since they have loaded up with debt and thus reduced their cost of capital.'

The argument will continue throughout the summer. With the threat of terror and strikes looming, this summer looks like being miserable enough to be getting on with.

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