IN APRIL last year, barely three weeks into his new role as chief executive of BAA, Colin Matthews ordered a shake-up of the airport group's top management team.
Under the changes he orchestrated, two new managing directors were unveiled: one responsible for Heathrow, the other with a remit to look after BAA's six remaining airports. At the time Matthews described it as a "bid to focus the organisation more d
irectly on improving operations and allowing its other airports the freedom to develop faster". In reality he was assembling his council of war.
The timing was deliberate. A day later the Competition Commission (CC) announced its "Emerging Thinking" document into its investigation into the structure of BAA, warning it could lead to a demand for the break-up of the BAA London airports monopoly. Nearly a year on, with the reality much worse, Matthews is preparing for his biggest fight yet.
When Rafael del Pino, the chairman of Ferrovial, paid £10.3bn for the world's largest operator in the summer of 2006, he knew it was likely to face the scrutiny of the CC. But he could never have guessed the CC's findings would be so severe. On Thursday the CC delivered its heaviest blow yet. In its final report, it told BAA that it must sell Gatwick and Stansted. As reported in Scotland on Sunday, north of the border it was also told to choose between a sale of either Edinburgh or Glasgow as well as plan for a regulatory overhaul that could potentially benefit millions of passengers. It was the toughest corporate divestiture ever demanded by the CC.
By lunchtime Matthews had retaliated, publicly stating that he thought the CC analysis flawed.
"Selling one airport is one thing, selling three is another, he said. "You can't assume we will appeal… but we might have to if we reach the conclusion that it is simply not practical to proceed.
"There is ferocious competition between Heathrow and other international hubs. Britain's airports monopoly, which includes the country's two busiest airports, has existed for nearly 45 years. It is not just a question of whether we agree or not with the CC's analysis, it is also a question of the practicalities of selling three airports in the current, extraordinarily tough (conditions]."
In Scotland the atmosphere was equally gloomy. "There is a huge frustration that we have just been caught in a crossfire," said one source close to BAA. "The CC report actually recognises that Glasgow and Edinburgh are two very distinctive aviation markets. They have even said in their press release how they are not sure how the advantages of competition can come about between them. So despite this being the first time they have ever broken up a growing concern they can't actually point to what the competitive advantages are. That is staggering. That's where the frustration lies."
This week Matthews will sit down with his board to begin a two-month process which will see BAA consider all the terms of the CC's report before deciding how to respond. Upmost in their minds will be the prospect of selling three UK airports in what one accountant described as "quite an alarming" timetable. With Gatwick already on the market and struggling to fetch its asking price, many analysts will be questioning the rationale behind the CC's findings. Moreover, with asset values plummeting, airlines slashing capacity and passenger numbers shrinking, not to mention a requirement to sell the three airports to different buyers, where will those buyers come from?
As one analyst said: "You can sell the three airports but whether you get anywhere near their true value is anybody's guess. If you look at the multiples applied to the recent purchase of Belfast City, that would value Edinburgh at about £1bn and Glasgow just beneath it. Would you get that at the moment? Probably not. But they are very profitable assets which work really well in big portfolios such as pension funds, so there will be interest."
Given the market, analysts believe Stansted is worth around £1.27bn, with Edinburgh and Glasgow at £585m and £440m respectively. Glasgow is believed to be the favoured airport for any potential sale. It is rumoured that Spanish officials flew in last summer to size up the two airports and have decided that, if pushed, Ferrovial would sell Glasgow. In recent years the airport has not performed as well as Edinburgh. Offloading Glasgow would leave Edinburgh with a clear run and no local competition. But the choice between a sale of Glasgow and Edinburgh is far from clear. One of the key findings of the commission was that Glasgow and Edinburgh do not compete effectively, offering a similar type of services and destinations. Christopher Clarke, the chairman of the inquiry, argues that by introducing separate ownership the operators would also have more incentive to meet the needs of airlines and passengers, an area where BAA was criticised for being unresponsive.
One potential scenario is that Edinburgh, which is faster growing, has better prospects for future growth and has more business passengers, would move upmarket. This would leave Glasgow free to attract Ryanair, transforming it into a low-cost hub at the expense of Prestwick. Another theory is that Edinburgh could try to attract more long-haul flights.
BAA has always argued that there is no need for a break-up in Scotland. It says there is little overlap between Edinburgh and Glasgow airports and its ownership cannot, therefore, be regarded as monopolistic. It points to figures which show that only about one in 20 passengers flying from Glasgow is from the east, while only one in 25 who use Edinburgh is from the west. In a recent survey, passengers said there would have to be a £15 difference in ticket prices for them to consider switching airport and only 5% said they would make such a change.
That view is endorsed by business lobby groups, who have never felt there was an issue of competition in the first place. Ron Hewitt, chief executive of the Edinburgh Chamber of Commerce said: "We never felt there was an issue of competition (or lack of it] between Glasgow and Edinburgh airports. As far as we could see, they serve different markets. So we remain unconvinced by the whole review process including Scottish airports at all.
"The fact of the matter remains that insisting BAA sell one or t'other of Glasgow or Edinburgh within two years shows scant regard to the present economic circumstances, where the existing operator will find it extremely difficult to realise true value."
BAA also points to its commitment in the next 10 years to pump £500m into its three Scottish airports. Later this year Glasgow will complete its £31m revamp, while work has just begun on a £41m extension of Edinburgh's lounge which will double its size.
Speaking on behalf of BAA Scotland, Gordon Dewar, the managing director of Edinburgh Airport, said: "We remain proud of our track record in Scotland, and have delivered substantial investments in both customer service and route development, to the country's clear competitive advantage. We continue to believe that the commission's analysis of the Scottish airports market is misguided and its remedies may not be practical in current economic conditions."
David Wragg, aviation expert and author of The World's Major Airlines, said: "In this market, if I was BAA I would be looking to sell Edinburgh, as they will get a much higher price than they would from Glasgow, which gets a lot of competition from Prestwick."
Wragg argues that the real issue is capacity. He said the more pressing issue was a third runway at Heathrow to reduce stack time.
He said: "The Competition Commission's recommendations are a bit odd. Glasgow already has strong competition from Prestwick, especially amid the low-cost carriers, and that is the sector that is experiencing the most growth at the moment."
Whoever buys Gatwick, Stansted and either Edinburgh or Glasgow, it is unlikely the CC will allow them to finance the deal in quite the same debt-fuelled way that Ferrovial did.
Ferrovial has struggled to refinance its debts, and only managed to complete a £13.3bn debt restructuring last August. Ironically, the £4bn that BAA expects to get for its airports will be welcome in Madrid, where Ferrovial saw a net loss of £787.4m in 2008. The economic meltdown has hit the group particularly hard as it is also exposed to the bombed-out UK and Spanish construction industry.
Back in Heathrow, Matthews knows his Spanish bosses can't afford to sell their assets at knockdown prices. He says he is "content" with the sale of Gatwick but may appeal against the commission's decision to force through the sale of two other airports. In the meantime, for Dewar at BAA Scotland it's business as usual.
"We just want to get back to having our destiny in our own hands," he said, "while getting on with delivering business as well as we can."
Airports for saleMay 2006
Spanish construction firm Ferrovial Group makes a successful bid of £10.3bn for BAA and officially takes control in June 2006.
May 2007
BAA sells Budapest Airport to German construction company Hochtief for ?1.9bn.
August 18, 2008
Ferrovial completes a £13.3bn debt refinancing of BAA. Under the terms, Heathrow, Gatwick and Stansted are to be hived off into a separate structure.
August 20, 2008
Britain's Competition Commission rules that Ferrovial must sell two London airports and either Edinburgh or Glasgow to address problems caused by its monopoly for passengers and airlines.
September 17, 2008
BAA puts Gatwick up for sale but says it would resist pressure to sell other parts of its portfolio.
December 17, 2008
Competition Commission confirms that, subject to final consultation, it will require BAA to sell Gatwick, Stansted and Edinburgh airports.
March 19, 2009
Competition Commission orders the sale of three airports within two years, forcing BAA to sell London's Stansted followed by either Edinburgh or Glasgow once it has completed the ongoing auction of Gatwick. Ferrovial may appeal the ruling to sell the airports, and will make a decision within the next two months, its British airports division head says.
