Breaking point

WHEN the World Airport Awards were unveiled last month, few people noticed that BAA had failed to make the short list.

While the British-built Hong Kong International celebrated its seventh win in a decade and Copenhagen, Helsinki and Zurich all toasted an appearance in the top 10, back in London the country's premier airport operator was embroiled in one of the most embarrassing fiascoes in its 80-year history.

As the world watched the calamitous opening of Heathrow's £4.3bn Terminal 5, BAA's image as the reliable, high-quality operator of airports around London and Scotland was shattered. Growing queues, delayed flights and missing baggage were the least of its problems. It was, as BAA's chief executive Colin Matthews later told a House of Commons Transport Committee, "a national humiliation".

"Everybody was hoping and expecting a great performance and was deeply disappointed by our failure to do so," he said.

This week its problems could get worse if the Competition Commission recommends the break-up of BAA as expected. Much of the report is expected to focus on Heathrow and Gatwick, but the authorities are also concerned that the company could be milking a near monopoly north of the border. BAA has two-thirds of the UK airport market, and its reputation for customer service is at an all-time low. That undermines the case for the group, which is owned by Ferrovial of Spain, controlling Scotland's top three airports – Glasgow, Edinburgh and Aberdeen – as well as Heathrow, Gatwick, Stansted and Southampton.

"The Competition Commission seem to have satisfied themselves that the public interest isn't necessarily served by having one company owning a number of airports," says Peter Morris, chief economist at aviation consultancy Ascend.

"It seems they have concluded that competition is needed in order to introduce an element of benchmarking. If a new company comes in and transforms an airport it sets a standard. The BAA airports don't tend to feature very often in the best airports in the world. Why not? What is it about Glasgow or Edinburgh airport that says we can't be as good as Helsinki or Dubai?"

If BAA is forced to sell any of its airports the news will be welcomed by airlines such as Ryanair and Virgin Atlantic, which have been pushing for its break-up. They complain that it operates a monopoly in the south-east of England, and in Edinburgh and Glasgow, resulting in poor service and unfair charges.

In Scotland it may have to choose either Glasgow or Edinburgh. It is rumoured that Spanish officials flew in early this 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 BAA argues that there is no need for a break-up. 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.

Business lobby groups believe the commission should leave well alone, with the Scottish Chambers of Commerce taking an 'if it ain't broke, don't fix it' approach. A spokesman said: "Our network is satisfied that their members' interests are well served by Scotland's existing airports, which are operated by a variety of owners. Our airports have been successful in developing a wide variety of new direct international routes to key business and leisure destinations, and long-term plans exist for the future enhancement of services and the travelling experience."

To some extent there has been an inquiry for the south and one for Scotland and close observers say that in each examination the commission has been hard pressed to justify the calls for a break-up, particularly in Scotland. One source said: "They have looked at everything and have struggled to land a punch in Scotland."

More research shows why Scotland could emerge unscathed. The assumed view is that the BAA airports overcharge the airlines, but when benchmarked against 24 European rivals, the fees charged by Scottish airports were in the bottom quartile.

One area where the Scottish airports could be vulnerable is on price regulation. Unlike the London airports, there is no regulation on fees so the Scottish airports could charge what they like. But in order to be seen to give value they have held to a voluntary arrangement for 15 years to offer retail price index, minus 3% at Glasgow and Edinburgh and RPI minus 1% at Aberdeen. As one source said: "With inflation so low for much of that time the airports could hardly be accused of cashing in."

In any case, there is unlikely to be any move on regulation this week as it is the subject of a separate inquiry by the Department for Transport due to report in the middle of next year.

Analysts say a sale of any of the airports would attract significant attention on the international market. They point to the recent sale of Jordan airport, which attracted nine bids. Frankfurt airports, Macquarie Airports, Hochtief and Aéroports de Paris would all be interested in Glasgow. Ryanair's ebullient chief executive, Michael O'Leary, has even floated the idea of buying Stansted, speculating that he would build a second runway and double the number of passengers by halving the landing fees.

"You could have a second runway for £150m and second terminal for £250m," he told a newspaper. Asked how much he would be willing to pay for Stansted, O'Leary replied: "Probably around £2bn. I'd take it up from 24 million passengers today to more than 40 million by halving landing fees for all."

O'Leary has since publicly withdrawn his comments, saying that they were misconstrued, but it does expose one aspect of the airports issue: that the real issue is capacity rather than competition.

David Wragg, aviation expert and author of The World's Major Airlines, believes that such is the overcrowding in the south-east that each London airport needs to build another runway. "The real issue is capacity," he says. "There is no other European airline that has as much traffic as Heathrow and it is creaking at the seams. Heathrow desperately needs a third runway and a fourth for regional aircraft. The trouble is a small aircraft cannot land directly behind a 747; it has to wait for the wake of the aircraft to dissipate, which uses up several slots. In an ideal world an extra runway would be added to all three London airports to reduce stack time, which uses an awful lot of aviation fuel."

Whatever the outcome, it is generally agreed that Britain's airports are in need of further investment. Ferrovial, which geared itself up to buy BAA in 2006 and is now trying to rearrange £10bn of its borrowings, will have to dig deep to finance the next wave of construction.

As one City-based aviation analyst said: "I am sure they (Ferrovial) want out. The trouble is the whole deal was so highly geared they don't have any money to invest. I'm not sure they knew what they were buying. A quick sale of either Gatwick or Glasgow could solve these problems in an instant."

But others say Ferrovial is committed to retaining the group and to turning round the business. One source said that breaking it up would delay rather than speed up investment and would also put the Government's plans for extra runways at Stansted, Heathrow and Edinburgh in jeopardy.

With Boris Johnson, the London mayor, calling for a new London airport to be built in the Thames Estuary, the politicians are accused of inconsistency and seeking knee-jerk solutions to the airports crisis.

All are agreed that the status quo is unacceptable, but there is a body of evidence that says a break-up of BAA and the introduction of more competition may not provide the answer.

Dogfight looms over 'world airline' bid

AT THE height of Cool Britannia, British Airways' then chief executive, Bob Ayling, introduced a series of multicoloured ethnic tailfins inspired by designs from Chinese calligraphy and the Kalahari desert.

Despite protestations from BA that they were popular with international travellers, the move was widely lampooned. After heavy criticism and a public denouncement by Margaret Thatcher, Ayling's successor, Rod Eddington, eventually gave way and announced the entire fleet would revert to the Union flag livery. BA's attempt at rebranding itself as a truly global airline had failed.

This week, as BA's chief executive Willie Walsh seeks anti-trust immunity for a joint venture with American Airlines, adding its putative Spanish merger partner Iberia into the mix, once again analysts are speculating that Britain's national carrier is taking tentative steps towards creating the world's first genuine 'world airline'.

If the proposed venture does gain regulatory approval, the trio would be able to co-operate on capacity, schedules and ticketing, while sharing revenues and profits. The airlines said passengers would be able to "travel more easily" on a combined network serving 443 destinations in 106 countries.

BA has tried a venture like this before and failed. Applications in 1997 and 2001 were both deemed too damaging to business by cartel watchdogs.

"The environment is very different to before," insists Walsh. "The industry has changed radically since our last application. What's different is that the industry is different and Heathrow is very different. Things have moved on very significantly since 2001. We now have 'open skies'. Five more airlines are now flying to the US from Heathrow. We also have more competition between alliances than in 2001."

What isn't different is Virgin Airways' vociferous opposition. Sir Richard Branson is planning a £3m publicity blitz and has already written to US presidential candidates Barack Obama and John McCain, one of whom will be in office when regulators rule on the proposed tie-up.

"Make no mistake," says Branson. "If this monster monopoly is approved it will be third time unlucky for consumers. It will still be bad for passengers, bad for competition, and bad for the UK and US aviation industries."

Walsh and Branson have not been on speaking terms since Virgin blew the whistle on BA's fixing of fuel surcharges, landing Walsh with a hefty bill. But many analysts think that Branson will struggle to cause much trouble this time around.

"On the basis of consistency it should be allowed," says Peter Morris chief economist at aviation analysts Ascend. "At the moment you have two major players in Air France and Lufthansa who are part of individual alliances and have clearance for synchronising flights and fares. Even if the BA, American Airline tie-up takes place it will only be the third largest transatlantic combine providing these services."

If the tie-up wins approval, Virgin Atlantic will be the only airline flying from Heathrow to the US that is not in one of the big three alliances.

Previous attempts to win antitrust immunity have been made when aviation relations between the US and the UK were tense. But from the early 1990s the US was busy imposing its template for aviation liberalisation on the world through so-called "open skies" treaties: the first with the Netherlands in 1992.

The impasse with the UK was eventually broken when the mandate for bilateral aviation negotiations was transferred by all European member states to Brussels and the EU finally agreed an "open skies" treaty with Washington which came into operation at the end of March.

But industry observers question whether BA and Iberia will reap similar benefits as Air France and KLM.

"British Airways are a bit behind the times," says Morris. "KLM and Air France has already achieved a successful consolidation within Europe and BA has yet to achieve this despite endless discussions from Russia to Greece to Scandinavia. To some extent Iberia is the last girl left in the village."

William Lyons