A new departure for London’s airports

Dismembering BAA should make it possible to develop a second hub airport for the capital and its region

AFTER years of being shamed by ever shabbier and more overcrowded airports, Britain is at last getting around to doing the right thing. On August 20th the Competition Commission, which investigates whether markets are working properly, released the damning findings of a 17-month study into the country’s airports. The report envisages the dismembering of BAA, the country’s dominant airports operator, as well as other proposals that amount to a wholesale rewrite of the government’s cherished aviation policy.

The commission blamed long delays, overcrowding and a shortage of capacity that has long bedevilled Heathrow, the world’s busiest international airport, on a flawed regulatory regime, poor policy and, most important of all, BAA’s ownership of the three main London airports—Heathrow, Gatwick and Stansted. It plans to force BAA to sell two of the three as well as another airport in Scotland.

The prescription may seem harsh, but so too were the findings that since BAA’s privatisation in 1987 the company has dragged its heels in building new terminals and runways. Last year for instance, Heathrow crammed some 68m hot and bothered passengers through terminals designed to accommodate 45m. Long queues, scruffy lounges and overpriced snack shops do little to endear it to passengers, who rate it far below international rivals, according to Skytrax, a research firm.

So overstretched are Heathrow’s runways, which operate at 99% of capacity compared with about 70% at most other large airports, that even the slightest hitch—a spot of fog, say, or a plane having to turn back with engine trouble—causes a cascade of delays to ripple through its flight schedules. Because of this a third of all flights at Heathrow are delayed by at least 15 minutes, a poor record compared with other large European hubs such as Amsterdam, where 21% of flights are delayed, and Frankfurt, where 24% are.

The hope is that once BAA’s monopoly around London is broken up, competition will force improvements at all three airports. Christopher Clarke, the commission’s deputy chairman, reckons that under separate owners each airport would press hard to get planning permission to build new runways and terminals. They would pay more attention to the needs of airlines and travellers, he thinks. The expectation is plausible. A queue of buyers has already lined up hoping to bid for Gatwick and Stansted, the two airports most likely to be sold. They are understood to be drawing up creative plans ranging from cheap and basic warehouses for low-cost carriers such as easyJet to luxurious lounges aimed at winning the hearts of frequent-flying businessmen.

The biggest loser from a shake-up will be BAA’s current owner, Ferrovial. The Spanish firm bought BAA for £10.1 billion ($18.8 billion) two years ago in a deal that seemed expensive at the time, although cunningly financed, since it spent barely £580m of its own money for BAA. But crunching credit markets have meant that BAA has struggled to refinance £13.3 billion of loans. It won support from its bondholders only when it agreed to ring-fence its London airports and to use their assets and income to back new bonds.

Air travellers will have to wait a while to see the benefits of BAA’s break-up. New facilities take time to build and London is unlikely to have any new runways before 2015, limiting the scope for competition between the three airports. Meanwhile some quick fixes could help. Paradoxically, one would be to reduce the number of flights at Heathrow. A study for London First, a group representing big businesses in the capital, found that cutting about 5% of Heathrow’s flights could lead to a 15% reduction in delayed flights.

Over the longer term, the real impediment to competition between London’s airports is Heathrow’s power as a hub. Because of its size, it benefits from “network effects” in that it can match incoming passengers with outgoing flights to hundreds of different cities. This makes it by far the most profitable of London’s three airports for airlines and explains why peak-time take-off and landing slots are traded for some £25m-30m a pair.

Given the huge demand for flights at Heathrow, it is tempting to think that it is the most sensible place to add new runways. This is precisely the case made by BAA, which along with the airlines like British Airways that have the biggest stake at the airport because of the slots they control, has been lobbying fiercely to add a third runway. But the argument is flawed.

There is little reason to think that an economy as large as London and its surrounding region cannot support two competing hub airports. If allowed to build a second runway, Gatwick could well become a second hub, and another runway there would bother fewer residents than at Heathrow. A decision to favour expansion at Gatwick would permit real competition, whereas at Heathrow it would entrench the airport’s dominance further.

Price regulators could play their part too by gradually easing their grip. Allowing Heathrow to raise its prices could well be the spur needed to encourage a group of airlines to move to Gatwick. Then Heathrow could concentrate on serving the business market, which prizes frequency and convenience over price. After the failure of two decades’ worth of government tinkering and ham-fisted regulation, it is time to see if markets can do a better job.

From The Economist print edition
Copyright © 2008 The Economist Newspaper and The Economist Group. All rights reserved.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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