For airport operators, getting in bed with one of Europe's most fractious airlines at a facility the government does not want to see expand may not seem like an attractive proposition, but the anticipated forced sale of may yet defy skeptics.
The details of what will happen to London Stansted are still not fully determined, but the writing is on the wall. The U.K.'s Competition Commission has been arguing for some time and recently concluded that airport operator BAA has to divest the facility as part of a larger restructuring in which it has soldand will soon shed either Edinburgh Airport or Glasgow Airport. Although the final legal word has not been given, even BAA owner Ferrovial concedes Stansted will have to go.
For debt-laden BAA, the prospect of securing a good price may appear dim. Economic recovery in the U.K. has not yet set in, and in selling Gatwick in 2009 to Global Infrastructure Partners (GIP) it had to settle for a below-par price. The situation could ease somewhat if the regulator gives BAA some flexibility in orchestrating the sale. “I'd have thought the commission will allow them a bit of leeway as they won't deprive [BAA] of the reasonable value of their asset,” says an official familiar with the proceedings. If not, he adds, “it would be a disaster” for the present owner.
What is more, for better or worse,is the dominant airline at that facility. While the Irish carrier has a strong balance sheet and growth ambitions, its chief executive, Michael O'Leary, is notorious for haranguing airports over costs and service. Given this, will a new airport owner feel it can still do business with the airline?
O'Leary and BAA have been on particularly bad terms. But an airport industry official notes that if the new owner adopts a different pricing model and offers Ryanair pricing certainty over a longer period, it will incentivize the carrier to bring more traffic to the airport.
Another obstacle lies with the U.K.'s decision not to permit new runways at any of the London airports. BAA has already sunk £200 million ($330 million) into the planning process and purchase of land and property for a second runway at Stansted (total cost would be around £4 billion), but London has said “no.”
While this could stifle growth, some industry observers believe there may be a hidden upside. With no new runway in sight for decades, traffic demand will eventually exceed supply. Anyone holding as scarce an asset as a London airport will eventually benefit from that position. The Civil Aviation Authority says it is embracing a more flexible approach to regulating airports: Rather than using a one-size-fits-all approach, new owners may be able to negotiate conditions for Stansted tailored to their property.
Once this litany of issues is overcome, the question for the new owner will be whether it can restructure Stansted operations to turn a profit. In that effort, the operator may be able to steal a page from Gatwick, where GIP is trying to effect a turnaround.
GIP inherited a five-year, £1 billion investment program from BAA at a time when the passenger experience at Gatwick was rated very poorly. The new owner's first priority was to review the program and ultimately reprioritize spending. Among the €200 million projects now completed are construction of six new large aircraft parking stands, a new shuttle between the North and South Terminals and an expanded departure lounge in the South Terminal.
“Everything that BAA were planning to do, we've done quicker and cheaper,” says Michael McGhee, a GIP partner who serves on Gatwick's board of directors. “We've saved £150 million out of this £1 billion,” says McGhee. “Out of the savings, we have committed to new projects.”
It isn't just about cost, either. “BAA had a risky 17-stage project for the baggage system which involved progressively replacing the existing system which is located in a cramped environment. We reduced it to a two-stage project by locating it on spare space outside, bang-next door to the existing system, and will wrap a new pier around it to replace the aged Pier One. This has de-risked the project and saved millions of pounds as well as solving the Pier One replacement,” says McGhee.
Eventually, GIP is expected to exit Gatwick. But for now, McGhee suggests the company will remain involved in executing the £1 billion capital expenditure program. “It's still early days and we're only 17 months in. We're a little bit ahead, but the real bulk of physical transformation takes time,” he says.
McGhee argues that its efforts at Gatwick shows there is an opportunity to develop Stansted, too. GIP has an interest in seeing Stansted succeed because driving up the value of London area airports would boost its own returns once it comes to selling Gatwick.