The Future of BAA
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House of Commons Transport Committee The future of BAA Fourth Report of Session 2007–08 Report, together with formal minutes, oral and written evidence Ordered by The House of Commons to be printed 5 March 2008 HC 119 Published on 14 March 2008 by authority of the House of Commons London: The Stationery Office Limited £0.00 The Transport Committee The Transport Committee is appointed by the House of Commons to examine the expenditure, administration and policy of the Department for Transport and its associated public bodies. Current membership Mrs Gwyneth Dunwoody MP (Labour, Crewe and Nantwich) (Chairman) Mr David Clelland MP (Labour, Tyne Bridge) Clive Efford MP (Labour, Eltham) Mrs Louise Ellman MP (Labour/Co-operative, Liverpool Riverside) Mr Philip Hollobone MP (Conservative, Kettering) Mr John Leech MP (Liberal Democrat, Manchester, Withington) Mr Eric Martlew MP (Labour, Carlisle) Mr Lee Scott MP (Conservative, Ilford North) David Simpson MP (Democratic Unionist, Upper Bann) Mr Graham Stringer MP (Labour, Manchester Blackley) Mr David Wilshire MP (Conservative, Spelthorne) Powers The Committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk. Publications The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/transcom. Committee staff The current staff of the Committee are Tom Healey (Clerk), Annette Toft (Second Clerk), Richard Ward (Assistant Clerk, Scrutiny Unit), David Davies (Committee Specialist), Tim Steer (Committee Specialist), Alison Mara (Committee Assistant), Ronnie Jefferson (Secretary), Gaby Henderson (Senior Office Clerk) and Laura Kibby (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Transport Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 6263; the Committee’s email address is [email protected]. 1 Contents Report Page 1 Introduction 3 Our inquiry 3 2 Background 5 History of BAA 5 Other inquiries 6 3 Regulation 8 The regulatory framework 8 Charges 10 4 Challenges 15 Competition 15 Operation 17 Capacity 18 5 Expansion 20 Adding capacity at Heathrow airport 20 6 Options 22 Competition between terminals 22 Divestment 23 7 Conclusion 25 List of recommendations 26 Formal Minutes 29 Witnesses 41 List of written evidence 42 List of Reports from the Committee during the current Parliament 43 3 1 Introduction Our inquiry 1. BAA Limited (BAA) owns and operates seven of the UK’s airports at Heathrow, Gatwick, Stansted, Southampton, Glasgow, Edinburgh and Aberdeen. Its dominant market position has for some time led to calls for it to be broken up, both by the airlines and this Committee. In March 2007, the Office of Fair Trading instructed the Competition Commission to investigate whether BAA’s market position was limiting competition in the UK aviation sector. 2. In October 2007, we announced our own inquiry into the future of BAA. We explained our reasons for holding an inquiry thus: BAA airports are a vital part of the country’s transport infrastructure, serving nearly 150 million passengers each year between them. The company is facing a number of unique challenges in addition to those faced by the aviation sector as a whole. We want to find out how the company, the government and other stakeholders will respond to the current situation.1 3. We particularly wanted to consider: • the regulatory framework; • the quality of service provided; • the size and quality of investment; • any consequences following from the acquisition of BAA by Ferrovial; • the implications of further runway and terminal capacity; and • how more competition could be introduced into the market. 4. In response to our call for evidence, we received written memoranda from 30 organisations and individuals. As well as BAA, we invited the regulators, unions, airlines and the Department for Transport to give oral evidence. A full list of witnesses is provided on page 41. 5. Our inquiry has taken place over a period in which BAA has rarely been out of the headlines. The publication by the Civil Aviation Authority’s (CAA) of its final price control proposals on 20 November came the day before representatives from the regulator gave evidence to the Committee. The Financial Times reported the claim made by airlines that the rise in fees represented a “reward for failure”.2 Meanwhile, The Guardian reported that the reduction in the return on capital investment from 7.75% to 6.2% at Heathrow and 1 ‘The future of BAA’, Transport Committee press release, Press Notice 57 Session 2006–07, 17 October 2007 2 ‘Prospect of higher fares as Heathrow charges rise 15%’, The Financial Times, 21 November 2007, p 3 4 6.5% at Gatwick that BAA’s owners Ferrovial would receive meant that under the CAA’s proposals the refinancing was “thrown into doubt”.3 This has been disputed by BAA.4 6. In November, the Secretary of State for Transport (Rt Hon Ruth Kelly MP) announced a public consultation on the construction of a third runway and sixth terminal at Heathrow airport.5 The consultation document, Adding capacity at Heathrow airport, invites members of the public to comment on the Government’s proposals. 7. In December, members of the Unite union threatened strike action over the proposed closure of the final salary pension scheme to new employees. This brought adverse publicity over the Christmas and New Year period, with media predictions of delays and the possible closure of BAA’s seven UK airports. In January, the strikes were averted after discussions between BAA and the union.6 Also in December unusually poor weather on a significant number of days led to cancellations and delays and brought even more adverse publicity. 8. On 27 February, BAA announced that Colin Matthews—formerly Chief Executive of Severn Trent plc and Director of Technical Operations at British Airways—would replace Stephen Nelson as Chief Executive from April. In a press release BAA’s Chairman, Sir Nigel Rudd, said that BAA was entering a new era in which “new demands for quality service and environmental responsibility” needed to be met. He explained that Mr Matthews had “the right background and experience to take BAA into that new era”.7 3 ‘BAA told to cut queues or face £75m fine’, The Guardian, 21 November 2007, p 27 4 Q 245 5 ‘Public invited to have their say on the future of Heathrow’, Department for Transport press release PN-166, 22 November 2007 6 ‘Air chaos threat recedes after negotiations’, The Guardian, 1 January 2008, p 6 7 BAA, ‘BAA has announced a change of Chief Executive to take effect from 1 April 2008’, 27 February 2008, www.baa.com 5 2 Background History of BAA 9. The British Airports Authority was established under the Airports Authority Act 1966, and was initially responsible for the airports at Heathrow, Gatwick, Stansted and Prestwick. In the early 1970s, the authority acquired Edinburgh, Aberdeen and Glasgow airports. Twenty years after the first act, the Airports Act 1986 was passed, which turned the British Airways Authority into the holding company BAA plc.8 BAA was privatised in 1987, and over the course of the 1990s sold Prestwick and acquired Southampton airport. Figures from the CAA show that BAA airports accounted for 53% of all commercial air transport movements nationally, and 85% of movements in the London area in 2006.9 The future of BAA is therefore of central importance to the United Kingdom’s transport infrastructure. Takeover by Ferrovial 10. In March 2006, BAA were approached by a consortium led by Ferrovial, an international construction group with a major interest in transport infrastructure.10 The first formal offer made by Ferrovial in April 2006 for 810 pence per share was rejected. A second offer of 900 pence was made and rejected in May. Following negotiations between the board of BAA and Ferrovial, an offer of 950.25 pence per share was made by Ferrovial on 12 June and recommended to shareholders by the BAA board four days later. 11. On 26 June 2006, the Ferrovial Consortium announced that it had received acceptances with regard to 83% of BAA’s issued shares, and took control of BAA plc. Once 90% of the issued shares had been acquired on 15 August, BAA plc was delisted from the London Stock Exchange. Debt and refinancing 12. Ferrovial’s final price of 950.25 pence per share (935 pence per ordinary share plus a 15.25 pence dividend) was a 17% increase on its original offer, and 49% above the share price prior to the takeover approaches becoming public.11 The sale price valued BAA at £10.11bn. BAA needs to refinance the debt that was placed on it by the acquisition and is expected to do so once the regulatory settlement is finalised in March 2008. An article in the Financial Times described how BAA plans to refinance its existing debt against Heathrow and Gatwick, as well as borrowing against the value of those two airports. It went on to speculate that: The numbers, however, look worrying. Earnings before interest, tax, depreciation and amortisation in 2008 are estimated at £1.2bn, rising to £1.3bn by 2010. This is 8 The apparent acronym has only historical meaning—‘BAA’ does not, strictly speaking, stand for anything. 9 CAA, UK Airport Statistics 2006 (Annual), Table 3 (Aircraft Movements), www.caa.co.uk/airportstatistics (latest figures available). 10 Airport Development and Investment Ltd. was formed by Ferrovial Infraestructuras, S.A., Caisse de dépôt et placement du Québec and GIC Special Investments PTE Ltd for the purpose of acquiring BAA.