Airport shake-up ready for take-off

THE year is 2016, the location is Edinburgh International Airport. Suited businessmen and diplomats lounge around in armchairs and tap away on the latest wireless gadgets as they wait for flights to Zurich, New York and Shanghai.

Fifty miles west, at Glasgow's Billy Connolly Airport, thousands of sunseekers queue up for cheap and cheerful flights to the latest popular destinations, such as Romania, Kuwait and Venezuela.

Such a contrast is hard to imagine under the current set-up, in which BAA, the company which owns Edinburgh and Glasgow airports, offers the same service and charges similar landing charges at both locations. But it could become a reality if the Office of Fair Trading, which is investigating BAA's dominance of airports in London and around Scotland, decides that the group should be broken up.

The seeds for the investigation were sown in April when Ferrovial, the Spanish construction group, made its first bid in an ultimately successful campaign to buy BAA.

Ferrovial's bid upset the industry consensus that has allowed formerly state-owned BAA, which handles 63% of the UK's passenger traffic, to retain its dominant market position.

British Airways chief Willie Walsh and Ryanair boss Michael O'Leary came together to demand that BAA's airports be divided up and sold to rival operators.

Walsh argues that separate ownership would make UK airports more responsive to customer needs, while O'Leary claims that competition would lead to lower charges. BAA chief executive Stephen Nelson last week hit back at the airlines - his customers - accusing them of mixing a "poisonous cocktail" which would endanger investment at London's Heathrow and Stansted airports in particular.

On the face of it, BAA does not have much of a case. It owns almost two-thirds of the market and can pick and choose which airports will receive investment. It would be failing its shareholders if it did not use that market dominance to pump up its profits.

If anything, BAA is even more dominant in Scotland than in the UK as a whole. Critics argue that splitting up its airport collection - Aberdeen, Edinburgh and Glasgow - would result in lower fares, as each would offer airlines lower landing charges and compete for business.

BAA itself admits that a split could result in lower fares. Malcolm Robertson, the group's spokesman for Scotland, says: "If you took Glasgow or Edinburgh airport out of [BAA] ownership, it is almost inevitable that there would be aggressive competition that would mean lower charges."

One of the key planks in BAA's defence is that these lower charges would mean less money to invest in key projects such as the planned £300m expansion of Edinburgh Airport to allow a 200% rise in passenger numbers. But Jim Smith, editor of Jane's Transport Finance, the industry bible, questions the idea that a break-up would mean less investment. He says: "Look at people like Macquarie [the Australian bank], with its airport investment fund. They have more money than God. They have a lot more money than Ferrovial, which has to go to the markets to raise money to invest in airports."

Ryanair argues that BAA has a habit of "gold-plating" airports with expensive and unnecessary features which raise ticket prices. A quick visit to Ryanair's favoured Scottish airport, Prestwick, illustrates the difference. The choice of shops is limited compared with Edinburgh and Glasgow, seating is at a premium and the atmosphere is not unlike that of a bus station.

But Scots can fly from here to dozens of formerly inaccessible places such as Marseilles, Krakow and Riga for fares which look ludicrously low. That suits passengers who would rather spend their money at their destinations than on facilities for an airport in which they will only spend an hour or two mooching around. A Ryanair spokesman says: "Prestwick is an efficient facility with low costs. If Scotland is to stand on its own two feet, it needs to have more international connections like those with Prestwick, rather than forcing customers through London."

If Glasgow and Edinburgh airports are separated, BAA's critics argue, at least one would be free to chase the low-fares market, leaving the other to operate a high-quality service for business travellers and discerning overseas tourists.

Given the fact that the two airports are within an hour's drive of each other - much closer together than, say, London Stansted and Gatwick - that would provide travellers with a real choice rather than today's one-size-fits-all regime.

Another criticism levelled at BAA is that the operator discourages freight users from using Edinburgh and Glasgow airports and makes them take their goods instead to London for export.

Despite the potential benefits of splitting up BAA, Scotland's business representatives would prefer to keep things as they are. A spokesman for CBI Scotland says: "We have been very happy with BAA's stewardship of its three Scottish airports, not least the significant investment the firm has put in. We certainly haven't been made aware of any anti-competitive practices that might cause a change of mind."

One of BAA's strongest supporters is the Scottish Council for Development and Industry (SCDI), which, in a submission to the OFT last month, warned: "Less investment in an airport's infrastructure and a focus on low-cost carriers could, potentially, have a negative impact upon inward investment and competitiveness."

The SCDI also raises the worrying prospect that taking Scottish airports out of BAA's ownership might make it harder for airlines flying from Scotland to get landing slots at BAA's remaining London airports. The think-tank says: "Business travellers require the flexibility and high frequency of service that hub airports [such as Heathrow or Gatwick] can offer."

BAA stops short of threatening that a breakaway Scots airport would lose landing slots at Heathrow. But Robertson says: "There may be indirect impacts of a fragmented ownership structure. The relationship we have had with airports in the south has been beneficial."

BAA's case is based on its track record, which includes an average annual growth rate of 6% since the airports were privatised in 1987 and 50 new destinations added since 1999. Robertson says: "There are a number of characteristics which are traditionally associated with a monopoly, which include little or no growth, poor customer service and no innovation. You cannot reasonably attribute those characteristics to BAA."

He adds that there is no evidence that BAA had abused its position by redirecting freight through London. "That is something I have heard a lot. I have looked and looked, but I can't see any mechanism by which [BAA] could control the movement of freight or people."

BAA enjoys a good reputation for service, despite the queues and inconvenience caused by the government's recent security measures. Business groups are likely to be wary of a sell-off which could threaten the comforts they currently enjoy.

But for the OFT, that may not count for much against the market-distorting potential of a debt-laden Spanish construction company controlling most of Britain's air infrastructure.