To order a break-up the watchdog would have to show that nothing else would do the trick
HE SPENT much of last week fending off accusations of mismanagement, monopolistic behaviour and lax security from his customers, but Stephen Nelson is not about to apologise.
Many bosses would regard such criticism as a resigning matter, but Nels
on, chief executive of the airports group BAA, came out fighting as the competition watchdog threatened to split up his sprawling empire.
BAA's image as the reliable, high quality operator of airports around London and Scotland has taken a knock over the past year with lengthening queues, delayed flights and missing baggage. Much of the criticism focused on Heathrow and Gatwick, but the authorities are also concerned that the company could be milking a near monopoly north of the Border.
On Thursday, Competition Commission deputy chairman Christopher Clarke pushed the button on a two-year inquiry that could change the shape of British aviation. The case would appear to be unanswerable: 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.
Nelson could have taken the easy route and promised to abide by whatever the commission decided. But last week the former Sainsbury executive staked his career on keeping BAA intact.
He insisted: "The problems of congestion and delay which affect passengers have their roots in lack of terminal and runway capacity, not the ownership structure of BAA. What London airports do not need are structural changes that will seriously delay the delivery of the investment that is urgently needed to improve the passenger experience and increase capacity."
Now Clarke's commission must decide whether breaking up BAA will really make things better, or if passengers' interests might be better served with a stiff dose of extra regulation.
Peter Willis, a competition partner at Dundas & Wilson, the law firm, says: "This divestment strategy [forcing BAA to sell an airport] would be the nuclear option as far as UK competition policy is concerned. To order a break-up [the commission] would have to show that nothing else would do the trick."
While tales of misery at BAA's airports are commonplace, rival operators such as London City Airport and Prestwick like to claim that they offer a better service. But passengers at these lower profile airports have been faced with similar problems of late planes and overcrowded lounges.
In the absence of friends on the tarmac, the formerly state-owned BAA has lined up a vocal group of supporters from among business representative groups, councils, development agencies and trades unions. These include Scottish Chambers of Commerce, Glasgow Economic Forum, the Transport and General Workers Union and Aberdeenshire Council.
Perhaps the group's most vocal supporter has been the Scottish Council for Development and Industry (SCDI), the think-tank which claims to have Scotland's economic interests at heart.
In his submission to the Competition Commission inquiry, SCDI chief executive Alan Wilson said he was "astonished" at a suggestion by the Office of Fair Trading that Edinburgh and Glasgow airports served the same market. According to Civil Aviation Authority figures, just 4.2% of passengers flying from Edinburgh come from Strathclyde, while only 5.2% of passengers flying from Glasgow started their journeys in Edinburgh.
Wilson said: "This minimal overlap indicates that to all intents and purposes each airport serves distinct and different geographic markets... there are also environmental benefits of encouraging passengers to travel to their closest airport."
BAA controls over 80% of the Scottish market, but Wilson warned that splitting Scotland's airports up could increase prices, because operators would be less worried about regulation. Such a move risked increased administrative costs, because each airport would need its own management, and it would threaten projects such as BAA's £95m route development fund and the Glasgow Airport Rail Link. The SCDI is also concerned that any change to the ownership structure could cut the number of landing slots at Heathrow and Gatwick open to flights from Scotland, reducing the ability of Scots businessmen and women to connect with the rest of the world.
Supporters of BAA argue that breaking up the group south of the Border could increase landing charges - rather than lower them - because anyone buying an airport from BAA would demand big returns to justify the likely price tag. There is also a danger that regulatory controls could be relaxed, again leading to higher charges. Others point to the financial muscle of Ferrovial, which bought BAA last year and which, in theory, has the commercial power to upgrade the group's runways and terminals.
Ranged against these supporters are BAA's customers, the airlines, who have poured scorn on the operator since the commission first proposed its inquiry a year ago. They are led by the British Air Transport Association, whose secretary general, Roger Wiltshire, wrote in his submission to the commission: "BAA have displayed a certain corporate arrogance on matters of strategic airport planning which would not have been possible if the major south-east airports had been separately owned, and that this has contributed to a slower development of additional capacity than the air travel market has required. There is a strong competition case for BAA to divest some of its airports."
One of BAA's harshest critics is American Airlines (AA), which believes the operator has neglected vital maintenance to concentrate on grand projects such as Heathrow Terminal Five and Stansted's expansion.
AA's attorney Jeffrey Ogar wrote: "BAA's joint ownership of Heathrow, Gatwick and Stansted has created an inefficient and unfair incentive for BAA to subsidise Stansted at the expense of Heathrow and Gatwick. BAA's mismanagement of Heathrow has made it an inferior connecting hub when compared with Frankfurt, Paris or Amsterdam."
Perhaps most damning of all, the US group said: "The security threat of August 2006... highlighted the fact that BAA has for years failed to adequately invest in security infrastructure at Heathrow and Gatwick. Rather than utilising terminal space to create additional checkpoints and other security measures, BAA instead invested in retail outlets. As a result, the two airports were completely unable to handle a shock to the system."
Rival international airports and Manchester in the UK coped far better with the security threat and have provided a better service since, the airline says. American's partner, British Airways, contends that BAA has invested heavily in its terminals at Heathrow at the expense of developing the runways and airfield itself to relieve congestion.
Rival Virgin Atlantic takes issue with the fact that most airport development planned for the London area will take place at BAA's airports.
"Airlines will perhaps increasingly be held hostage to BAA's internal strategy and BAA's ability to exercise overwhelming monopolistic behaviour," says Sir Richard Branson's airline. "The current regulatory regime does not offer adequate safeguards against inappropriate investment decisions by BAA, particularly the tendency for BAA to 'gold plate' capital investment projects. The [regime] presents BAA with the opportunity to undertake 'regulatory gaming' to maximise its own financial return."
BAA also comes in for criticism from smaller firms which work with the airports. The Confederation of Passenger Transport, a coach and bus trade group, says BAA has cranked up charges for coaches to stop at Heathrow from £8 to £18, and is worried that these charges could spread to the group's other sites. And taxi drivers at Heathrow complain that BAA has imposed a 20p per journey levy to develop a credit card system which they claim is unwanted.
Added to this has been a steady stream of negative media coverage about problems at the airports, particularly since last year's aborted terrorist attacks.
Critics have been rare north of the Border, but the likes of Ryanair's Michael O'Leary argue that BAA "gold plates" its Edinburgh and Glasgow airports with better facilities than customers require. A quick visit to Ryanair's Scottish base, the rather utilitarian Prestwick airport, illustrates the difference.
Ryanair also argues that BAA's London connection forces Scottish passengers to change at the UK capital and inhibits the growth of direct flights from Scotland to the rest of the world.
The Competition Commission last week went out of its way to acknowledge the critics' concerns. Clarke said: "We are well aware of the concerns expressed in the media and elsewhere over the operations of BAA's airports, especially Heathrow, Stansted and Gatwick. These include delays experienced by passengers going through security or immigration, as well as the availability of facilities such as lifts, escalators and travelators."
The most radical solution suggested so far is for BAA to sell off parts of its airports, for example Terminal Four at Heathrow, giving customers the purest form of competition.
John Schmidt, a competition partner at Shepherd & Wedderburn, believes this is the least likely outcome: "I think the OFT is pushing it too far there. If terminals are competing against each other, you would get a lot of disconnections and it is not clear how easy it would be for airlines to change between one terminal and the other. I would be very surprised if the Competition Commission went down that route."
Even if Nelson is forced to sell off one of his prized assets, there may be an upside. Ferrovial paid £10.3bn for the airport group last year, but experts believe its English airports alone could be worth up to £15bn if sold off - because regulators such as the Civil Aviation Authority would go more easy on them if they were owned separately.
