Vowing End to 'Heathrow Hassle,' London Expands Bursting Airport

LONDON (MarketWatch) -- At the headquarters of Heathrow airport's operator, BAA, employees drink tea out of "Making Heathrow Great" mugs.

A few miles away, at the home of flagship carrier British Airways PLC, impatient executives watch a clock that's counting down the hours to the opening in March of the airport's much-hyped and long-awaited Terminal 5.

There's a good reason British Airways and BAA, who have toiled together on the 4.3 billion-pound (about $9 billion) project for more than two decades, are on edge.

The very future of Heathrow as a key European travel hub hangs in the balance.

In the last two years, the reputation of the airport has taken a battering. The phrase "Heathrow hassle" has entered the lexicon, coined by passengers tired of creaky infrastructure, endless queues caused by new security and the recurring menace of lost luggage.

In a 2007 survey of travelers published last month by Web site TripAdvisor, Heathrow tied with Chicago's O'Hare as the world's least favorite international airport.

As Tony Douglas, the airport's former chief executive, put it when he resigned earlier this year, Heathrow is "bursting at the seams," crippled by delays and increasingly unable to process 68 million passengers a year in a structure intended for 45 million.

The threat of the airport losing its dominance in the U.K. and Europe is a real one, with budget-conscious travelers flocking to smaller, less crowded facilities and international business travelers increasingly preferring to touch ground in Paris, Amsterdam or Frankfurt.

It's no wonder then, that as March 27 draws closer, T5 is being promoted as the panacea to all travel ailments.

British Airways (BAY) and Spanish-owned BAA promise the new building will eradicate not only queues and lost bags, but ease delays and general travel stress too.

Even British Airways Chief Executive Willie Walsh can barely mask his impatience, saying in a speech this fall that T5 was "crucial" to the airline's long-term future and wasn't coming a "moment too soon."

MarketWatch earlier this month gained access to the building and spoke to top executives in charge of the project to understand how much it will change the Heathrow experience.

A long time coming

British Airways has been waiting for a new Heathrow home for more than 20 years.

While the original design for T5 was approved in 1989, it wasn't until 11 years later, following a comprehensive public inquiry, that planning consent was granted. Construction began in September 2002 on a swamp between the airport's two runways.

The final structure, the size of 13 American football fields, is the largest free-standing building in Britain. The facility includes a baggage system that can handle 12,000 suitcases an hour on 18 kilometers (11 miles) of conveyer belts.

Jonathon Counsell, head of T5 development for British Airways, stressed the central role given to the luggage system as the facility evolved.

"Most airports consist of a luggage system built around a terminal. This is a terminal built around a luggage system," he said in an interview.

The system is so essential to the smooth running of the terminal that it has been tested nonstop for the past year. It was, after all, the failure of its luggage setup that made Denver International a case study in how not to open an airport. There, in April 1994, airport authorities treated reporters to a demonstration of the automated luggage system only to see most of the bags thrown off the belts. The airport's opening was delayed; eventually the luggage system was scrapped.

Given the extensive testing of the baggage system at T5, passengers shouldn't be treated to scenes of strewn luggage in London come March. What will capture their attention instead, both British Airways and BAA fervently hope, is the quality of the building itself.

ABN Amro analyst Andrew Lobbenberg, who visited the facility, said he found it "very impressive," if not radically superior to other new airport terminals in Europe, such at Madrid Barajas' Terminal 4, home to national airline Iberia, which can handle 20 million passengers a year and cost 6 billion euros ($8.8 billion) to build.

He describes T5 as a "truly giant leap forward" and said the new terminal will offer a "far improved customer experience." In the medium term, it will mean "material operating-cost benefits" for British Airways, thanks to a more centralized operation, shorter taxi times for aircraft and better reliability in terms of baggage and punctuality, he added.

Poor record on punctuality, lost luggage

In the busy summer period, British Airways ranked 24th among 25 European airlines that detailed lost baggage statistics, according to the Association of European Airlines. British Airways also ranked 26th out of 28 European carriers for punctuality.

BAA didn't fare much better. The association data show that Heathrow and Gatwick, also operated by BAA, had the worst record for delayed flight departures among all leading European airports this summer.

These statistics help explain why BAA, which was bought last year by Spanish infrastructure giant Grupo Ferrovial (016260101) , has faced a barrage of criticism this year.

In the wake of rising complaints from passengers and airlines, Britain's Competition Commission got involved. The regulator is now investigating whether BAA's ownership of seven U.K. airports may inhibit competition and investment.

Attacked on many fronts, BAA hopes T5 will help restore its reputation.

Perhaps the most impressive feature of the new building is the top-floor departure hall, which has unobstructed views of one of the airport's two runways, said Mark Bullock, who took over as Heathrow's CEO following Douglas's departure. On a clear day, passengers will be able to see as far as the Canary Wharf financial center in east London to the British royal family's Windsor Castle in the west.

"From the departure lounge, there are fantastic views across the airfield and you will feel the buzz of travel," Bullock added.

Passengers should get a chance to enjoy those views, he said, as 96 automatic check-in counters, twenty security lanes and new X-ray machines reduce the time it takes to get to the gate.

More retail space; hope for higher charges

Airport authorities hope less time queuing means more time shopping at one of the terminal's 144 stores, or eating at one of its 25 restaurants. The food venues include 'Plane Food,' the latest venture of Michelin-starred chef Gordon Ramsay.

T5 will increase Heathrow's total retail space by 50%.

BAA hopes that passengers will come to the airport early to shop and eat, rather than coming early because they're consumed with the fear that, stuck in an immobile check-in or security queue, they'll miss their flight.

Retailers competed ruthlessly for T5 space, giving BAA, which gets 38% of its income from retail operations, the opportunity to select those willing to go the extra mile by doing something a bit special.

British fashion designer Paul Smith, for instance, will decorate its shop with travel memorabilia from around the globe. Magazine and book retailer WH Smith Plc (SMWH) , meanwhile, is installing self-service checkouts to cut queues.

And Coach International (COH) , a U.S. accessories store, will be launching its first European shop at Heathrow, hoping to use the outlet to establish the brand in the U.K.

But T5 is not just about getting travelers to shop.

BAA has been using the expansion as a springboard to lobby its regulator, the Civil Aviation Authority (CAA), for an increase in the fees it charges airlines to use Heathrow. Those fees are lower than at most leading airports, including New York's JFK and Paris' Charles de Gaulle. But the regulator last month didn't recommend the price increases BAA wanted.

Without additional investment and a third runway, BAA has warned that capacity constraints -- 98.5% of its flight slots are already filled -- mean it risks losing its dominance to competitors such as Paris' Charles de Gaulle and Schiphol in Amsterdam, which run at about 70% capacity.

British Airways' Walsh made the same point in a speech to the Guild of International Bankers in London last week.

"If we as a country turn our backs on expanding Heathrow, then we are throwing in the economic towel -- and must prepare ourselves for the consequences of a low-growth or perhaps no-growth economy in the future," he said

"More capacity at the country's hub airport is essential for the future prosperity of an island nation in a globalized economy," he added.

The British government is equally concerned with the need to expand congested Heathrow to support London's continued economic growth. Last week Transport Secretary Ruth Kelly unveiled proposals for a third runway and a sixth terminal. The CAA has estimated the project could cost as much as 9 billion pounds.

"If nothing changes, Heathrow's status as a world-class airport will gradually be eroded -- jobs will be lost and the economy will suffer," she cautioned.

Once seen as Europe's No. 1 airport, Heathrow now serves fewer destinations than Frankfurt, Amsterdam and Paris.

Until these plans get the green light, a process likely to take years, BAA argues it needs the extra money from higher fees to carry out major refurbishments to other Heathrow facilities after T5 is completed. The airport's four other terminals have been in use for 50-odd years, and are showing their age.

With T5 nearly completed, lobbyists have turned their attention to the other terminals.

Earlier this month city business leaders demanded government action to reduce "Heathrow hassle," which in the third quarter included the temporary closure of terminal 4 following a security alert and repeated failures of the luggage system.

The 30-plus senior executives at a biannual meeting put their concerns to BAA management. Business leaders see the current fee review by the CAA as an opportunity to set tougher standards for quality of service and prioritize investment to restore Heathrow to world-class status.

Business passengers will fare especially well at T5, with half a dozen lounges, a champagne bar, a wine gallery and a spa, as well as showers and changing rooms.

But BAA's Bullock is adamant that all passengers will enjoy the benefits of T5, if indirectly.

"T5 does two things for us. It lets 27 million passengers move out of existing terminals and into British Airways' new home and it creates opportunities for us to redevelop the other terminals," he said.

Work has already begun on T1 and T3 and is starting later this month on T4. T2 is set to be demolished and entirely rebuilt. Most airlines flying to and from the U.S. out of Heathrow, including American Airlines (AMR) , United Airlines (UAUA) and Virgin Atlantic Airways, are based out of Terminal 3, which was built in the sixties.

BAA is hoping to have all the work done in time for London's 2012 Olympic Games.

Some aviation experts, however, caution that expectations may be too high. They said the new terminal is unlikely to entirely eliminate Heathrow hassle.

"T5 has to be seen as a remedial action without any doubt," said Peter Morris, chief economist of U.K.-based aviation consultancy Ascend. In particular he noted that T5 means British Airways passengers will no longer face the "misery" of having to trek from T4 to T1 to change flights.

"That's a huge improvement," he said.

But regardless of T5, Heathrow will remain a building site for the next five years as older terminals are refurbished, he added.

"T5 is by no means an overall panacea," he concluded.

Will it be enough?

Some analysts also worry that the move to T5 won't be enough for British Airways to offset the negative effect of the "open-skies" pact between Europe and the U.S. The agreement is set to liberalize transatlantic traffic starting in April and means the carrier is likely to see much more competition on some of its most lucrative routes.

Rivals Air France-KLM (AKH) and Delta Airlines (DAL) have already unveiled plans for a joint venture that will see them share costs and revenue on transatlantic routes.

Many other airlines are considering similar alliances.

Meanwhile, investors are growing impatient with the airline's share price. British Airways' shares are down roughly 37% so far this year compared with a 27% decline at Air France-KLM and a 15% drop at Lufthansa (823212) .

"It is our view that T5 will definitely be beneficial to British Airways, but we do not see it supporting earnings materially in fiscal 2009," said ABN Amro's Lobbenberg. Instead, he sees "open-skies" denting earnings in that period.

For British Airways, the financial benefits from T5 will start to trickle through in 2010, Lobbenberg said.

For travelers, it will undoubtedly be "a much better passenger storage facility," said Ascend's Peter Morris. Can "Heathrow harmony" be far behind?

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