How to end the 'Heathrow hassle' BAA's monopoly on the capital's three main airports means that it has become complacent, writes Russell Hotten

Aug. 7, 2007

IT IS difficult to think of another company with so many dissatisfied customers. More than 70m passengers have passed through Heathrow Airport in the past 12 months and it seems a reasonable bet that not many enjoyed the experience.

Most businesses would not survive the sort of criticism heaped on Heathrow but then this is no ordinary business. It is part of a monopoly and, with a pivotal position as the "gateway to Europe'', its customers often have little choice but to use it.

Gatwick, and to a lesser extent Stansted, can be equally dismal experiences. Besides, they do not have the network of connections and services often needed by travellers, especially globetrotting businessmen and women, 18m of whom used Heathrow last year.

Apart from bad service, the other thing these three major airports have in common is that they are run by BAA, which in turn is owned by Spanish construction group Ferrovial. The three airports account for 80pc of flights and 90pc of passengers in south-east England.

Much has been said in recent days about the damage being done to UK business and London's financial centre by Heathrow's problems.

Yesterday, the chief executive of British Airways, Willie Walsh, said the current problem could not continue. The CBI employers' group has warned of the economic consequences. Executives, some of whom might use the airport several times a week, now talk of the "Heathrow hassle'' being a threat to inward investment.

The vice-chairman of Standard Chartered Capital markets, Sir Thomas Harris, said that many executives do whatever they can to avoid using Heathrow.

Last May, in its submission to the Competition Commission, which is considering whether to break up BAA's monopoly, American Airlines, the world's largest carrier, wrote: "BAA's mismanagement of its London airports has cost American millions of dollars in higher landing fees, reduced operational performance and lost revenue as passengers choose to connect through other European hubs.

"We believe that these problems stem in large part from the conclusion reached by the Office of Fair Trading in its study of UK airports - lack of competition has led to lower quality services and higher prices. Any frequent traveller comparing Heathrow and Gatwick with other major European hub airports would likely echo the sentiment that BAA-owned London airports are poorly maintained, equipment is often inoperable, and the customer experience is simply unacceptable.''

In short, Heathrow is bad for business. American's comments underline these are not recent problems, but have been simmering for years.

Ferrovial bought BAA for pounds 10bn more than a year ago, borrowing heavily for

the purchase. It said

little about the Heathrow chaos until recently, when Ferrovial's chairman Rafael del Pino admitted the airport had "many deficiencies''.

What he did not say was how the company intended to improve things.

This week, The Daily Telegraph had expected to interview Stephen Nelson, BAA's chief executive, about just such issues but he decided against it, with the company "citing reasons it could not go into at the moment''.

Professor Rigas Doganis, former chairman of Olympic Airways, believes that not all the blame can be put at Ferrovial's door. The long queues getting through security and sometimes squalid facilities are a BAA problem. But aircraft delays and congestion is a Government issue, the professor says.

And then there are disruptions caused by industrial action or lost luggage - two issues that blight the performance of British Airways, Heathrow's biggest carrier.

The Government introduced new security measures last summer, sparking complaints from passengers that it now takes up to an hour to get through the various screenings and checkpoints. Ferrovial might argue the security clampdown was something it could not foresee but has to enforce. But critics say that, 12 months on, BAA has done nothing to ease the situation. Nor does it explain the pre-existing operational problems.

BAA needs to create more space within the terminals for security functions, says Prof Doganis. But there is a constraint on space caused by BAA's expansion of its retail activities - prompting dismissive complaints that Heathrow is now a shopping mall with an airport attached. BAA's aviation activities are regulated by the Civil Aviation Authority (CAA), which has capped the company's pre-tax rate of return at 7.75pc and may reduce it to 6.2pc.

BAA has always argued that this price regime incentivises the expansion of unregulated operations - that is, retail. But the "lack of space'' argument does not wash with a lot of people - one of them being the head of the International Air Transport Association (IATA), Giovanni Bisignani. He acknowledged the inconvenience created by the Government's passenger screening policies, but says BAA should be spending more. "The only beneficiary is the airport operator - BAA - that continues to deliver embarrassingly low service levels by failing to invest in appropriate equipment and staff to meet demand. This must stop,'' he said.

Constraint on space has always been an issue for Heathrow. The airport's real capacity is probably about 45m passengers a year, but it now handles more than 70m. Building terminals between the runways was a mistake, because it put an immediate limit on expansion. Terminal 5 opens next year, but planning inquiries and delays put the project years behind schedule. But even T5 won't solve all BAA's problems, as 60pc of passengers will still use the other terminals.

A fundamental problem, Prof Doganis told the BBC earlier this week, is that "successive Governments have failed to bite the bullet and build more runways''.

Not only should there be more runways built in south-east England, another one is needed at Heathrow, he said. Yet, Governments have considered this route and turned back, either because of the economics or because it was not politically expedient.

Instead, there is a growing consensus around the airlines' view that the best way to force London's three main airports to invest and improve is to get them to compete.

Regulators are now considering breaking up BAA's London monopoly but Ferrovial would have considered that as possibility before buying it and probably found the value of the sum of the parts to be greater than the pounds 10bn it paid.

BAA's threat that it could even withhold investment from Heathrow unless the CAA allows it to raise charges is unlikely to endear the company to those considering its future structure. For BAA's critics, the existing regulatory structure has failed. Time to try a new framework.