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Last Updated: Tuesday, 16 January 2007, 23:32 GMT
Heathrow owner set for more turbulence
By Gavin Stamp
Business reporter, BBC News

People waiting to enter a holding area in the middle of last December's fog chaos at Heathrow
Recent fog chaos raised questions about Heathrow's ability to cope

Over the past year, airports operator BAA has faced the kind of turbulence that would have had even seasoned travellers reaching for their sick bags.

Heathrow's owner came under fire for how it handled heightened security measures introduced after August's bomb alert.

Four months later, a foggy pall caused chaos at Britain's largest airport, leaving thousands of passengers stranded.

This raised further questions about the ability of BAA and its most prized asset to cope with unforeseen events.

At the same time, a protracted takeover battle finally saw the company pass into foreign hands.

Runway battle

After its takeover by a group headed by Spanish airport operator Ferrovial, BAA chairman's and chief executive left, threatening further upheaval.

The business, which served nearly 150 million passengers last year and whose operations are vital to the growth of the UK economy, is likely to be under even greater pressure this year.

At the end of the month, BAA will outline details of its plans to build a second runway at Stansted before submitting a formal planning application this summer.

Woman protesting against planned Stansted expansion in 2004
BAA says expanding Stansted is vital but others disagree

Projected to cost about 2.7bn, the development would more than triple the number of passengers to 75 million by 2030.

The number of annual flights could rise sharply, particularly if the runway is used concurrently for takeoffs and landings.

The proposal is strongly backed by ministers, conscious of the economic imperative of improving access to London and the south east of England, but local opposition is unwavering in many quarters.

BAA has been consulting with local residents for the past year.

But in a sign of the fight to come, a separate proposal to expand existing facilities - to accommodate an extra 14 million passengers - was rejected on environmental grounds by Uttlesford Council in December.

Plans for the runway, which BAA hopes to complete by 2013, are almost certain to go to a public enquiry.

BAA acknowledges there are legitimate worries, but insists it is listening.

"Heathrow is on a knife-edge. I suspect it is going to get worse
Gehan Talwatte, aviation analyst

It has promised people living within the boundary of the development, whose property values could be hit, that it will buy their homes at the market price as if there had been no disruption.

"We can't promise to do everything that's asked of us, but we do promise to listen to every point of view and if we can respond positively to reflect those views, we will do so," says BAA's Mark Mann.

But it still fears a rehashing of arguments about the need for extra capacity - it already can't meet the current demand for air travel in the south east - a situation that saw Heathrow's Terminal 5 embroiled in planning arguments for 14 years before it was approved.

Security focus

Accused of mishandling August's security situation by Ryanair and other airlines, BAA has spent 23m on rectifying problems since then.

1965: BAA set up to run Heathrow, Gatwick, Stansted and Prestwick airports
1971: Bought Edinburgh airport
1975: Bought Glasgow airport
1987: Privatised
1990: Bought Southampton
1992: Sold Prestwick
2000: Competition review approves continued ownership of three London airports
2006: A group headed by Ferrovial buys BAA for 10bn

It has hired 500 new security staff on a permanent basis.

From this summer, it will have installed an extra 16 security lanes at Heathrow and other airports to ease existing congestion at peak times.

"Since August we have been working hard to improve the passenger experience at our UK airports," Mark Mann says, while acknowledging that security issues still remain a "significant challenge".

It defends its response to the fog chaos, saying it set up marquees several weeks before to house passengers in case of future delays and did all it could given the shortage of available space.

But observers believe that with the extra capacity afforded by Terminal 5 more than a year away, BAA is in for a rough ride this year.

"Heathrow is on a knife-edge," says Gehan Talwatte, managing director of aviation consultancy Ascend.

"It just takes a flutter of a butterfly's wings to make it tip over. I suspect it is going to get worse before it gets better."

Chart showing growth in passenger traffic at leading airports

This, Mr Talwatte argues, is due to under-investment in the past - something which BAA is seeking to address by its 1bn plus proposal to build a new facility to replace Terminals 1 and 2.

"Terminal 5 is going to have a positive impact, but it is not going to be a solution to the fundamental issue Heathrow is facing," he says.

"It needs another runway."

This is implausible in the short term although ministers will launch a consultation on Heathrow's future later this year which, along with a new environmental audit, could build fresh momentum for further expansion.

Under scrutiny

Meanwhile, BAA's own future will be under scrutiny, with the Office of Fair Trading (OFT) expected to recommend a full Competition Commission investigation into the firm's commercial position.

Its airports account for 60% of all passenger trips and 90% in the south of England, something the OFT says stifles competition and pushes up prices.

Airlines want regulators to look at whether BAA should be forced to sell off either Heathrow or Gatwick.

They believe BAA's set-up means it is not being run as efficiently as it should be and carriers are being forced to foot the bill for this through "unacceptable" increases in charges at London airports.

A plane docked outside the new Terminal 5 building at Heathrow
On budget and schedule, Terminal 5 will boost capacity from 2008

"The current market structure doesn't deliver best value for passengers," says a spokesman for industry body IATA.

"Competition could bring significant benefits."

BAA says its charges, which are regulated by the Civil Aviation Authority, are highly competitive and that fragmenting the business would threaten much-needed investment.

While industry experts say there are advantages to the status quo being maintained, they believe Ferrovial's own hand may well be forced.

They say the Spanish firm overpaid for BAA and the imminent sale of Budapest Airport, which BAA bought only last year, suggests hard financial decisions are now being taken.

"BAA has done a great job squeezing money out of various parts of their portfolio, such as property and retail assets," says Gehan Talwatte.

"But they have already started the process of asset sales outside the UK. It is quite possible they would start considering it within the UK in the next two to three years."

This is the first of two articles looking at the future of UK airports. The second feature, which will look at the growth and prospects of smaller regional airports will be published on Friday 19 January.

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