By Colin Baker in Edinburgh

BAA accepted a 950p per share bid from Spanish construction firm Ferrovial in early June valuing the company at £10 billion ($18.7 billion). Two weeks earlier, the UK’s Office of Fair Trading (OFT) announced that it was going to look into the UK airport market “with a view to establishing whether the current market structure works well for consumers”.

BAA Airport 

BAA monopoly at its seven airports is coming under scrutiny

FT chief executive John Fingleton says that BAA currently owns and operates airports that handle 63% of UK air passengers, with the figure in Scotland rising to 86%.

“Competition in the air transport sector is an extremely important part of the UK economy, with a significant impact on UK consumers and business alike,“ he says, adding that the investigation will examine whether the current market structure “delivers best value for air travellers”.

This has led to speculation that the OFT may seek to break up BAA’s monopoly over London’s three largest airports, Gatwick, Heathrow and Stansted, with analysts viewing a sale of Gatwick as a distinct possibility. The OFT could also decide that either Glasgow or Edinburgh airports, or both, should be sold off. Of course, the new owner may have its own plans for the future shape of BAA, which could pre-empt any decision by the OFT.

This comes at a time when the UK’s civil aviation authority is itself in the early stages of a regulatory review of BAA for the next five-year period, running from 2008 to 2013. In both cases, the main focus is on the London airport system, which accounted for just under 70% of BAA’s revenue in 2005.

Under the single-till pricing system that has been in place since 1987, Gatwick and Heathrow’s sizeable non-aeronautical income means that they have tended to offer better value for money than their peers in Europe. Investment bank Dresdner Kleinwort Wasserstein (DrKW) estimates that Heathrow has an enterprise value per passenger of only £90.40 ($163.70), compared with £112.90 at Frankfurt, £121.90 at Zurich and £125.20 at Copenhagen.

In a report on BAA, DrKW states: “The cumulative pricing differential, built up over 20 years, fails to adequately reflect the attraction of Heathrow as a point of origin, destination and transfer.” The report says that BAA, by virtue of its regulatory requirement to provide airport capacity in the south-east of the UK, has been put in the position of being obliged to provide more capacity at economically low prices, therefore never being able to meet demand. “This in turn, creates the planning and environmental issues that add to the cost and political pressures on BAA.”

As a result, DrKW argues: “Capacity can be better rationed through something closer to open-market pricing, having the effect of driving out operators of small aircraft or uneconomic routes who are only still using Heathrow because of the artificially low aeronautical charges, thereby freeing up capacity, lowering the investment requirement of BAA and reducing the planning and environmental pressure.” ■

Source: Airline Business