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Heathrow slot values under pressure?

Heathrow's second largest slot holder bmi has admitted it needs to raise £190 million ($313 million) to carry it through to 31 October next year. The figures are bleak. For the year to 31 December 2008 bmi generated £1 billion in revenues, but its operating loss totalled £135 million.

It burned more than £90 million in cash, leaving it with £40.7 million, and internal forecasts show it is going to need the£190 million sum.The company's auditor has also expressed reservations about the airline's ability to continue as a going concern, highlighting its heavy losses.

And while new bmi parent Lufthansa has agreed to loan it £95 million, the German carrier is under no obligation to supply this funding and, should it decline, bmi may be forced to tap its precious slot portfolio - which it values at £616 million - to see it through. "Negotiations are significantly advanced with several airline groups," says the UK carrier.

 bmi may tap its slot postfolio to meet its £190 million cash need

Bmi's plight has naturally sparked the interest of UK rival British Airways. Chief executive Willie Walsh says: "We remain interested in the future of bmi and will watch what Lufthansa does with interest. We have made that known directly to Lufthansa but there are no discussions or formal contact with them on the issue." Walsh says BA's interest in bmi is "primarily in relation to the slots at Heathrow", although he also sees value in bmi's network which includes "a number of destinations" that BA would like to serve.

After battling for years against BA's dominance, this would be a painful blow for bmi. But some commentators claim a slot sale could prove tricky in the current climate. Has the downturn really taken the shine off such a sought-after asset?

Somewhat counter-intuitive figures from Airport Co-ordination Limited, which handles slot allocation at Heathrow and other UK airports, show that slot trading volumes at Heathrow have risen this year.

ACL director of co-ordination James Cole says: "The volume in 2009 was actually slightly higher than in 2008, but this includes more temporary slot trades and movement of slots within grouping of airlines, as some airlines seek to reduce unprofitable flying, whereas the 2008 trades were mainly associated with US carriers buying their way into Heathrow with 'Open Skies'."

John Balfour, a partner and aviation specialist at London-based legal firm Clyde & Co, has acted on slot deals since the 1980s. He says: "The signals I'm getting are a bit mixed on this. Somebody recently asked if I knew of any slots for sale. I made some enquiries and couldn't find any quickly. But there are reports saying that bmi is likely to have trouble selling theirs, because there's not much of a market at the moment. Those two things are fundamentally inconsistent."

Lack of transparency

It is notoriously tricky to get a true picture of the Heathrow slot market because it lacks transparency. "There is no official way of finding out what's for sale," says Balfour. "There's no single place you can go to. I have come across a couple of brokers, but they are not transparent or obvious."

While few slots are available at the moment, Balfour believes we could see a flurry of activity with the "use-it-or-lose-it" rule coming back into force this winter, particularly in leasing and "babysitting" activity. "The last information I heard was that the suspension wasn't going to be extended," says Balfour. He believes airlines will "try to make the best of it and sell the slots, rather than just giving them up, increasing the probability of more sales over the coming months".

Meanwhile, the topic of slot values remains murky as ever. "ACL does not have comprehensive data on slot values," says Cole. But he adds:"It appears that prime morning slots are still very highly valued, but afternoon and evening slots much less so than before the downturn."

Balfour adds: "From what I've heard prices are certainly a long way down from their [Open Skies] peak. But it is difficult to compare because no two slots are worth exactly the same. Nobody could write a list of prices or show it on a graph."

US carrier Continental Airlines paid $116 million to secure slots to launch twice-daily services from Newark and Houston in 2008 and a further $93 million for slots for that winter. But prices vary widely, depending on time of day, market demand and terminal availability, and sources indicate a pair of poorly timed slots can go for under £1 million.

Asked whether now is a good time to buy slots, Balfour replies: "That's like asking whether it's a good time to buy shares; it's difficult to tell until after the event." This is not good news for bmi or parent Lufthansa as they seek to revive the ailing UK carrier.

Click here for more on the flurry to secure Heathrow slots in the wake of the "open skies" deal


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