The British Airports Authority - Case Study Example

BREAK UP OF THE BAA The British Airports ity or BAA as it is known was set up by the Airport ity Act of 1966, which was aimed at creatinga central authority that would take ownership of three major airports of London namely the Heathrow, Gatwick and the Stansted airports. Over the past few years, the airport had been brought to own four additional airports namely the Glasgow, Edinburgh, Southampton and the Aberdeen airports. The BAA was soon converted into a private limited company (PLC) by the Airports Act 1986 so as to enable the company to be traded on the stock market. Since 2006, BAA Plc has been owned by a Spanish group Grupo Ferrovial and has since been known as the BAA Limited (Adrian Haberberg, Alison Rieple, 2008). A recent enquiry by the UK competition commission during August 2008 to March 2009 led to the decision that BAA would be made to sell 3 out the 7 airports it currently owned. Out of these, Stansted, Gatwick, as well as one out of Glasgow or the Edinburgh airports have been earmarked for being sold. The decision to initiate the sale was made with fear over the monopoly of the BAA over the airports in London and Scotland, which it believed would have an adverse effect over the operations of airlines as well as the services available to passengers in these airports. The sale of the three airports is likely to generate as much as £4 billion in revenues (Peter Forsyth, 2008). Ferrovial, which holds a majority stake in BAA has been directed to affect the sale within 2 years and will be allowed to keep the Heathrow airport. BAA has rejected the call to sell the airports by claiming that the review by the commission was flawed and that such measures were uncalled for in the current economic scenario. Of late, BAA has expressed the willingness to dispose one instead of 3 at once citing difficulties in the current market (Peter Forsyth, 2008). The current paper is aimed at providing a critical analysis in this regard over the factors leading to the proposed sale and the resulting break of the BAA. The decision to sell the airports has been a thoroughly studied effort and has received widespread coverage and analysis from industry experts as well as the media. In order to study the reasons for this decision, it is important examine the ground factors in which the BAA has been managing its airports. This approach will help determine if the BAA was indeed living up to its expectations of servicing passengers and airlines in an effective and qualitative manner. Firstly, the BAA has for long, been notorious and criticized for a number of reasons over the past several years so much so that it for once ceases to be anyone’s favorite airline operator. Passengers using any of the airports owned by the BAA have always complained of the long queues and waiting times that they have had to endure in order to catch their flights. The situation is even more pitiable for people in transit or waiting to catch a connecting flight. The decision to strip the BAA of three airports has led everyone to say that it would not stand to receive any sympathy from the travelling public (Gwyneth Dunwoody, 2008). With the current economic turmoil and with the mushrooming of several new low cost airlines, the only means for an airline to cut costs, stay profitable and remain in business is to reduce its dependence on fuel and associated costs. Airlines for long have acknowledged severe concerns over the lack of proper and timely landing facilities that had led several incoming flights to await approval to land, thus forcing them to burn more fuel unnecessarily. Several airlines such as Ryanair and Easyjet have welcomed the ruling of the commission and have been alleging that their appeals to have more runways has gone unheard by the BAA. The airline industry is constrained by a single factor, namely the handling capacity, which can only be met by providing more runways and additional facilities (CIT, 2008). The commission has identified that the primary reason for creating the BAA and allowing it to be controlled by private business entities was to allow it meet the growing demands from the industry, a fact which the BAA has been found wanting and something which it has acknowledged. Several other experts in the industry question whether breaking up the BAA is the ultimate solution towards addressing the current problems. The industry is aware that changes in existing facilities and procedures require a lot of investment and restructuring before anything tangible can be observed. There have also been calls for better communication between the airlines and the airport operator in every area concerning the service to the passenger. This is true in several of the airports under the BAA, especially in the case of Heathrow, which is known to run at almost 98% of its total capacity. Additionally, a delay due to weather and other causes simply result in further delays and inconveniences for the passenger. Constructing new runways in addition to the existing ones is more of a ploy to increase the existing capacity to match the demand thereby allowing more flexibility into the system. though this is seen as a major requirement to improve upon flight delays, the BAA has for long faced numerous hurdles over getting the required land for constructing such new runways, especially within the airports in London. When the opening of the new International Airport in Beijing prompted critics to compare the promptness of Beijing to the BAA, the latter was honest in responding that while it was easier for the communist regime to simply relocate thousands of people living previously in the area without a whisper, this simply was not the case with the BAA, which had to undergo several lengthy legal procedures in order to expand its current runways (BP, 2008). Critics of the plans to build more runways have expressed that such moves must not be made to merely allow a more planes to fly more often, which would simply compact the current problems faced by BAA’s airports. Instead, they have suggested a shift from the existing procedures by using the existing system to create a buffer prior to undertaking any such expansion. But one observes the need for adding more capacity. With the arrival of low cost travel, the volume of traffic handled by London’s airports has increased by as much as (need to add info here). This growth in traffic needs to be properly serviced as it is quite vital for the local economy. As has been mentioned before, such proposals has received bitter resistance from people and home owners living in and around these airports who are against the idea of any such proposed expansion. In this context, it is quite clear that simply breaking up the BAA combined with the rising demands for more runways will simply not eliminate the problem of acquiring more space. So far, the response of BAA over the decision has been rather inconclusive. While terming the decision of the CC to be based on flawed analysis, it has claimed that such measures may be detrimental in the current economic scenario. The Unite Union, has come out in support of the BAA and has rejected in unanimously. Its secretary for aviation, Mr. Steve Turner, has said that the report causes unnecessary instability in the aviation sector that is already bearing the brunt of the global economic crisis, which has seen a drop in passenger numbers (BAA Scotland, 2005). As mentioned above, Easyjet and Ryanair have been quite vocal over their support for the breakup of the BAA and have greeted the decision by the competition commission, claiming it a victory over the monopoly of the BAA that has led to deterioration in competition and problems to the travelling public. Ryanair has gone a step further and had called for the director of economic regulation, Mr. Harry bush to resign. The airline industry acknowledges that the work and analysis undertaken by the competition commission was something that was being awaited by the industry over the past few years and had ultimately demonstrated the profound dominance by the BAA against its inherent deficiencies in regulating the airports and servicing its passengers and airlines. Several industry experts such as Bob Atkinson of www.travelsupermarket.com has welcomes the decision to split the BAA and attributes this as a good news for the traveler as he believes that the Edinburgh airport has a growth potential and a potential boom from holiday traffic, which he believes can be better managed by the BAA if its lets go of the Glasgow airport. BAA has also been the subject of criticism from the parliament, whose members have for long been calling that the operator be stripped of the three biggest airports that it currently owns. The MPs have alleged that the apparent monopoly of BAA over London’s Heathrow, Stansted and Gatwick airports is a bad sign for passengers and must be dealt with immediately (GBCAA, 2008). The MPs have based their criticism over the mismanagement on the part of the BAA for deliberately restricting competition among airlines, which is seen as a ploy against the interests of the passengers. Several politicians believe that with Heathrow brimming to its full capacity, there is a lot of untapped capacity left with Gatwick even in comparison to Stansted, which they believe must be harnessed to full capacity. They allege that stripping the BAA of its monopoly would rein in the much needed competition thereby benefiting passengers and airlines. This is because airports controlled by different owners would have to compete against each other to secure more traffic. In the existing model, the total control of London’s three airports by BAA is seen as a wielding tool in the hands of the operator which can allow it to allot airports to the airlines at will thereby causing inconveniences to airlines and passengers. Additionally, having a total control allowed the BAA to fix the tariffs for airlines wishing to land in London’s airports at will thus severely impacting their operating costs and adding to their frustration. With individual ownership, it is believed that separate operators will vie with one another to attract different airlines with attractive and competitive offers, thus helping airlines make the best choice. Such a move is widely seen as having a positive consequence on the passengers who will be able to benefit from a more competitive airline industry that is able to leverage more out of the individual ownership. BAA’s ownership has thus been accused of restricting the natural market. Further, BAA was found wanting for planning towards addressing contingencies such as long queues at check in counters, baggage areas, or even worse as a terrorist attack or a plane crash. BAA has been criticized for not being up to the mark in planning for these possibilities and putting the requisite mechanisms in place (J. Christopher Holloway, Neil Taylor, 2006). With these conclusions, the MPs believe that the sale of the airports will take place either voluntarily or through the use of force. Ferrovial, the owner of the BAA has been quite concerned with the latest developments. Alongside the rulings of the Competition Commission to sell three of the seven airports under the BAA, the commission has further outlined the need for initiating an overhaul of the regulatory framework. With this twin pronged approach, the commission believes that passengers will be served in a better way and new procedures will allow for servicing additional passengers in the near future. The commission has studied the case for the BAA in a detailed manner and notes the problems associated with debt that have plagued the Spanish consortium that is known to invest in infrastructure holdings as one of the other reasons for declaring the proposed sale. Ferrovial has been further upset by the fact given the present global meltdown that has impacted the airline industry, the price for selling any of the airports is not expected to match a good offer from any potential buyer and is worried that any forced sale would deepen its debt constraints. Negotiations and activity within the markets had led to several potential buyers declaring an intent to buy the declared airports weeks before the commission was to make a formal announcement, thus accelerating the pace of competition in the market and prompting further intense speculation from several market watchdogs (Anthony Sampson, 2007). The competition commission further claims that it has pursued all issues and parameters associated with the airports under the BAA and claims that it has based its decisions on a strong case that has called for several prominent measures. As has been mentioned before, the commission is of the view that allowing the Heathrow, Gatwick and Stansted airports to be managed under different ownerships thereby ushering in fresh investments from diverse sources. Additionally, such a move would allow better focus over individual projects associated with expansion, procedures and efficiency in each airport. The commission further believes that individual airport ownership would add more incentive on the part of the airport operate to see to it that the demands of passengers and airlines are adhered to in a strict manner without any distortions and discrepancies (Helen Peck, 2007). This is one of the gray areas where the BAA has been found wanting and has often been criticized for being unresponsive and uncaring towards all key stakeholders. It is also widely believed that allowing BAA to retain ownership of even two of London’s airports would not help much in relieving passengers and airlines of current issues as it would still allow the BAA to maintain its monopolistic standpoint as it would still continue to control at least 60% of London’s air traffic. Subject to widespread criticism from the industry and passengers, BAA has accepted that it faces several key hurdles, though it refrains from accepting everything that is it presently being blamed for. BAA cannot feel content and safely placed from the argument that existing capacity constraints signify the lack of any room to improved competition. Instead, it is widely speculated that the common ownership of the airports has been the most significant contributing factor to the problems over shortages in capacity and handling. BAA has further been accused of delaying and going easy on development in one airport to concentrate on efforts at another airport and switching these positions quite constantly leading to wastage of funds with no significant achievement in improvement (Christopher Clarke, 2008). The ruling of the commission additionally calls for a regulatory revamp as mentioned previously. In the current framework, the civil aviation authority revises price controls once every 5 years, which relies on the issuance of licenses. However, the commission believes that the role of the Civil Aviation Authority can be further extended to setting benchmark standards for managing airports and performance barriers. It could further help in resorting to an annual review instead of the traditional 5 year approach and could also look into the financial performance of the airport operator. This way, it is believed that the operator will be made more answerable to a regulating authority thereby allowing more room for scrutiny and improvement. Increased competition as a result of individual ownership would eliminate any sluggishness and the competitiveness could be controlled and monitored by the regulating authority. The preceding paragraphs have highlighted the sentiment within the British airline industry over the proposed breakup of the British Aviation Authority, the controller and operator of 7 airports in the United Kingdom, including the 3 airports in the London area. The decision to force a sale of 3 of the 7 airports has been appreciated by passengers and airlines, who allege that they have been victims of the monopolistic actions of the BAA and concede that the decision to break up the existing ownership will help bring in the much needed efficiency, competitiveness and perfection in service. With the proposed sale, the advantages cannot be realized overnight. However, with a sound regulation and a good governing framework, it is believed that British airports would be able to serve passengers and airlines in a much better manner. REFERENCES 1. Adrian Haberberg, Alison Rieple (2008), Strategic Management: Theory and Application. Oxford University Press. 2. Gwyneth Dunwoody (2008), The future of BAA: fourth report of session 2007-08, report, together with formal minutes, oral and written evidence. London: The stationery office. 3. Peter Forsyth (2008), The economic regulation of airports: recent developments in Australasia, North America and Europe. London: Ashgate. 4. CIT (2008), Transport: Chartered Institute of Transport in the UK. University of Michigan. 5. BP (2008), The future of BAA: Government response to the Committees fourth report of session 2007-08 : third special report, session 2007-08.Great Britain Parliament. House of Commons. Transport Committee. 6. BAA Scotland (2005), Enabling Responsible Growth: BAA Scottish Airports Response to the Governments Consultation Document, The Future Development of Air Transport in the United Kingdom: Scotland. Edinburgh: BAA Scotland. 7. GBCAA (2008), AA Airports Market Investigation: Provisional Findings. Competition Commission, Great Britain Civil Aviation Authority. 8. J. Christopher Holloway, Neil Taylor (2006), The business of tourism. New York: Pearson. 9. Anthony Sampson (2007), Empires of the sky: the politics, contests and cartels of world airlines. University of Michigan. 10. Helen Peck (2007), Relationship Marketing: Strategy and Implementation. Chartered Institute of Marketing. New York; Bytterworth Heinemann. 11. Christopher Clarke (2008), BAA Ltd: A Report on the Economic Regulation of the London Airports Companies (Heathrow Airport Ltd and Gatwick Airport Ltd). Great Britain: Competition Commission. Read More