Heathrow engulfed by debt
When BAA was taken over in 2006, there wasn’t much fuss or controversy whipped up about the deal.
Our most important airports – those vital to the prosperity of the South of England – were to fall under the sway of a Spanish construction and transport group, Ferrovial, in partnership with a Canadian manager of pension funds and an arm of the Singapore Government.
But it was – and is – par for the course for Britain’s largest and most famous businesses to come under the control of overseas interests.
So, true to form, the various regulators nodded it through.
However a few of us raised a concern about another characteristic of the takeover: the financing of the deal with a spectacular amount of borrowed money. BAA was bought by Ferrovial’s consortium at almost the peak of what was a bubble in debt markets, when it was possible to borrow enormous sums on advantageous terms.
Ferrovial and its partners borrowed £9bn, but hoped to replace that with cheaper finance in the subsequent two to four years.
Refinancing on advantageous terms looked a sure thing when they acquired BAA. Debt was cheap and plentiful, and financiers had become convinced that this deluge of cheap money would last forever.
Well, flood turned to drought last summer. Suddenly debt is neither easy to obtain nor cheap.
And although Ferrovial is not facing demands from its lenders for immediate repayment and has a year or two to sort itself out, it will not be easy to replace that £9bn with new loans on attractive terms.
There’s another headache for the Ferrovial gang of three.
In just a few days, the Civil Aviation Authority will announce new caps on what BAA’s airports can charge their customers. Barring a last minute change of heart by the regulator, BAA will be permitted to earn significantly less revenue per unit of invested capital than it had been doing – about a fifth less, on average.
So Ferrovial and its partners are seemingly in a painful vice.
The costs of financing operations and investment at Heathrow, Gatwick, Stansted and so on are turning out to be significantly greater than they hoped, due to the global crisis in money markets. But their ability to generate incremental revenues looks set to be significantly restricted.
How bad could it get for the Ferrovial troika?
Well the value of their investment in BAA could be severely impaired, perhaps almost wiped out.
There’s only a remote possibility that BAA would actually go bust – because however much customers moan about the experience of flying from its airports, they are top quality assets that would always find a buyer.
In the worst case where the consortium could not obtain sufficient finance from debt markets, they could raise capital by selling a lesser airport, such as Gatwick. They may indeed be obliged to do so, if an investigation into BAA’s virtual monopoly by the Competition Commission goes the wrong way for them.
Or, in extremis, the owners could sell a substantial stake to one of those deep-pocketed sovereign wealth funds – which are currently on a mission to own a few pillars of the western economies.
But it would be naïve to assume that all the risks of BAA’s agony are with Ferrovial and friends. They also fall on us. If our airports are less than best in class, that’s detrimental to our economic growth prospects.
We all have a powerful interest in seeing those airports transformed into world-leading hubs. They are in need of billions in investment, an estimated £10bn over the next decade.
In order to secure that investment, it is just possible that the CAA will relax the price controls it had been planning to impose on the airports.
But many would see that as bailing out Ferrovial and its partners for their foolishness in borrowing too much.
It’s a proper old mess. And the regulators must shoulder some of the responsibility, in permitting our airports to be engulfed by debt.
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Many bankers fell over themselves to "name lend" to Ferrovail/BAA. I should now..I sat next to one of the idiots who was desperate to get into the deal.
Some Spanish businessmen overpaid some British owners and now they can't make a profit. That represents everything that’s good about British business - if only we can continue to sell things for more than they are worth, we might end up rich!
Our economy, along with much of the
western world, has been building on
cheap debt for the last 10 years.
The worst side effect for me personally
is house prices and buy-to-let leeches.
Now debt is not that cheap anymore.
It's all unravelling. It was going to
happen some day. You can't keep
borrowing forever.
The talk of continued growth and a new runway at Heathrow fascinates me. With Britain heading for the worst recession in living memory and the Pound about to drop below parity with the Euro, who are all these travellers expected to use Heathrow?
We have lived in a fantasy economy with debt accounted as earnings and a government policy of an over valued currency making things appear better than they are. The pendulum effect means that ten years of currency overvaluation will lead to ten years of currency undervaluation due to the damage the currency has caused to the underlying producer base. Debt now has to be paid back.
The three foreign holidays a year is soon to be a thing of the past. Rising fuel prices are here to stay. I would also expect massive increases in the tax on flying as the treasury tries vainly to maintain its current levels Tax and squander. Britain could be forced into the Euro at a rate of 0.85 - 0.80 Euros to the Pound. These will make flying considerably more expensive at a time of rising unemployment and living costs.
It is likely the numbers flying from London will fall in the next ten years. Those worried about runway three can relax. Those sort of grandiose plans will not survive in the economy Mr Debt Brown has left us.
er..so what?
who really cares................
Using any airport is always an appalling experience. It is part of the overall experience of flying, which is so stressful that it ruins any holiday.
To make the use of an airport less stressful one needs
a) adequate check in facilities - why should you have to queue for an hour or more to check in?
b) enough security staff - why are most of the machines unmanned when you have a long queue?
c) comfortable seats for the 2 hours or more you can expect to be in the departure "lounge"
All this costs money. BAA has none. London will continue to have rotten airports.
Hopefully, BAA will go bust and someone else with some cash to spend will run our airports.
This will not solve the problem of lousy seats and rotten food on the airlines.
With oil at $105 today I think there are going to be fewer flights as Mr Tax and Spend Brown gets his mitts on more and more of people's wages. Fewer people will be able to afford to fly.
BAA/Ferrovia. £9 Billion DEBT. Don't worry the government and tax payer will sort that out! Or just go bankrupt, the debt will be clear in 8 months time! happy days!
Michael writes: "Using any airport is always an appalling experience" and "London will continue to have rotten airports".
One airport not in the BAA rogue's gallery is, of course, London City.
Twenty minute check-in and usually straight on and off. One of London's best kept secrets.
To Simon R.
Wheres the rising unemployment?
You would like to think there is rising unemployment, because you're most probably a tory supporter and looking for anything, *anything*, to bash the success of Labour over the last 11 years.
So instead of hard facts, you sit there and make inaccurate claims.
Hmm. That explains why Gatwick Airport now charges people to collect - it's abolished the 'pickup' point and you have to drive into the car park, get a ticket, pay £4 or so (IIRC) and drive out.
Ahhh, debt-funded acquisition. There's nothing like it for trashing a company.
I don't think debt has anything to do with it. This is the problem of letting private companies run what were public monopolies and in particular foreign companies who couldn't care less about UK customers.
Customers want all the facilities that Michael talks about in comment 6 but what we got was a glorified 'retail experience' because that's how BAA made money!
Going through a BAA airport is like walking through a disaster movie - inconsistent and long security checks, long checkin queues, poor information and lifts and escalators frequently out of order. But we have the best choice of shops in the world! Coming back into the country is just as bad and makes us look a fourth rate nation.
Ferrovial have been woeful in their management of our airports and let's hope the Government don't feel tempted to bail them out in any shape or form. It may act as a warning to future companies.
"If our airports are less than best in class, that’s detrimental to our economic growth prospects.
We all have a powerful interest in seeing those airports transformed into world-leading hubs. They are in need of billions in investment, an estimated £10bn over the next decade."
D'you know, for the life of me I can't recall reading anywhere that such opinions have been established as indisputable. I know that various organisations have made these assertions, but my recollection is that all these organisations have a vested interest in Big Air. And so I'd have thought, unless one is mentally deficient, that one should accompany ones reception of what they claim are established facts with a gigantic pinch of salt. Particularly nowadays, when there appears not to be even a whiff of shame about misrepresentation for selfish advantage.
It seems, however, that the ³ÉÈËÂÛ̳ is prepared to swallow this sort of stuff unchallenged. I wonder why?
Now there is an opportunity to break up the cosy monopoly enjoyed by BAA for so long. The CAA can refuse to budge on pricing until BAA agree to sell one of the London aiports to a competitor. Then there will be an incentive for BAA to try to improve the mess the other airports are in, rather than permit them to decay even further because BAA are strapped for cash.
The CAA took the easy way out 5 years ago, and awarded a generous price cap. Before they do the same this time, maybe they'd be wise to reflect on what happens when regulators award over generous settlements to utilities. Far from securing more investment, it simply encourages over-bidding by debt-laden acquirers. The result is indebted firms lacking the capacity to invest, insisting that they must be given yet more generous terms. Meanwhile, the consumer loses twice -once through higher prices, and once through lower investment.
I wonder what the UK government are going to say when one of the big Russian power companies (Lukoil or Gazprom) make a bid for BP or Shell.
My mother was delighted to get a decent price for her shares!
It is quite ironic to see everyone from a big construction consortium down to my chav neighbour with his silly extension over-borrow in the expectation of cheap refinancing and increased asset value. Which will come first - my neighbour's for sale sign or Ferrovial's?
Very interesting article Robert, but because "Peak Oil" is near, I think airports are close to, or at, their prime. Unless you know of a way to get aeroplanes to fly without fuel, its all downhill from here for the UK's airports, or soon will be.
I think ferrovial have overpaid substantially, for BAA. All the problems, experienced by us now, are the mistakes and fatal future planning errors made by BAA, even bofore ferrovial was in the frame. I don't think putting any amount of money immediately won't solve the problem, all they need now is time and luck for ferrovial to stay afloat to see light at the end of the tunnel.
Considering how much Britain has hoovered up foreign companies, don't you think there's an alarming touch of xenophobia about? What's more, BAA has *always* been awful.
we may need terminal 6 to get out of this mess? - i know green activists would raise their eye - bt you cant keep everybody happy.
I regularly fly on both business and for family reasons. Heathrow is a nightmare to use so when possible I use local airports to a European hub. More should do this as it is much less stressfull and then BAA may? sort out the place!! if they can
Simon R is falling into the same hole as others have since the first oil crash of the early 70s when Maplin was cancelled. Air traffic grows at an average 5% a year. It may dip for a year or two but will be back up. If our economy is down then tourists flood in. If our economy is up then Brits flood out. There are plenty of potential travellers in India and China, let alone other parts of the world.
And 'peak oil' won't stop people flying. It will just put the price up and slow the growth, not stop it.
Yes why is it in our interests for Heathrow/Gatwick to be a worldwide hub? Slots in south-east England are scarce as it is. There are too many competing calls on this scarce capacity (UK regions, crown dependencies, shorthaul flights etc etc). Environmental concerns argue against unnecessary airport expansion. We don't have a single dominant airline like Delta making a hub business work (though BA would like to have it that way). The last thing we need is more people landing just to take off again for somewhere else.Read the air transport white paper. Or if you prefer fiction, read the long-form Heathrow consulattion. Think before you write.
The regulators must shoulder more than some blame. The BAA heathrow saga : declining service and a shambles : would under a consumer oriented regulator have resulte din BAA losing its Heathrow licence.
Instead nothing happened.
What's the point in regulators when they don't regulate?
They are just an expensive Quango.
Time for heads to roll.
BAA is just one example of dozens of companies finances with huge debt, and a downturn will flip many profitable Big Names into crisis.
Personally I think BAA future inability to invest is the least of our problems - the decision to expand airports when we need to reduce flight emissions is a crass failure in government responsibility.
cool phrase -- tho we may not have social elements to bail us out from this crunch
"We all have a powerful interest in seeing those airports transformed into world-leading hubs. They are in need of billions in investment, an estimated £10bn over the next decade."
Well, speak for yourself Robert.
Air travel as we know it is finished. It's currently a loser of money from the economy (Britons spending more abroad than foreigners do here), it produces ever growing amounts of CO2 being the fastest growing single contributor to global warming, it blights existing communities around airports, and it relies utterly on oil which, as BA have recently announced is dramatically increasing their costs. That's without the main reason, namely the increasing expense and reducing availability of oil over the coming decades which mean that people jetting off to Italy or Spain for the weekend will become the province of the very rich, and then ultimately, not even them as the remaining oil will be either forced to remain in the ground (because burning it will be seen as the climate crime that it is) or be used for those things which society requires to make the transition to a sustainable society.
Mass air travel is on a road(!) to nowhere ...
Re: #13 Simon Stephenson
"D'you know, for the life of me I can't recall reading anywhere that such opinions have been established as indisputable."
Here, here! Very well written Simon, together with the rest of your comment.
They are already trying to shift World Duty Free, the airport shops owned by BAA.
This reminds me of the Simpsons when Mr Burns sells the power plant to the Germans and then buys it back at a fraction of the price when they realise it is falling apart.
I understand that BAA is about to make an announcement to increase the size of Stansted Airport to larger than the current Heathrow.
Where will they get the funds? Is it likely that the Govt will cave-in and change the rules to keep up the illogical race for more and bigger airports in the UK?
re Comment #9
London City Airport being a "best kept secret"?!?
I think LCY is a great example of being just as bad as Heathrow (I think worse), but on a smaller scale:
- Not enough capacity at peak times - especially in departure lounge
- Horrendous value for money in the departure lounge, awful customer service (treated like cattle)
- One bit of bad weather and the whole thing goes wrong
Competition could only improve airport service if there is capacity - i.e. the airport operators have to work to attract customers rather than turning them away.
And the talk is of entrusting them with a 3rd runway and 6th terminal?? They can't even run the shambles they have now!
I CAN SEE A MR BRANSON LOOKING VERY CAREFULLY AT THE NEXT FINANCIAL DEVELOPMENTS AT BAA I CAN SEE RICHARDS NAME OVER THE DOOR IN THE NOT TO DISTANT FUTURE,
It may also be worth noting that Ferrovial are 100% owners of Amey, who in turn are the major shareholder of Tubelines .
Tubelines are responsible for the upgrade and maintenence of the Jubilee, Northern and Piccadilly lines on the London Underground.
Given the mess that Metronet (the maintenence company of all other lines) got into in July, I think that we need to pay closer attention to any company, whether foreign or British, having such a large say in essential transport.
The honeymoon is over for air flights, for sure, let the very rich pay extraordinary amounts to travel in this damaging way, make the poor understand that they cannot afford to fly, rather, go and breathe some fresh air in Brighton or camp in a field as I did for my entire childhood, and please please raise the price of oil so that we can get out of our cars and get back our lives in a simpler way - we may have no choice soon
Robert Peston says " If our airports are less than best in class, that’s detrimental to our economic growth prospects." This is utter nonsense. Economic growth will happen regardless of what happens at our airports. Mr Peston seems to accept the propaganda from BAA without questioning it.
The greatest economic benefit we could achieve would be to allow the communication that flying gives without causing the pollution. This can be done with multimedia videoconferencing. This is going to give cash-strapped businesses far more benefit than increasing airport capacity.
Mr Peston seems to have failed to understand the cost of climate change and the damage that the aviation industry does to the real economy (as opposed to short-term company profits).
We need to stop the hidden subsidy that the aviation industry gets from tax exemption.
Its time for Robert Peston to understand that when all the true costs are considered the economy needs airport expansion like a hole in the head!