Select Committee on Transport Fourth Report


2 Background

History of BAA

9. The British Airports Authority was established under the Airports Authority Act 1966, and was initially responsible for the airports at Heathrow, Gatwick, Stansted and Prestwick. In the early 1970s, the authority acquired Edinburgh, Aberdeen and Glasgow airports. Twenty years after the first act, the Airports Act 1986 was passed, which turned the British Airways Authority into the holding company BAA plc.[8] BAA was privatised in 1987, and over the course of the 1990s sold Prestwick and acquired Southampton airport. Figures from the CAA show that BAA airports accounted for 53% of all commercial air transport movements nationally, and 85% of movements in the London area in 2006.[9] The future of BAA is therefore of central importance to the United Kingdom's transport infrastructure.

Takeover by Ferrovial

10. In March 2006, BAA were approached by a consortium led by Ferrovial, an international construction group with a major interest in transport infrastructure.[10] The first formal offer made by Ferrovial in April 2006 for 810 pence per share was rejected. A second offer of 900 pence was made and rejected in May. Following negotiations between the board of BAA and Ferrovial, an offer of 950.25 pence per share was made by Ferrovial on 12 June and recommended to shareholders by the BAA board four days later.

11. On 26 June 2006, the Ferrovial Consortium announced that it had received acceptances with regard to 83% of BAA's issued shares, and took control of BAA plc. Once 90% of the issued shares had been acquired on 15 August, BAA plc was delisted from the London Stock Exchange.

Debt and refinancing

12. Ferrovial's final price of 950.25 pence per share (935 pence per ordinary share plus a 15.25 pence dividend) was a 17% increase on its original offer, and 49% above the share price prior to the takeover approaches becoming public.[11] The sale price valued BAA at £10.11bn. BAA needs to refinance the debt that was placed on it by the acquisition and is expected to do so once the regulatory settlement is finalised in March 2008. An article in the Financial Times described how BAA plans to refinance its existing debt against Heathrow and Gatwick, as well as borrowing against the value of those two airports. It went on to speculate that:

The numbers, however, look worrying. Earnings before interest, tax, depreciation and amortisation in 2008 are estimated at £1.2bn, rising to £1.3bn by 2010. This is not enough to fund interest costs, which should be in the order of £800m annually, as well as capex [capital expenditure], which Collins Stewart [a financial services group] estimates at an annual £1.4bn for the next five years. So, either borrowing will rise significantly more or BAA's capital structure will have to change.[12]

13. The plans for refinancing are being delayed until March because they depend in part upon the CAA's decision on the level of charges that BAA will be able to make to the airlines. When we questioned BAA's Chairman, Sir Nigel Rudd, about the rate of return that Ferrovial will see on their investment, based on the level of charges proposed by the CAA on 21 November, he said that Ferrovial "have been genuinely surprised and shocked by the reduction [of the estimate of the cost of capital at Heathrow] from 7.75 per cent to 6.2 per cent in the present review."[13] Stephen Nelson, BAA's Chief Executive, explained that:

We would imagine that actually the risks of operating and building out a runway, and indeed an airport of the kind of Heathrow, are going up rather than down, but what that settlement indicates is that the risks have gone substantially down, and we do not accept that.[14]

14. Ferrovial acquired BAA with the expectation that it would make a worthwhile return on its investment. The premium it paid, the reduction in the CAA's estimate of the cost of capital affecting the price settlement up to 2013, and the uncertainty resulting from that combination has led to speculation that the amount that could be borrowed against the airports will reduce. When we asked Sir Nigel Rudd what he thought had gone wrong, he told us that Ferrovial "had that advice and the advice was clearly wrong, because the rate which has been offered is far lower than that advice".[15] The level of charges, and the process by which they are set, is discussed in more detail in Chapter 3.

Other inquiries

Our previous inquiries

15. In recent years, we and our predecessor committee have held inquiries into Aviation,[16] the Work of the Civil Aviation Authority[17] and Passengers' Experiences of Air Travel.[18] Our opinion of BAA's position in the UK aviation sector has been consistent, as has our proposal for a remedy. Our predecessor committee wrote in 2003 that "it is ineffective and inappropriate to have a single private sector operator controlling such a large part of our aviation infrastructure […] In our view it would be more appropriate to break up its monopoly".[19] In our inquiry into the work of the CAA, we noted that "during the course of our inquiry, a number of witnesses again raised the monopoly issue […] We remain of the opinion that the BAA monopoly should be broken up".[20] Most recently, in our inquiry into passengers' experiences of air travel, we "received little evidence pointing to benefits from BAA remaining in its present state and we see no reason to change the view of our predecessor Committees that BAA should be broken up".[21]

16. Breaking up the BAA group of airports is one of two major options for change that we considered, the other being the possibility of competition between terminals. There is also competition from other international hubs.

The Competition Commission's current market inquiry

17. On 29 March 2007 the Office for Fair Trading (OFT) made a reference to the Competition Commission for an investigation into the supply of airport services in the United Kingdom. Under section 131 of the Enterprise Act 2002, the OFT is able to make a reference to the Commission if it:

has reasonable grounds for suspecting that any feature, or combination of features, of a market in the United Kingdom for goods or services prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the United Kingdom or a part of the United Kingdom.[22]

18. The main issues identified by the Competition Commission as relevant to their investigation are the regulatory framework, the common ownership of airports by BAA and the restrictions on development and capacity. These issues are central to our own inquiry, and while we hope that the Commission will take our conclusions and recommendations into account, we do not believe our report will prejudice whatever conclusions it may come to. As at February 2008, the Commission hoped to publish its emerging thinking in around April 2008, with provisional findings and remedies following in August 2008 and a final report to be made in December 2008.


8   The apparent acronym has only historical meaning-'BAA' does not, strictly speaking, stand for anything. Back

9   CAA, UK Airport Statistics 2006 (Annual), Table 3 (Aircraft Movements), www.caa.co.uk/airportstatistics (latest figures available). Back

10   Airport Development and Investment Ltd. was formed by Ferrovial Infraestructuras, S.A., Caisse de dépôt et placement du Québec and GIC Special Investments PTE Ltd for the purpose of acquiring BAA. Back

11   BAA, 'Recommended final offers document', Acquisition History, 12 June 2006, www.baa.com Back

12   'BAA finances', Financial Times, 9 November 2007, p 18 Back

13   Q 281 Back

14   Q 284 Back

15   Q 286 Back

16   Transport Committee, Sixth Report of Session 2002-03, Aviation, HC 454-I Back

17   Transport Committee, Thirteenth Report of Session 2005-06, The Work of the Civil Aviation Authority, HC 809 Back

18   Transport Committee, Eighth Report of Session 2006-07, Passengers' Experiences of Air Travel, HC 435-I Back

19   Transport Committee, Aviation, HC 454-I, para 117 Back

20   Transport Committee, The Work of the Civil Aviation Authority, HC 809, para 142 Back

21   Transport Committee, Passengers' Experiences of Air Travel, HC 435-I, para 64 Back

22   Enterprise Act 2002, section 131 Back


 
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