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Fallout from Ferrovial's takeover


Spanish construction giant Ferrovial has yet to finalise its takeover of BAA but there are already fears that this costly purchase will put the airport operator's long-term development plans in jeopardy.

But fear not, non-BAA operators have robust growth plans, writes David Taylor

LAST month, BAA published a 10-year traffic forecast and outlined a £9.5 billion capital investment programme to support traffic growth at its three London airports - Heathrow, Gatwick and Stansted.

But rejoicing at the news of this prom ised spending spree was tempered by the knowledge that a question mark hung over the company in the shape of a hostile takeover bid by Spanish construction giant Ferrovial.

Since the success of Ferrovial's revised bid, the Spanish company has stated that it intends to honour White Paper plans, but jitters remain in the market.

In May, as BAA fought to keep Ferrovial and rival bidder Goldman Sachs at bay, the Office of Fair Trading launched an investigation into the structure of the airports market, with specific reference to BAA's dominant position. The result of that investigation is critical as it will almost certainly inf luence the Civil Aviation Authority's price regulation of the three London airports and could even precipitate the sale of one of them.

Every five years the CAA sets aviation price caps on the UK's four largest airports - Heathrow, Gatwick, Stansted and Manchester. The current so-called quinquennium expires in March 2008 and already the CAA and the airport operators are discussing prices for the next.

'The timing of the Ferrovial-BAA takeover is not coincidental, ' comments Nick van den Brul, aviation analyst with French bank Exane BNP Paribas. 'There is a direct link between capital expenditure outputs and remuneration levels set by the CAA.

'The first thing Ferrovial will do with BAA is start reviewing the capital expenditure and possibly look to re-scope the outputs.' Mr van den Brul points out that, while BAA is highly respected as a construction client, Ferrovial will be looking for cost savings - especially as its takeover of BAA entails huge borrowings.

'Ferrovial will be ask ing itself whether it has to spend so much money or whether it could achieve the same results for less, ' says Mr van den Brul.

The CAA has already indicated that it is unlikely to allow BAA's new owner to raise airport fees to cover the cost of the company's new burden of debt. But one way for Ferrovial to save money is to bring more projects in-house. It is, after all, a construction company and the owner of British contractor Amey.

Existing BAA framework contractors will be under pressure to perform, warns Mr van den Brul.

Many people feel that the sale of BAA offers the Government an opportunity to restructure the UK's airport sector. Nigel Turner, chief executive of budget airline BMI, recently told The Times that 'regulators must take a rigid stand and use any change in ownership as an oppor tunity to review some cr it ical questions about the strategic importance of the UK's airports. Effective monopolies in London and in Scotland are not healthy for the consumer and airlines alike, ' he said.

Gwyneth Dunwoody MP, chair of the House of Commons Transport Select Committee, also thinks official intervention will be necessary to prevent the despoiling of Britain's airport industry.

'The reality is that, if BAA is worth buying, it's because Ferrovial thinks it can make a huge profit from it. If they think they can strip out some assets to pay back to the bank, they might do that, ' says Mrs Dunwoody. 'Or they might go ahead with the existing expansion plans. The point is we don't know.'

With the next quinquennium up for negotiation and the OFT currently investigating the structure of the airport industry, the Government cannot simply sit on its hands and refuse to intervene, says Mrs Dunwoody.

Beyond BAA

BAA LAYS claim to the title of 'world's largest airport operator' - so it's not surprising that the other UK airport operators are all substantially smaller entities.

This is not to say they are not significant construction clients in their own right, however. The main airport operators in the UK are:

Manchester Airport Group controls four important regional airports: Manchester, Nottingham East Midlands, Bournemouth and Humberside. MAG has plans for infrastructure improvements at all its airports over the next three years.

TBI, the owner of Luton, Belfast and Cardiff airports, was bought by Spanish firm Abertis last year for £551.3 million. Abertis, a major toll-road operator, is currently in negotiations with Italian rival Autostrade Group to create an £18.3 billion European infrastructure giant.

Luton and Cardiff have published masterplans forecasting significant investment to 2030.

Birmingham International is owned by a partnership of seven West Midlands' district councils with state-owned Irish company Aer Rianta (now Dublin Airport Authority) and Australian investment group Macquarie Airports. BIA has recently published a proposal to build a second runway to serve the West Midlands.

Bristol International is owned by a joint venture holding company, South West Airports, which is in turn owned by Macquarie Airports and Ferrovial Aeropuertos, a subsidiary of Spanish construction giant Ferrovial. Bristol's masterplan includes plans to expand the airport to accommodate 9 million passengers a year by 2015. Current capacity is 4.6 million passengers per year.

Exeter International Airport, owned and operated by Devon County Council, is currently up for sale. The council has underlined its commitment to the airport's future by approving the 2005-06 capital investment programme of £2.7 m illion, wh ich includes the extension to the terminal concourse and fuel storage capacity and a further £1.5 million investment for upgraded airside baggage handling facilities and addit ional aircraf t stands. Exeter is one of the fastest-growing of the UK's airports, increasing passenger th roughput by 36 per cent last year.

London City Airport is now owned by Irish investor Dermot Desmond. Current capacity of 2 m illion passengers per year is forecast to grow to 5 million passengers per year by 2030, according to the 2003 White Paper.

But the airport has ambitious proposals to extend the main terminal, build new hangars, build a new control tower and equip the airport for 8 million passengers a year by 2030.

Liverpool John Lennon Airport is owned by property and transport group Peel Holdings. Since buying the airport from British Aerospace in 1997, Peel Holdings has invested some £74 million on a new terminal, control tower and other facilities.

The airport is currently completing its masterplan for further development over the next two decades. Peel Holdings also owns three other airports: Robin Hood (Doncaster/ Sheffield), Sheffield City and Durham Tees Valley.

Constructing the team

AS A construction client, BAA is renowned for pioneering and innovative construction methods. Off-site manufacture is now a by-word for efficient, quality-controlled construction and at Heathrow T5, these methods and the just-in-time delivery of modular components is a key factor in keeping the project on programme and site accidents to a minimum.

Ferrovial's takeover of the airport operator is bound to bring about a change of culture and BAA's supply chain must be praying that good partnering pract ice will not be swept aside by more adversarial-based contracting.

An example of how this partnershipbased approach currently works is Amec's contract to design, procure and install mechanical and electrical services for the main T5 terminal building. Using modularisation techniques developed for the offshore industry, Amec has supplied eight prefabricated service 'chimneys', some weighing more than 100 tonnes, to heat and ventilate the 270,000 sqm of internal floor space on each floor of the new terminal building.

These 15m-high chimneys contain most of the building's ventilation systems - from general ventilation to smoke extract and kitchen extract - as well as mechanical and electrical services.

Besides all the necessary pipework and ducting, each chimney contains all the control systems together with all the containment and cabling between the panels fans and fan inverter controllers.

Lighting, small power, communications infrastructure, containment and fire alarms are included for maintenance and safe access. Assembling these chimneys off-site has reduced the number of onsite interfaces by 60 per cent, says Amec, thus minimising the risk of defects in the finished systems.

Each of the chimneys is made up of prefabricated modules, manufactured by Babcock Engineering in Scotland and delivered to site for installation on top of the main terminal service cores, which rise from the ground floor into the roof space.