Stephen Nelson, chief executive of Britain's dominant airport operator, is firefighting all around him. To the right is the Competition Commission, which has just launched two separate investigations into the company. To the left are BAA's major airline customers, including British Airways and Ryan-air, demanding that his company's ownership of London and Scottish airports be dismantled. In front of him is the environmental lobby, concerned by the aviation industry's growing impact on carbon emissions and demanding savage restrictions on flights. And joining the throng are the millions of passengers who pass through Britain's airports each year, standing mutely in line for lengthy security checks and putting up with delays and lost luggage every time they fly.
Nelson is a retailer by trade. He came to BAA from Sainsbury's to head its retail division and was then elevated to the top job after the company's £10.1 billion takeover last summer. It had been bought by a consortium led by Grupo Ferrovial, the Spanish construction company.
Nelson's project as retail head before the takeover was to make Heathrow's Terminal 5 - due to come on stream next spring - a retail cash-cow for the company. Crammed with designer shops, including famous names like Tiffanys, and laid out with luxurious lounges for business travellers, it would transform the airport experience, he said. But Nelson's narrow focus was shifted by promotion.
The Ferrovial takeover prompted an exodus of senior executives, including Margaret Ewing, the group finance director, and Mike Clasper, the chief executive who had led the fight against the Spanish bid.
Nelson stepped up, and was immediately embroiled in crisis when last August's terror alerts wreaked havoc on Britain's airports. Allegations that terrorists were planning to smuggle liquid explosives on board transatlantic flights provoked a massive security response, leading to flight cancellations and interminable queues at Heathrow, the jewel in BAA's crown. Michael O'Leary, Ryanair's pugnacious CEO, was incensed by the response of BAA and the Department of Transport, calling them 'Keystone Cops' for their 'farcical' restrictions on hand luggage.
'These restrictions have absolutely no impact on security, they are nonsensical and the height of stupidity,' said O'Leary. 'If you look at where the terrorists have been striking in recent years it's the London Underground and the trains in Madrid. Yet you don't see the Government confiscating lipsticks and gel-filled bras on the Underground. It's a way of politicians making it look like they are doing something.' He was joined in battle by Willie Walsh, CEO of British Airways, who stood to lose most from the chaos at Heathrow.
Nelson rode out the storm, but it could not have come at a worse moment. At the same time, Britain's Office of Fair Trading (OFT) was pondering whether to refer BAA's ownership of airports to the Competition Commission. Although the OFT avoided commenting on the August security response, its findings, published last December, were stark.
BAA's dominance of airports in Scotland and the South of England, it concluded, 'restricts, prevents or distorts competition'. This April, the OFT decided that BAA's dominance demanded further investigation, and it confirmed that it was referring it to the Competition Commission. The commission has two years to make up its mind, but it has already promised to come to a decision much more quickly. Speed, however, is relative, and uncertainty over BAA's future will hang in the air for at least the next nine months, and possible for more than a year, as the commission probes both the company's dominance of the market (referred by the OFT) and the system of regulation that dictates how much money it can make (by the Civil Aviation Authority).
BAA, formerly known as the British Airports Authority, came into being in 1965 when the UK Government decided to assemble England's major airports under one authority. Edinburgh, Glasgow and Aberdeen were added in the 1970s and BAA was privatised in 1987. The Government had to abandon its golden share in BAA because of an EC ruling, and it took just three years for the former state company to pass into the hands of an international predator.
BAA's empire covers Heathrow, Gatwick, Stansted and Southampton as well as Edinburgh, Glasgow and Aberdeen airports. BAA also has management and retail contracts at airports in the US and Australia, as well as stakes in airports in continental Europe. It is, however, its dominance of English and Scottish aviation that is under the microscope.
Air travel is a booming industry, with air passenger numbers in Britain forecast to double over the next 30 years. Liberalisation of the regulations that strangled the market's growth began 20 years ago in Europe, but it was not until the late 1990s that the effects of liberalisation started to show. The growth has been fuelled by the dramatic emergence of low-cost carriers, led by Ryanair and easyJet, which have transformed the industry by cutting prices and boosting demand.
They have directed growth away from the traditional airports, with Ryanair leading the field in its development of tiny regional airports, a move that has turned on its head the traditional relationship between airline and airport operator. Power has swung to the airlines, which can deliver the volumes of passengers required to make airports profitable.
The aviation industry's growth in the UK has been phenomenal. In 1970, just 32 million passengers used British airports. By 2002, as the low-cost revolution was getting into its stride, that number had risen to 189 million. Government forecasts now predict that by 2020, between 350 and 460 million passengers will be using UK airports. The industry generates £13 billion annually and supports half a million jobs.
The shift towards low-cost carriers has been dramatic. In 2000, budget services had 19 million passengers in the UK, compared to 125 million for the full-service operators. By 2005, low-cost carriers had grown their share by more than 300% to 77 million, while full-service airlines had slipped 5% to 119 million.
Airports now compete to attract the low-cost carriers, with most prepared to offer rock-bottom landing charges and inducements - they prefer to call them 'marketing subsidies' - for new-route developments to secure the business.
The next wave of liberalisation is about to break. After years of negotiation, Europe and the US have agreed a new transatlantic regime, dubbed 'Open Skies', which makes possible low fares in the long-haul markets. Competition between carriers will intensify across the Atlantic as US and European airlines open new, unrestricted, routes.
Competition between Britain's main airports will not happen unless BAA's ownership of Heathrow, Gatwick and Stansted is broken up, the OFT suggests. Without separate ownership and direct competition between the three London airports, passengers and airlines will not benefit from lower charges and more efficient airport management, and the potential benefits of the Open Skies agreement will be diminished.
Critically, the OFT believes BAA's ownership of all three airports will limit UK ability to deliver the extra airport capacity cost-effectively. It noted that 'none of the major airlines operating out of BAA's airports in the south-east of England expressed confidence' in the company's investment plans. The OFT was also concerned by the pricing structure at BAA's airports, which give it an incentive to make investments that justify higher charges to airlines but don't necessarily expand capacity.
It's a practice that airlines dismiss as 'gold-plated investment' - elaborate new terminals that are beautifully marbled and crammed with sexy shops, but do not increase the airport's ability to handle extra passengers. It is not a phenomenon at privately owned airports that have to compete for business. Hahn airport, 60 kilometres from Frankfurt and used by Ryanair as a German base, spent less than EUR20 million (£13.6 million) to double its capacity, providing functional facilities for its airline customers rather than architectural gems. Its emphasis is on cost and passenger throughput, not aesthetics.
In Scotland, where BAA's dominance is challenged only by Prestwick, the development of both Glasgow and Edinburgh airports has been constrained by the lack of competition between the two. 'BAA's ownership ... limits competition between these two airports,' said the OFT. 'There are high barriers to entry and these airports are not subject to detailed price regulation.'
Nelson will fight the break-up of his empire, arguing that only a major company with a spread of airport assets can possibly fund the £1 billion a year that BAA is committed to investing over the next decade. He will maintain, too, that airline companies that complain about BAA are not interested in lower costs for their passengers but for their own bottom line and that his pricing policies are dictated by regulators at the Civil Aviation Authority (CAA) and not by him.
But there, too, he faces a problem. The second Competition probe is a review of those prices, and the CAA has argued that the rate of return BAA should be allowed to extract from its airports should be reduced. It proposes that BAA should be allowed to make no more than 6.2% at Heathrow and 6.7% at Gatwick, significantly lower than the current 7.75%, and lower than returns allowed to other regulated utilities like gas and water. But Nelson insists that airports carry inherently higher risks than natural monopolies like water, and should be allowed higher returns, particularly since the required level of investment in runways and terminals is so onerous in the years ahead.
It's a point that may not find much favour with the Competition Commission, precisely because of BAA's dominance in Scotland and south-east England. In 2005, BAA's airports handled more than 60% of all UK passenger trips, and more than 90% of all trips in the south-east. It is, by any definition, a dominant market share. The Competition Commission will have to decide whether that dominance translates into a distortion of the market, or whether Nelson is right: that proper long-term planning can be delivered only by a large, stable, well-regulated group.
But therein lies a second layer of difficulty for BAA. It is no longer a British company, and no longer a state-owned company. Its fate is now intertwined with the fortunes of its ultimate owners, Ferrovial, the Spanish company that has expanded across Europe, buoyed by the strong performance of the Spanish building sector. Spain's economic performance over the past decade has encouraged a number of its companies, such as mobile phones giant Telefonica, and its banks to spread their wings. Ferrovial's ambitions took it to Britain, where it saw the value of a key infrastructural asset. Backed by borrowed money and private equity, it was able to fund the acquisition of BAA and now holds the key to Britain's development of its aviation industry.
What happens, worry some analysts, if the Spanish construction bubble bursts? How secure an owner is Ferrovial if conditions deteriorate either in its home market or for its financial backers? Logically, they argue, a break-up of BAA's ownership would spread that risk across a number of owners, and give Britain a better chance of securing the future of its aviation sector. The UK's willingness to allow foreign companies untrammeled access to British companies is not matched by its European counterparts, who move swiftly to block foreign takeovers of key national assets. Britain's flexibility has allowed London to develop as the financial capital in the world, but it creates potential problems for the measured planning of key industries.
Aviation, already a major player in the British economy, faces the uncertainties created by the current debate about climate change: it can ill afford any additional uncertainties.
Passengers have different priorities. Asset ownership and the complexities of modern financial engineering pale beside the frustrations of standing in a security queue for hours on end. In a speech last month, Nelson committed himself and his company to a new passenger-focused approach, promising that waiting times would be cut to just five minutes for 95% of journeys, and announcing an increased investment of £40 million on security measures to back his resolve. BAA, he said, will recruit 1,400 extra security guards to cope with passenger demands for swifter queues, and open a further 22 security lanes.
He knows better than anyone how intense the criticism of BAA has become since last August's terror alerts, and it will take more than promises to reassure passengers that BAA has got to grips with the management of the ever-rising security threats to airlines. A step in the right direction, but it will have little impact on the Competition Commission, whose concerns are more fundamental than security queues. Prodded by the OFT, it has to establish whether sole ownership of Britain's major airports represents the best way to secure Britain's future participation in the remarkable growth in air travel. It must determine whether competition between airports - which has gathered pace across Europe - would deliver better facilities at lower prices for customers than BAA can manage on its own. More fundamentally, it must decide whether competition is a more effective way of ensuring low prices and quality investment than the current system of price regulation.
Competition between airports is made more critical, the OFT argued, by the barriers to entry that hamper the market. Cost alone is not the issue, though new runways and terminal buildings are expensive - at Stansted, for example, BAA is planning a new runway that will cost in excess of £2.2 billion.
The real problem is that airport expansion is deeply unpopular, both with residents and, increasingly, with the environmental lobby, which views aviation as one of the most significant contributors to climate change. Although global aviation accounts for just 2% of carbon emissions, its impact is claimed to be far greater because of the height at which planes emit carbon and because further damage is suspected to be caused by jet contrails - the long tails of water vapour that flow behind jets.
Proposals for new runways and new terminals face lengthy and bruising inquiries. Heathrow's Terminal 5 spawned the longest-running public inquiry in British planning history, lasting four years. The company's plans for Stansted face similarly intense opposition, while those to develop Gatwick are on hold until after 2019. The barriers to new airport development are exceptionally high: over the next 30 years, it's likely that BAA's London airports will get extra runways, but it is far from certain.
The commission will not rush its conclusions, but if it decides on a break-up, there will be no shortage of buyers for BAA's jewels. Already, a price tag of £3 billion has been pinned on Gatwick, with Scotland's three airports worth an estimated £1.5 billion. Nelson, the retailer-turned-airport operator, may be left with what he knows best: the retail magnet that is Heathrow, complete with its brand-new Terminal 5, which - he has already told us - 'will take airport retailing to a new level'.
HOW BAA DOMINATES THE UK AIRPORT BUSINESS
- Manchester Airport Group 28.3 million passengers (Manchester, Nottingham, Bournemouth, Humberside)
- Abertis 16.4 million passengers (Luton, Belfast, Cardiff)
- Peel Airports 6.7 million passengers (Liverpool, Durham/Tees, Doncaster/Sheffield)
- Others 36 million passengers
- BAA 147.6 million passengers.