UK: AUTO PILOT - BAA. - The principles that pushed the car industry into profit are now steering the privatised utility - with a market value of £5 billion - along the path to high-growth retailing. By Jeff Ferry.

Last Updated: 31 Aug 2010

The principles that pushed the car industry into profit are now steering the privatised utility - with a market value of £5 billion - along the path to high-growth retailing. By Jeff Ferry.

It had to be on one of the hottest days of the year that the chiller decided to pack up, Gary McWilliam thought as he made his way down the long corridor in Terminal Four that led to the maintenance room where the chillers sat. It was a busy Friday afternoon in August 1993 at London's Heathrow Airport and it felt hotter inside the ultra-modern Terminal Four building than the 80F it was outside. The chillers were Carrier air-conditioning units, giant, humming steel boxes, 20ft across and 15ft high. As duty engineer on the day shift, any problems with the Terminal's systems were McWilliam's responsibility. The motors were running full blast, but the water coming out of the condenser was lukewarm. For some reason the cooling gas was not getting into the condenser, McWilliam decided. It was probably a fault in the electronics. Soon McWilliam, assisted by two of his engineers, was lying on the floor, spanner in hand, overalls on top of his suit, working on the bolts on the chiller front plate.

It was 10am on Monday morning - precisely 76 hours after he'd left for work on Friday - before McWilliam was able to return to his home in Surrey, confident that the Carrier's faulty parts were being replaced and the air-conditioning would be back in action by early afternoon.

Today, McWilliam is a bit embarrassed by the story. He insists that any BAA engineer would have done the same. `It's such a volatile environment, an airport. Anything can happen and that's half the excitement. Two chillers going down at the same time was an absolute fluke. But I was the manager and I felt I had to see it through. If you decide to go home in the middle of a serious problem, then what sort of commitment can you ask of anybody else?'

In fact, McWilliam is right. He is one of a new breed of manager at BAA, and they all share that level of commitment. Formerly the state-owned British Airports Authority, the privatised utility is now more of a shopping-mall developer, run with the philosophy of a car manufacturer. Along with British Airways (its biggest customer), BAA is the most glowing example of success among the crop of Thatcher-era privatisations. But BAA's success is of a more recent vintage, dating from the appointment of Sir John Egan as chief executive in 1990. He arrived at a company which had more than its fair share of problems: the 1988 purchase of property group Lynton for £222 million and a diversification into hotels had gone wrong. In retrospect, the appointment of ex-Hanson man Jeremy Marshall was a mistake: he bought companies at the top of the market and focused on cutting costs and putting up prices in a business that was too much in the consumer spotlight for such policies to go unnoticed. In May 1989 under roaring banner headlines, `It's a rip-off', the tabloid press revealed that Heathrow duty-free prices were higher than the local supermarket's.

Egan, now 55, had spent the previous 15 years in the auto industry, at British Leyland and then as MD of Jaguar. He gave BAA what it lacked: a philosophy, a mission and a sense of purpose. The two guiding principles of Egan's BAA are customer service and continuous improvement. Both ideas come directly from his experience in the car industry. For Egan, the greatest revelation of his life was learning about the Japanese system of designing cars in half the time it took European producers, at half the cost. And they were better cars. `In the West there was always a great deal of living in hope. You designed the prototype, built it, and hoped it worked. The Japanese secret was that they saw everything as a process. Get the process right and you get the product right.' The key part of the process was continuous improvement.

`The most important thing is a constant drive to have people thinking that they've always got to be getting better, that while they're doing their job they've also got to be thinking of ways to improve their job,' says group airports director Mike Hodgkinson, another motor industry veteran who joined BAA 18 months after Egan. In the early 1980s Hodgkinson ran Land Rover, where he saw the effects of the Leyland/Honda partnership: `We were always saying we wanted 3-5% productivity improvements, and usually failing to get it. When Honda came in, they were asking for treble that - and getting it. Our figures were just a joke.' The secret was in motivating the employees and in the concept of continuous improvement as everybody's responsibility. Says Egan: `It's getting people to use their brains as well as their hands and their feet.' BAA has its own education system and spends 4% of its wage bill on training - `not by any means enough', says Egan.

McWilliam is an example of that philosophy in action. In 1985, he left a job at BBC Television to join BAA as a mechanical engineer at Heathrow. He had left school at 17 to become an apprentice engineer, but by the age of 28, he was looking to improve his education to give him a boost up the career ladder. The BBC refused to agree to his request for a day-release education course; BAA was enthusiastically in favour. `They paid all my course fees, gave me a day off a week and even gave me study leave - all with pay,' McWilliam recalls. He passed the course `with distinction' and then BAA urged him to enrol in a university course. Meanwhile, the promotions came too. Today he is Terminal One operations manager, with 65 people reporting to him and a budget of £1.5 million. Needless to say, McWilliam is a keen advocate of training and advancement. `We are always looking for managers. A lot of firms wouldn't give you the opportunity at my age. At BAA, if a 50-year-old engineer comes to me and wants to go for training, I'll fund it.'

The benefits of investing in people show through in a plethora of statistics. Nobody at BAA seems to go anywhere without their statistical printouts. Egan's favourites are customer surveys. He pulls out a sheaf to show that the catering at Heathrow and Gatwick is rated by passengers as the best in Europe; the landing fees charged to airlines are in the lowest quartile, and Gatwick's two terminals and Heathrow's Terminal Three and Four take four of the six top spots in a Europe-wide survey of overall customer satisfaction. McWilliam has a different, but equally weighty, set of charts and graphs. They show that the airbridges, travelators, escalators and ventilation systems are achieving their 98% targets, downtime is declining, and average time between breakdowns is steadily growing. Productivity at BAA has gone up 30% since Egan's arrival, which helps to explain the rise in pre-tax profits from £255 million in 1990 to £322 million last year. Interim profits, reported in November, were 12% up at £265 million on revenue up 5% to £660 million.

One of the secrets of BAA's success is the widely differing backgrounds of its senior managers. Egan and Hodgkinson share a motor industry background with its focus on systems and people, while property director Gordon Edington has the dapper style and deal-making skills of the property market veteran. Retail director Barry Gibson, formerly at Ralph Halpern's Burton Group where he ran Top Shop's operations, lives and breathes the retailer's religion of turnover, turnover, and turnover. He arrived for his Management Today interview in a smart charcoal grey suit. In his left hand was a blue blazer on a hanger. `This is for the photo,' he apologised cheerfully. `The PR people tell me I have to project a softer image.'

Gibson glows with pride as he walks around the Terminal Four shopping mall, a gleaming symphony of marble flooring and blonde wood panelling. He strolls around, ticking off the facts: `This is Bally accessories; they make £1.5 million a year, and that's not counting Bally shoes which they sell more of at Heathrow than at any of their other retailers. Over here' - he stops at an HMV CD shop - `we had another record retailer whose offering was too teenage for our consumer profile. When he wouldn't change it, bang, he was out. HMV came in and doubled the turnover within a month.' On to Mappin and Webb where the manager shows us a rare Omega Speedmaster `skeleton' watch - a snip at £25,000. Who buys these sorts of products while they're waiting for a flight? Collectors, explains the manager. `They know the exact price of things and they know they can save the 171/2% VAT inside the airport.' Mappin and Webb make £4 million a year at Terminal Four alone and sell more Rolexes there than at any other branch. What makes this especially interesting is that under EU rules, retailers do have to pay VAT on any purchases over £72 made by passengers on intra-EC flights. But as a matter of good marketing, Gibson decided that the retailers and BAA should bear the cost of those VAT payments to keep the no-VAT message of airport shopping consistent.

In retrospect, the airport-as-shopping-mall concept is obvious. Airports are full of high-income individuals with time on their hands, on their way to see people for whom they might want to buy a gift. But BAA led the world in implementing it and there are many otherwise well-managed airports which have yet to catch on. In the six months to 30 September 1994, BAA pulled in £273 million in revenue from retail, up 67% on two years ago, and nearly as much as the £278 million they earned from landing and other airport charges. Gibson calls it a vindication of the policy he introduced in 1990: brand-name retailers the consumer knows and respects, competition in as many products as possible, but a requirement that nobody can charge more than the high-street price. And of course, the rule that every retailer must give a fixed percentage of turnover to BAA. (Gibson won't say how much but it is estimated to be 12-13%.) Gibson cites the example of car parking: five years ago, off-airport car parks were picking up a growing share of the business. Gibson opened up on-airport parking to competition, including low-price, mid-price, and high-price. The result is that car parking revenue shot up from £5 million to £25 million in just five years.

The City is thrilled with the potential of BAA's retail growth, the driving force behind the company's earnings multiple of around 20, giving the company a market value of some £5 billion. A close examination of BAA's figures shows what the City is excited about: today, BAA has about 620,000 sq.ft of retail space in operation at its seven UK airports. Its construction projects are busily creating more retail space, much of it scheduled to come on stream this year. Under the leadership of Egan and building director Michael Maine, BAA is cutting its construction costs dramatically, delivering a new Glasgow terminal building for £40 million, as compared to the £110 million the BAA board had approved before Egan's arrival. Says Maine: `The secret is in common-sense things, like better procurement, using standardised components, and building up long-term partnership relations with suppliers where we and they share in productivity improvements.' By the end of 1996, the seven airports will have 840,000 sq.ft of retail space, an increase of 35%. At the moment, retail sales are depressed at certain terminals, not only by space shortage but by the construction itself. At Heathrow's Terminal One, retail income is running at just £2.06 per passenger, compared to £5.59 per passenger for the whole group. It is the largest single terminal in the group and the revenue impact of the all-new shopping complex there should be dramatic.

While most City analysts are big BAA supporters, there are one or two critical voices. Rowan Morgan at Nikko Securities questions why its price/earnings rating should be on a 40% premium to the FT-SE average. As its income stream changes from that of a regulated utility to that of a retailer, it could fall victim to the vagaries and cycles of the retail market. `If the underlying profit growth is 10%, how do you justify a 40% premium to the market on the rating?' asks Morgan. `I'm not anti the company, I think it's well-managed. I just worry about the rating.' Egan admits BAA's share price premium is high - he puts it at nearer 30% - but cites the annual forecast of 4-5% growth in passenger numbers as the underlying force for higher growth in both landing fees and retail business at the seven airports. `What we've told the City is that with that passenger growth we can deliver a steady 10% increase in profits year in, year out. That kind of growth puts us in the top quartile of all businesses.'

One criticism of BAA might be that it has been a bit slow about expansion. It is in the fortunate position of being able to expand organically, ie without expensive and risky acquisitions. In 1992, BAA won the contract to manage Pittsburgh airport - and has made an unqualified success of it. Today Pittsburgh is a cheerful, airy, brightly-lit emporium with oodles of consumer choice, scooping up award after award from America's award-happy travel industry. Last November, the Washington Post published an entire column singing the praises of the airport. It was the sort of free publicity Richard Branson would have thrown himself over the Grand Canyon for.

But BAA has yet to follow up Pittsburgh with other overseas contracts. Executives are reluctant to talk about the obstacles, but one story - about the failure to win Philadelphia - gives an insight into the difficulties of breaking into this business. BAA's bid included a pledge to the city of Philadelphia that it would turn a minimum of 20% of the shops inside the airport over to minority-run businesses. Excited by this offer, the members of the City Council went away to ruminate - and came back with a demand that 40% of the businesses must be minority-run. It was too much for BAA, and its competitors. All three bidders pulled out. Egan is gloomy about the prospects in the US. However, with the Australian government's commitment to privatising all of its airports, Australia now looks the best bet for a new BAA contract.

Egan is scathing about the management of US airports. Most, he points out, are far less efficient than BAA. New York's JFK, for example, uses its gates an average of twice a day compared to 15 times at Heathrow. They charge more in landing fees and for retail services such as food. `It is the last bastion of socialism. They're all owned by local city governments. Heathrow is cheaper than nine out of the top 10 American airports even though they are not supposed to make a profit. ' So what's the lesson?

`The lesson is: Capitalism works.'

Egan is trying to implement that lesson, too, at the London Tourist Authority of which he is chairman. He is critical of the tourism industry's tepid growth rate: the UK industry grows at some 5% a year compared to 8.5% for worldwide tourism. `London is a world-class product. All the surveys show that visitors love the city, especially the people.' His aim is, he says, to get management in the tourism industry to wake up to the potential. The solution lies in a nationwide continuous improvement policy similar to the one he has led at BAA. `We have a huge job to do to increase the competency and the aspiration level of the British people. I believe that if Britain is to break out of its long-term relative economic decline, then a continuous improvement crusade is necessary.'

Some commentators have found Egan a bit too earnest for their taste, a bit too much the poster-boy for Thatcherism. He looks a bit like a fatherly US senator of the sort played by Jason Robards, especially when you hear the rounded Lancashire Rs which sound almost American. He may sound like a politician, but he has none of the glibness. He is always ready to admit when he doesn't know the answer to a question.

Who among the politicians, I ask, would even understand what a continuous improvement policy means, let alone be ready to endorse it?

`Well...Michael Heseltine,' he replies.

Right, OK. Anybody else? `Ah, you've put me on the spot now...Perhaps Stephen Dorrell [tourism minister]. Or at least I hope he does.'

Sir John Egan: career highlights

Born 7 November 1939

1961 BSc Petroleum Engineering, Imperial College, London

1962 Petroleum engineer, Shell International

1966 MSc Business Studies, London Business School

1968 General manager, AC-Delco Replacement Parts, GM

1971 MD, Unipart; parts & service director, Leyland Cars

1976 Corporate parts director, Massey Ferguson

1980 Chairman, Jaguar Cars Ltd

1984 Chief executive, Jaguar plc

1985 Chairman and chief executive, Jaguar plc

1990 Chief executive, BAA plc.

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