breakingviews, 7/30/01

BAA: You win some, you lose some. BAA is currently suffering a tourist shortage from the foot-and-mouth outbreak, a few months after benefiting from more passengers deserting the crisis-hit railways. In retail, BAA lost a huge chunk of business when duty-free was abolished within the EU, only to gain from air traffic control delays that left passengers stranded with nothing to do but spend money. And the disappointment of a failed B2B alliance was offset by great returns on the Heathrow to Paddington Express. BAA has been canny in ironing out such temporary ups and downs of the transport industry to its net benefit. However, its luck may be running out.

Future growth depends on the very people who are not customers – the folks living close to its airports. Take the endless saga of creating a fifth terminal at Heathrow, the world’s busiest airport. A decision on planning approval is finally destined for this autumn. A green light would mean work could start next year. The terminal is desperately needed. Steadily rising numbers of air passengers obviously creates a need for a place to land. And the next-generation of super-jumbos, offloading up to 600 people at once, will need super-terminals custom-built to handle them.

Yet there is no guarantee that Terminal Five will be allowed. The campaign against it is strong, led by fears over noise in west London and the ability of Heathrow’s infrastructure, such as the badly clogged M4 motorway and a Tube system in disrepair, to service it. Campaigners also argue that traffic could be moved to BAA’s other airports at Gatwick and Stansted, where BAA has been investing heavily. That, in theory, would put BAA in a win-win situation. But the problem is both are too far out to attract airlines packed with business travelers and tourists. And they have their own vociferous locals against too much traffic coming their way.

Without Terminal Five, there are growth prospects in Europe and America. BAA has management and retail deals with foreign airports, including New York’s JFK, though it has never been allowed to buy one because of the inevitable national security conflicts. BAA’s core strength lies in UK landing slots. They will continue to be goldmines as airlines fight over them and keep the shares riding high for now. BAA currently trades on 18-times this year’s expected earnings and is close to an all-time high. That anticipates a positive verdict on Terminal Five. Investors should proceed with caution