What’s wrong with commercial aviation?

My story in The American magazine is now up on its website. Here’s the lede: “Thirty years ago this October, the era of affordable mass air travel was unleashed. Why was this revolution stalled, and what can be done to finish it?”

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Surprise! BAA to sell Gatwick; everyone wants to buy it

No sooner do I say that the BAA case will be a hot topic this fall on yesterday’s Things with Wings Radio Show (thanks, Benet!) than BAA beats the Competition Commission to the punch and puts London’s Gatwick Airport up for sale. According to BAA’s chief, quoted in the Financial Times, “We have decided to begin the process of selling Gatwick Airport immediately. . . . Gatwick has long been an important and valuable part of BAA and the decision to sell was not taken lightly. We believe the airport’s customers, staff and business will benefit from the earliest possible resolution of current uncertainty.” This comes after the Competition Commission’s provisional findings indicated that it would order BAA to sell off two London airports and either Edinburgh or Glasgow in early 2009. (See my posts on the provisional findings here and here.)

According to the International Herald Tribune, BAA will continue to contend for keeping Stansted Airport — “At Stansted, we believe that a change of ownership would interfere with the process of securing planning approval for a second runway, which remains a key feature of government air transport policy” — and its three Scotland airports.

The Competition Commission released a statement today indicating that between now and its 2009 final report, it will “take account of any action by BAA in the meantime which may impact the competition problems we have provisionally identified.” Will the Gatwick sale delay the commission’s final recommendations, or will it come quickly enough to send signals about competition in the new London airport market?

And now comes the fun part: airport operators have been circling Gatwick for weeks now, planning their bids for whenever BAA was forced to relinquish the airport. Potential buyers include the Australian infrasturcture giant Macquarie Group, Manchester Airport Group (which owns Manchester Airport in England), Hochtief (which operates and owns shares in several European airports), Singapore’s Changi Airports International, and Fraport (which runs Frankfurt International Airport). The most interesting entry in the mix is Richard Branson, involved through either Virgin Atlantic or the umbrella Virgin Group (news reports are unclear). Virgin has expressed interest in joining a consortium to bid on Gatwick. With this cast involved, the sale of Gatwick may be one of the highest-profile airport deals ever.

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More on the BAA case

I have a guest post on the Competition Commission’s remedies for BAA’s common ownership over at Towers and Tarmacs. Thanks to Benet Wilson for the invitation!

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More on BAA: why it needs to be broken up

I’ve been digesting the UK Competition Commission’s provisional findings on BAA, and I’ll have more to say on the proposed remedies later. Here, in summary form, is what the Commission has found.

BAA was privatized with control of London’s three main airports in 1987 primarily to increase airport efficiency and provide a solid financial base for future expansion. It has not done this. “More than 20 years later, there is inadequate capacity, particularly runway capacity, in the South-East.” Furthermore, BAA’s airports are widely criticized by airlines, travelers, and other stakeholders. The Commission acknowledges that BAA is not entirely to blame — they do not oversee air traffic control, immigration and HM Customs, or airline operations. But BAA is not blameless. They are unresponsive to “the interests of airlines and passengers,” reports the Commission.

Is the lack of competition between BAA’s airports inevitable? Evidence suggests not. The Commission points out strong competition between Belfast’s airports, Birmingham and East Midlands, Cardiff and Bristol, and Liverpool-Manchester-Leeds Bradford. And BAA’s airports are easily substitutable, especially for leisure travelers — there is no natural monopoly in airport services in the Capital or Edinburgh-Glasgow as there is in, say, Aberdeen (where BAA ownership has been OK’d by the Commission).

BAA argues that competition is restricted not by common ownership but by capacity constraints. The Commission agrees, and it also fingers three other culprits in capacity constraints: the planning process, which slows up capacity development; government policy, which shapes future runway investments; and price regulation of airports. But this, the Commission argues, does not absolve BAA: “We acknowledge that to some extent BAA’s actions can be attributed to Government policy and/or the planning system and we have noted the interdependences between them. But in our view, as the owner and operator of the three major airports in the London area, BAA has to be regarded as responsible for their achievements and shortcomings.”

Because of capacity constraints, even if BAA were broken up today, there would be limited competition between airports in the short run. But the Competition found that “under separate ownership . . . we would expect the market structure to be sufficiently competitive so as to incentivize airport operators to overcome the current constraints on expanding capacity and to expand capacity to facilitate competition with one another, increasing competition in the longer term.” In other words, even though external forces impede airport expansion, BAA had little reason to seek out competitive expansion.

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As expected, Competition Commission finds BAA hinders competition at London airports

The Competition Commission has published its provisional findings. Key passage:

Our provisional view therefore is that a number of features each give rise to an AEC:

(a) As regards common ownership:

(i) Common ownership of Edinburgh and Glasgow is a feature which prevents competition between them.

(ii) Common ownership of the three BAA London airports is a feature of the market which prevents competition between them; the effectiveness of competition between them absent common ownership is likely to increase in the longer term, with the increased incentive to invest, although we also see some scope for competition between them in the short-term despite existing capacity constraints.

(iii) However, Heathrow’s position as the only significant hub airport in the South-East and indeed the UK is a feature which restricts competition between airports for some airlines.

(iv) Common ownership of Southampton and both Heathrow and Gatwick is a feature of the market which prevents competition between them, as shown in particular by the lack of responsiveness of BAA to developing Southampton to satisfy the requirements of its airline customers.

(v) Common ownership of the BAA London airports further restricts competition between airports through its effects on capacity constraints; and exacerbates the inadequacies of the regulatory system, reducing the benefit of regulation, distorting competition between airlines.

(b) Aberdeen’s comparatively isolated geographical position and other factors that make it unattractive to serve a catchment of Aberdeen’s size with more than one airport are features preventing competition to Aberdeen.

(c) Aspects of planning restrictions are features which restrict competition by contributing to the current capacity constraints at the BAA London airports.

(d) Aspects of Government policy restrict or distort competition by contributing to the current capacity constraints at the BAA London airports.

(e) The current system of regulation of airports is also a feature which distorts competition between airlines.

Much more commentary on this not unsurprising decision coming soon.

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UK Competition Commission leaning toward breaking up BAA; will Heathrow be set free?

The UK Competition Commission (CC) will likely recommend that BAA Ltd., the commercial owner-operator of London’s three primary airports, be forced to sell at least two of them. The CC signals this strong leaning in its “emerging thinking” document published on April 22. The CC is in the middle of an investigation of whether BAA’s ownership of seven UK airports, including the three largest in the London area and the two largest in Scotland, creates adverse effects on competition. It took up the investigation in spring 2007 based on a referral from the Office of Fair Trading.

First, some background: several British airports were once run by the British Airports Authority. In 1986, as part of the Thatcher government’s privatization program, the agency was spun off as BAA plc (today BAA Ltd.) The government held a “golden share” in the firm until 2003, when the European Union ruled against it; in 2006, BAA was bought by Ferrovial Group, a major European airport infrastructure business. BAA both owns and operates seven British airports: Heathrow, Gatwick, and Stansted near London; Southampton; and Edinburgh, Aberdeen, and Glasgow in Scotland. It’s gotten in trouble lately for a failure to keep up with demand at Heathrow, with needed new terminals and runways decades from completion. BAA was further wounded by the Terminal 5 opening debacle at Heathrow, and it has been slowly bleeding customers–airlines and passengers–to much more up-to-date, larger, and expansible airports on the European continent. BAA’s finances are complicated by the fact that its landing fees are capped by regulation, which is why BAA invests so much in retail and other profitable commercial activity, as you’ll see if you ever wander around a BAA terminal.

BAA’s four airports in the southeast of England (especially Heathrow, Gatwick, and Stansted) account for 91 percent of traffic. In its document, the CC considers the extent to which common ownership affects competition, including its affect on responsiveness to customers, infrastructure investment, substitutability of demand, regulation, and capacity constraints and development.

What follows are the highlights from the CC’s 170-page report, with special reference to the London airports:

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UK Competition Commission: BAA is baad for competition

As expected, the British Competition Commission released its interim report on competitive effects of BAA’s ownership of several UK airports (accounting for more than 60 percent of UK travelers), including most of the capacity in greater London and lowland Scotland. The conclusion?

The CC is inclined to the view that common ownership of the BAA airports is a feature of the market that adversely affects competition between airports and/or airlines. It is also inclined to the view that shortage of airport capacity, government policy and the regulatory system for airports might also be features that adversely affect competition or exacerbate other features which do so.

Among the key points in the CC’s very long report, which I plan to digest over the next couple of days, is the conclusion that the capacity constraints at BAA’s London airports have impaired competition, as BAA has not made necessary improvements to make its properties more competitive with one another — partly a result of insufficient government support for airport expansion. The CC also suggests that CAA, the British aviation regulator (sounds like BAA, but BAA Ltd. is a private company), might have regulated BAA too lightly.

The document is not a final recommendation or report; rather, it “set[s] out our current thinking in some detail” and requests further comment. The CC is expected to release a final report and recommendations in August.

• Full “emerging thinking” report [PDF]
• Executive summary [PDF]

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