Uncharted territory: The implications of the enforced sale of one of BAA's Scottish airports remain unclear

COLIN Matthews may well be wishing that Easter fell a bit earlier this year, as the chief executive of BAA looks for a break from what has undoubtedly been one of the tougher months in his long career of trouble-shooting.

The airport operator's no-nonsense leader spent much of March fending off severe criticism of BAA's handling of the pre-Christmas snow which virtually shut down Heathrow, Europe's busiest airport. Clashes with airline operators and a grilling by MPs culminated in further apologies to the thousands left stranded, but did little to take the sting out of a damning inquiry report listing an embarrassing string of operational failures by BAA.

Having come through that, Matthews might have felt deserving of a bit of respite. Instead, the news came last week that the Competition Commission intends to press ahead with moves to force BAA, owned by Spain's Ferrovial, into the sale of London's Stansted and one of its two largest Scottish airports.

Announcing its decision, the Compet-ition Commission reiterated its long-held view that "passengers and airlines would still benefit from greater competition", which in Scotland will result in the sale of either Edinburgh or Glasgow airports.

Commission chairman Peter Freeman went on to defend his position by arguing that passengers would recognise the benefits of improved competition "by the sort of service that is provided to them at the airport". In reality, any benefits that come from a forced sell-off are likely to go the way of the airlines rather than travellers, according to analysts.

While taxes such as the controversial Air Passenger Duty are linked to tickets and are thus immutable, airport operators do have leeway when it comes to landing charges, passenger processing fees and rebates for opening new routes - all of which could make a difference as to whether a service is run out of Scotland.

Experts are hopeful that the ultimate outcome of the commission's controversial decision will be a greater choice of routes and destinations from Scotland. But there are fears, particularly from busi-nesses, that key routes such as the direct Glasgow to Dubai flight run by United Arab Emirates could easily be re-located to other parts of the world if airlines find that the finances cease to stack up under new ownership. "It is a really crucial issue for business - for people to be able to get to places quickly, and be able to get to Scotland easily," says Robert Hannah, Scottish managing partner for accountancy firm Grant Thornton.

Hannah is concerned that the loss of flights, such as bmi's suspension of daily routes between Glasgow and Heathrow, will hamper the ability of the estimated 3,000 Scottish exporting firms whose staff need to travel abroad. With key industries such as whisky, life sciences, technology and the burgeoning renewable energy sector reliant upon both overseas sales and investment, he believes Scotland is in crucial need of more - not fewer - direct flights to European and long-haul destinations.

"As part of the overall economic regeneration of Scotland, we have got to address this structural problem," Hannah says.

But if increased competition between Glasgow and Edinburgh does deliver benefits, they could be some way in the offing. While the Competition Commission has warned that passengers and airlines "should not have to wait indefinitely", there is as yet no firm timeframe for the sales, which will kick off with the disposal of Stansted. There is also the possibility of further legal wrangling, which has been ongoing since the commission published its original findings in March 2009.

Although last week's announcement did not come as a surprise, the findings remain provisional until the watchdog publishes its final verdict in either May or June. It is in the meantime accepting responses from the industry, and BAA has said it is "carefully considering" its position. Further legal challenges therefore remain a possibility, albeit a slim one. The competition watchdog's report was endorsed by the Court of Appeal in October of last year, followed by February's Supreme Court decision that BAA should be refused permission to launch any further appeals.

The uncertainty as to where BAA might go from here reflects, as much as anything, the fact that the forced divestment of airports is essentially uncharted territory in the UK. Even the Competition Commission seems unsure as to what might happen next.

"Obviously we shall listen very carefully to what BAA says now in response to that before coming to a final view," Freeman said. "We can't stop BAA from taking further appeals if they wish to, but the grounds on which they can do so are diminishing."

John Strickland, of industry specialist JLS, says BAA will "seriously consider" any available alternatives, but he and most others agree that they will be unlikely to avoid a forced sale of either Edinburgh or Glasgow. Though prices are depressed by the currently parlous financial state of the air transport industry, buyers will be attracted by the long-term revenue prospects and the fact that airport assets rarely come up for bidding.

Potential buyers will likely come in the form of consortia comprised of airport operators and deep-pocketed investors such as pension, or possibly sovereign, wealth funds. Major infrastructure groups will also be drawn by the potential to diversify their portfolios.

Among those linked to a possible bid for one of the Scottish airports are regional operator Manchester Airport Group and TAV, the Turkish-headquartered operator. The owners of Vancouver Airport - the YVRAS consortium of Vancouver Airport Services and Citi Infrastructure Investors - have also been touted as potential buyers.

Peter Morris, chief economist at air industry consultancy Ascend, says BAA may be "shedding crocodile tears" in its claims that it is being unfairly forced to sell at a time when the downturn in the industry has pushed asking prices to record lows. He believes this is particularly true in the case of Stansted, the only airport in the greater London area that currently has the potential for expansion.

"Sure, it sounds great in the long-term, but it will probably take 20 years and about 1 billion to put in another runway," Morris says, adding that any potential buyers will have to factor both the pros and cons of this into their bid.

He estimates that Stansted's annual passenger flow of 18.6 million means it will likely fetch between one-half and two-thirds of the price paid for its larger rival Gatwick in 2009. BAA sold Gatwick to Global Infrastructure Partners for 1.51bn under pressure from regulators before launching its fight to retain the rest of its UK airports.

"That was not the best time to be selling major infrastructure assets, but they got quite a good price for it, because how often do airports come up for sale? There is a scarcity factor that will attract bidders," Morris says. He estimates that one of the Scottish airports would attract bids of about half of the sum paid for Gatwick, though this would partly hinge upon which airport was up for sale.

Glasgow, which currently serves 6.5 million passengers annually, has long been touted as the more likely of the two to be sold. Not only does it lag behind Edinburgh's 8.6 million passengers, but it also lacks the political and tourist cache of the capital city.

Strickland says Glasgow has been caught between growth at Edinburgh, which has just undergone a 40m expansion and upgrade, and the drive to bring low-cost carriers to Prestwick, the Ayrshire base owned by New Zealand's Infratil.

Meanwhile, Ferrovial has been on a drive to cut its massive debt, which was 17.5bn at the end of last year. The group has said it intends to sell a 10 per cent stake in BAA, a move that would take its holding to below 50 per cent and allow Ferrovial to take BAA's debts off the group balance sheet.

"If push comes to shove, the question for BAA becomes whether they would sell Glasgow and take a lower return, or would they try to raise the most money they could and sell Edinburgh, which in the Scottish context really represents the crown jewels," Strickland says. "I suspect they will want to hold on to Edinburgh."