The BAA Leviathan

True to form, the BAA leviathan, which owns and operates seven airports in the UK, is predictably resisting the Competition Commission’s recommendation that it should be broken up, and an element of much needed competition finally injected into the monopoly it has enjoyed since the business was privatised in 1987.

Accusations of ‘flawed’ analysis and other jibes favoured by lobbyists are thrown at the Competition Commission’s 290 page report, but in truth, the Commission’s robust assessment highlights the company’s lacklustre vision with regard to planning capacity, its poor standards of service and its high-handed snubbing of its main customer base: the airlines.

Combined with a score of other criticisms this explains BAA’s abysmally poor position in the Airport Council International league table of airport operator performance. Indeed, perceptions of BAA have sunk so low that the company must win the duffer’s prize for the least favoured business currently operating in the UK.

BAA plc was created as a dominant monopoly by government. And it ranks as probably the foremost monopoly in Britain. No less than 91% of all passengers flying in and out of airports in the South East fly through one of the company’s three airports that encircle the capital, not to mention its 84% share of airport passengers in Scotland.

BAA’s monopoly grip on the airport sector is identified by the report as the principal reason why service levels for both airlines and passengers are so abysmal. Complaints about poor service, lost baggage and smelly loos have escalated in recent years, culminating in the debacle of the Terminal 5 opening at Heathrow. Following the classic behaviour of a dominant monopolist, BAA has been slow to develop new runway capacity in the South East. As the main player in the market, it has benefited from restricting capacity – as the Commission’s deputy chairman, Christopher Clarke, reminded reporters when the report was launched.

The Competition Commission is to be commended for its radical package of remedies. It proposes that both Gatwick and Stansted are sold off as separate businesses in competition with Heathrow. This will probably require an independent trustee to ensure that BAA does not shun rivals that could attract airlines away from Heathrow.

In implementing a set of remedies the Commission could learn from the suggestion made in the IEA study, A Market in Airport Slots, which urged that over a period of ten years 10% of slots (landing and take-off rights) at Heathrow, Gatwick and Stansted should be randomly auctioned to the highest bidder. This would inject some much needed competition into the circumscribed world of slots at congested airports and identify the true value of these scarce resources.

What is more, if a third runway at Heathrow is given the go-ahead by government, all slots should be auctioned off to the highest bidder. A proportion of the proceeds could be reinvested in improved facilities and a substantial slug could be earmarked to address the external costs, such as noise and pollution, linked to such a step-change in capacity. Accordingly, local residents would benefit from better double-glazing, landscape initiatives aimed at minimising noise and improved mass transportation links.

A similar strategy has been advocated by the Federal Aviation Authority (FAA) for La Guardia, the grossly congested airport serving the domestic market in New York. Such an approach would introduce a welcome market-based rationality into the Byzantine world of civil aviation. And nowhere is it more Byzantine than Heathrow.

Keith Boyfield is a Senior Fellow at the ASI and chairman of REG – our regulatory evaluation group.