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(Updates with Ferrovial’s closing share price in 25th paragraph, comment from regular Heathrow users from 30th.)
Dec. 14 (Bloomberg) -- London’s Heathrow airport, hemmed in by urban sprawl and barred from adding a new runway, is turning to bigger jets and glitzier shops to keep growing in the face of a campaign to build a rival hub on the Thames estuary.
Heathrow owner BAA Ltd. will widen taxiways to handle more A380 jets, adding seats, while an upgrade of its oldest terminal should lift retail sales, Chief Executive Officer Colin Matthews said in an interview. A government pledge to maintain a global hub in the U.K. may signal an easing of antipathy toward expanding the busiest international airport, Matthews said.
“Until the last year, very senior people were arguing that transfer traffic wasn’t important,” he said. “They’re not saying that now. There’s an understanding that to give business people starting or ending their journey in London the frequencies and destinations they want you have to fill the rest of the plane.”
Chancellor George Osborne said Nov. 29 the government will “explore all options” for retaining a U.K. hub, a positive remark according to Matthews, before adding “with the exception of a third runway at Heathrow.” The qualification could suggest he favors an airport at the mouth of the Thames, where noise would be less intrusive, as proposed by fellow Conservative and London Mayor Boris Johnson. Architect Norman Foster, designer of Hong Kong airport, has also drawn up plans for a coastal site.
Matthews, 55, said in London that with the government seemingly persuaded that a hub is vital to the economy, BAA’s No. 1 task is to convince lawmakers and officials that Heathrow can raise its capacity without disrupting people’s lives.
“People feel really strongly about noise and we have to do a better job of getting an understanding of that story on the table,” he said. “It’s about quieter engines and airframes, different landing technologies and ways of operating the airport, about flight paths and the time of day you operate.”
A small aerodrome in open country when chosen as London’s main airport after World War II, Heathrow, located 14 miles west of the city center, is now part of Europe’s biggest urban area.
Heathrow’s runways also run east-west, so in prevailing winds planes descend over London 70 or 80 percent of the time, taking off above the city on remaining occasions. Paris Charles de Gaulle and Frankfurt airports are north and south of the urban areas they serve, so jets don’t affect residents as much.
A third runway, as proposed by BAA, would lift Heathrow’s capacity of 480,000 flights a year by 50 percent, Matthews said, allowing passenger numbers to almost double from a maximum 68 million based on existing aircraft sizes to about 130 million.
Prime Minister David Cameron’s government, which includes pro-environment Liberal Democrats, blocked the plan after taking power in 2010. It also opposes more capacity at London Stansted, which an antitrust ruling may force BAA to sell, and Gatwick, the busiest single-runway airport, which it disposed of in 2009.
While the Department for Transport is evaluating a new aviation policy, it’s headed by Justine Greening, who represents a district located directly under the Heathrow flight path and has previously been a vocal campaigner against expansion plans.
Matthews says complaints from well-heeled suburbs ignore the “slightly uncomfortable truth that one of the features that makes them attractive is their connectedness to Heathrow.”
Howard Wheeldon, senior strategist at BGC Partners in London, said the CEO’s optimism is probably wishful thinking.
“The Conservatives are clearly against the idea of a third runway, so I don’t see any chance of it happening over the next three years, and possibly longer than that,” he said.
While it waits for the political tide to turn, BAA, bought by Spanish builder Ferrovial SA for 10 billion pounds ($16 billion) in 2006, will spend hundreds of millions of pounds to lift the number of Airbus A380s Heathrow can handle to 35 a day.
Heathrow currently offers six daily flights on the 525-seat plane, two each by Singapore Airlines Ltd., Qantas Airways Ltd. and Emirates of Dubai, which has ordered 90 of the jets. British Airways, based at the airport and its No. 1 carrier, will start taking delivery of 12 of the double-deckers starting in 2013.
“With all those A380s we need to have more stands, but they’re wider than other aircraft and the taxi layout needs to be different,” Matthews said. “It’s expensive, it’s not quick, and it won’t be hugely visible, but the plane gives an increase in the number of passengers without any increase in movements.”
BAA is also spending 2.6 billion pounds renewing Heathrow’s Terminal 2, built in 1955. Due for completion in 2013, the plan is aimed at creating a lighter, airier space offering a more streamlined passenger check-in experience, and will add no capacity. Matthews said the investment will pay off by boosting retail sales that contribute one-quarter of revenue.
“There’s a strong correlation between retail spending and the customer rating of the quality of security,” he said. “I won’t buy a tie or a bag unless I’m relaxed. If I’ve just been really aggravated in security I won’t, if I’m delayed I won’t.”
BAA is also in talks with airlines about demolishing 42- year-old Terminal 1 and integrating it with Terminal 2, Matthews said. The six-year plan will create a complex handling 30 million people a year, matching BA’s base at Terminal 5, which had a chaotic opening in 2008 weeks before the CEO took over as baggage systems broke down, earning the sobriquet “Heathslow.”
‘Rearranging the Furniture’
Matthews said runway capacity remains the ultimate concern, and Heathrow is already feeling the strain, falling from second to fourth by passengers in 2010 as the total slid 0.2 percent to 65.9 million, overtaken by Beijing with 13 percent growth and Chicago with 4.1 percent. Atlanta remained the world No. 1.
“There has been this kind of stasis gripping London’s airports over the last 25 or 30 years,” said Peter Morris, chief economist at London-based aviation consultants Ascend. “The furniture has been rearranged quite dramatically, but no new airports or runways have been built. All they’ve done is spread things round old air bases from the Second World War.”
While Heathrow is still Europe’s busiest airport, it serves only 180 destinations -- down from 227 in 1990 -- as airlines focus slots on the most profitable routes, versus more than 250 at Amsterdam, CDG and Frankfurt, which all have four runways.
“If we take too long over the debate we are, by default, making a choice,” Matthews said. “Paris and Amsterdam will do the jobs that could otherwise be happening here.”
The sale of a 5.9 percent stake in BAA to infrastructure firm Alinda Capital Partners for 280 million pounds on Oct. 10 valued it at 4.76 billion pounds, less than half the 2006 price. Ferrovial, which has a 49.99 percent stake, fell 1.5 percent to 8.99 euros in Madrid today, paring gains in 2011 to 21 percent.
Mayor Johnson has said he, too, is concerned about London’s shrinking global connections and the relative paucity of links with emerging markets in Asia, while maintaining that “massive environmental dis-benefits” mean expanding Heathrow won’t do.
Johnson instead favors a 30 billion-pound hub dubbed “Boris Island,” to be built at Shivering Sands, off Whitstable in Kent. Architect Foster’s Thames Hub would be located closer to London on the Isle of Grain. Both feature four runways, 24-hour flying, high speed rail links and capacity of 150 million people a year.
“There are people who dislike the concept of developing an airport in a relatively unspoiled location, but I don’t see the public anger that was evident with the third runway at Heathrow, or extending Gatwick or Stansted,” BGC’s Wheeldon said.
Travelers interviewed in London were split on the merits of an airport in the Thames estuary, which would require the bulk of Britons to make a journey across or around the U.K. capital.
“It’s on the wrong side of London,” said Rob Nunn, 35, a resource manager at a professional services firm. “It seems like a bit of a fantasy and can’t imagine how it could work. Maybe we need the other runway at Heathrow -- I’d prefer that.”
Matt Maleavy, 32, a senior manager at a City investment bank who lives in Essex, east of London and closer to Johnson’s preferred site, reckons a replacement of Heathrow is inevitable.
“There’ll be a requirement for another airport because business travel needs it,” he said. “We don’t compete enough with other global cities.”
Matthews said a coastal hub would take 25 years to deliver and come with a price tag that could prove to be Heathrow’s biggest advantage in its own push for additional capacity.
“Sooner or later people have got to put numbers on the table and figure out what the costs and benefits are,” he said. “If a new airport ends up costing four times more than investing in Heathrow, landing charges are going to be four times higher.”
--With assistance from Katie Linsell in London. Editors: Chad Thomas, Heather Harris.
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