Global Economics

New Heathrow Hub: Slick, but No Savior


Terminal 5's opening will unleash complications as British Airways vacates most of its gates in the other four terminals

Baggage delays and environmental protests weren't supposed to be part of the pomp surrounding the first flights into a new multibillion-dollar concourse at London's Heathrow Airport on Mar. 27. But glitches and greens dampened the buzz that airport operator British Airports Authority (BAA)—a subsidiary of Spanish construction firm Ferrovial (FER.F)—hoped to generate as the first passengers arrived at the airport's long-awaited £4.3 billion ($8.6 billion) Terminal 5.

As travelers streamed into the soaring glass-covered atrium, reports emerged that opening-day computer problems in the new high-tech baggage handling system were causing lengthy delays at the facility Queen Elizabeth II recently dubbed a "21st-century gateway to Britain." Then hundreds of campaigners showed up in the face of a large police presence to protest the proposed construction of a third runway at Heathrow, which is scheduled to open in 2020.

Things got worse later in the day: British Airways had to cancel 33 flights due to problems with Terminal 5's security and baggage-claim systems. The glitches left passengers stranded with little hope of reaching their destinations, forcing many to sleep rough overnight on the concourse's newly-polished floors. On Mar. 28, BA said one-fifth of its Terminal 5 flights had been cancelled, saying operations wouldn't return to normal until the weekend at the earliest.

All in all, not an auspicious start for a terminal tapped to play a vital role in boosting one of the world's busiest—and least popular—airports. The massive new facility, which will handle more than 350 flights a day and 30 million passengers a year, represents a huge investment in the future for BAA and British Airways (BAY.L), Terminal 5's sole tenant. The airy aluminum-and-glass concourse will surely improve travel for the BA customers who use it. It sports nearly 100 self-check-in kiosks, 25 restaurants, ubiquitous Wi-Fi Internet access, and an array of plush lounges for business travelers.

Long Lines in Other Terminals

But Terminal 5 may actually exacerbate Heathrow's pressing problems, especially a severe shortage of takeoff and landing slots. "It's not really going to help improve the airport's overall performance," says Peter Morris, chief economist at consultancy Ascend Aviation in London.

Some passengers are already clued into that. "People flying from here should see a benefit," said Sarah Hughes, a 42-year-old British businesswoman checking in at Terminal 5 for a flight to Los Angeles on the morning of Mar. 27. "But everyone else using the other terminals will still have to suffer long lines and overcrowding." Heathrow was built to handle between 45 million and 55 million passengers per year but was accommodating 68 million even before Terminal 5 opened.

Indeed, with the signing of the new Open Skies agreement between Europe and the U.S., which goes into effect Mar. 31, traffic to Heathrow is only likely to increase (BusinessWeek.com, 10/22/07). The new treaty ends the monopoly of certain carriers offering transatlantic flights and should increase competition among airlines. Clement Wong, travel and tourism manager at market intelligence firm Euromonitor in London, says the new capacity provided by Terminal 5 is coming just in time.

Slow Baggage Handling a Common Complaint

Unfortunately, the opening of the new terminal also will unleash months of complications for airlines and passengers as British Airways vacates most of its gates at Heathrow's other four terminals and different airlines move in. According to estimates, 50 out of the 90 carriers using Heathrow will have to change concourses, with some airlines switching gates more than once. Ascend Aviation's Morris figures the moves will exacerbate delays. "It's a huge logistical operation," he says.

That may not help Heathrow's tattered reputation. In a new customer satisfaction survey of 7.8 million passengers conducted by British consultancy Skytrax, Europe's busiest airport ranked 103rd out of 162 airports studied. The most common complaints: long waits at security and slow baggage handling. Heathrow placed far below Europe's top performers, Munich and Zurich, which finished fourth and fifth, respectively. (Skytrax ranked Hong Kong No. 1.) A different study, from Airports Council International, ranks Seoul's Incheon as the world's best (BusinessWeek.com, 2/27/08).

BAA parent Ferrovial aims to change Heathrow's image with continued investment. The company has earmarked $12.4 billion over the next 10 years to improve the airport's other concourses, and on Mar. 11, it was given the go-ahead by Britain's Civil Aviation Authority to sharply raise landing fees (BusinessWeek.com, 3/11/08).

Raking in the Revenue

What's more, for all its problems, Heathrow remains a money-spinner. Indeed, analysts are downright bullish about the airport's financial performance. Citigroup (C), for example, estimates Ferrovial's commercial revenues from the airport will reach £2.13 billion ($4.27 billion) by 2013, up from £1.38 billion ($2.77 billion) last year.

Terminal 5's teething problems are likely to be short-lived, and both BAA and BA are staying focused on its long-term benefits for passengers, from faster security clearance to more shopping and eating options. No question, Terminal 5 will give Heathrow a lift. But before the huge investment can pay off, BAA has a lot of other problems to overcome—and the solutions won't come overnight.

For a look inside the new Terminal 5, check out our slide show.


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