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Buying frenzy

Analysis - Growth at regional airports is making them an attractive proposition for investors

The purchase of Leeds Bradford International Airport (LBIA) by investment giant Bridgepoint last Thursday was the latest in the airport buying frenzy that shows no sign of slowing down.

Private equity manager Bridgepoint, bought LBIA from local authorities for £145.5M and immediately announced a £70M expansion plan.

And it is this expansion that makes the deal attractive. A Bridgepoint spokesman explained 'Leeds operates from a prosperous but under exploited catchment area.

Traffic growth is strong and with developments at the airport we could boost the passenger share.' 'It was looked at as a commercial venture and found that the airport had just 2.5M passengers from a catchment area of 5M.' Its potential for growth is proven. Civil Aviation Authority gures show that air movements rose by a half in the past 10 years while the passenger figures nearly doubled.

In 1996 1.7M movements catered for 130M passengers and by 2006 this had risen to 2.4M movements catering for some 240M passengers.

More passengers and more flights means more infrastructure. Something that contractor Balfour Beatty is very aware of.

In January it purchased Exeter airport from Devon County Council and has now set about developing an airport master plan.

'The airport will be substantially redeveloped with new terminal facilities, new aircraft stands and, in the longer term, further terminal capacity, stand and taxiway development. It is anticipated that a new departures building will be constructed by 2010, ' says the airport website of its future plans.

Exeter is not the only airport the firm has its eye on. Having lost out at Leeds NCE understands Balfour Beatty is considering purchasing shares in Birmingham International airport and waiting eagerly to see what the competition commission forces BAA to sell off. 'We would be interested in a Scottish airport, ' Balfour Beatty Management managing director David James told NCE.

But Birmingham could be bucking the private investment trend.

Following the announcement in January that 49% of its shares were up for sale Birmingham councils were last week urged by the chamber of commerce to snap up ownership Macquarie Airports Group and Dublin Airport Authority (DAA) both announced an intention to sell their shares, together worth 49% And on Friday the Birmingham Chamber of Commerce and Industry (BCI) called for local councils take over ownership of BIA to make sure the expansion plans are carried out.

BCI chief executive Jerry Blackett explained that the limited return on investment for expansion at Birmingham could deter private investors from going through with expansion to 40M passengers by 2030.

'While it is reassuring to have the government's support for the expansion of BIA and the recognition that BIA is the region's preferred international hub, the money to do this needs to be found by the airport company.

'It seems the business case for the airport company to expand in terms of return on investment, is marginal. But the importance to the region of an expanded airport and in particular the lengthening of the existing runway is critical.

'If private sector investors Macquarie and Aer Rianta [Dublin Airport Authority] do not see their shareholdings playing a long-term part in their investment strategies, it is vital we either find new private sector investors who do, or examine how the remaining shareholders (being local authorities) increase their stake, ' he said.

'If BIA were to return to being majority-owned by the public sector, it should make assessment of the wider business case easier. Local authorities could ascribe value to the regional business case in a way private sector businesses cannot, ' he argued.

'There are examples elsewhere, not least Manchester Airport, where the controlling interest is the local authorities and where expansion of the airports has been substantial.

'While in many sectors these days, the private sector plays an increasing role in releasing innovation, imagination and investment we might find that in the case of certain airports, such as BIA, it is public ownership that will work best.' Perhaps, but there are other clear benefits for a private company such as a major contractor buying Birmingham. Backing the expansion could guarantee the firm a multi-million pound workload.

Elsewhere pressure for expansion at regional airports is growing.

Major airports like Heathrow are running at 99% capacity and expansion is restricted by noise and air pollution limits.

A third runway is at least a decade away.

Heathrow operator BAA's head of government relations Simon Baugh explained that in the 2003 white paper the government said there was an urgent need for further airport capacity and one method for achieving this was by building a third runway at Heathrow.

'We know that building a third runway now would exceed the air and noise limits but over time aircraft, and the cars people travel to the airport in, will be improved through technological developments so that they meet the restrictions, ' said Baugh.

A study to model the impact of growth at Heathrow is currently being carried out.

When complete in the Autumn, the government will hold a public consultation and a policy decision on expansion is expected in 2008.

The sum of this and the planning process means that Baugh didn't think a third runway could be realised till at best 2020.

However, Baugh thought it might be possible to boost capacity by 15% by 2011 if the runways were switched from segregated mode, where planes take off on one runway and land on another, to mix mode where planes take off and land on both runways.

The advantage is the time between planes taking off and landing can be reduced because the necessary separation distance is less.

But Baugh noted that this would not ease demand.

This is because BAA would not increase the number of flghts at Heathrow, it would instead use the extra capacity to reduce delays.

These restrictions make it easier for regional airports to balance the environmental impacts and the economic benefit of expansion than at the major airports, which are already pushing the air and noise pollution boundaries.

And should the competition commission order BAA to sell off airports following its investigation there may be yet more opportunity for regional investment.

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