Nemesis follows shopping hub-ris at Airstrip One

In the end, it all comes down to shopping. Shopping is what fuels the growth of airport expansion these days, lubricates airport profits and appeases greedy shareholders. It has been an obsessive concern with shopping, via the Terminal 5 folly, that has done for BAA as our monopoly airport owner.

Don’t believe me? Here’s Nick Ziebland, retail director of Terminal 5, telling us all about it back in May: “Retail is the new battleground in airport development. We want to persuade people, including frequent travellers, to come early to shop but we know frequent travellers are often sceptical about these things so we realised we had to come up with something special.”

The something special, as it turned out, was one of the most consummate management cock-ups in recent years, in which both BAA and BA, co-adjutor in the £4.3bn T5 project, proved they don’t know the fundamentals of their own business. Five hundred flights in ten days cancelled; 23,000 bits of baggage displaced. Quite a record for the Guinness Book of Management Incompetence.

But that’s not Nick’s fault. He’s only underlining a home truth which finds ample substantiation elsewhere. Both Verdict Research and Mintel affirm that retail sales, and particularly high-margin luxury-end goods – now that duty-free is on a downward slope – are key drivers of airport revenue.

According to Verdict, airport retailing was worth $23.9bn globally in 2006, of which $10bn was accounted for by Europe. Amsterdam’s Schipol has been upping its high-end content, as has Madrid’s Barajas. Paris’s Charles de Gaulle, meanwhile, added 3,000 sq metres of retail space last year and is adding another 7,000 this year. These, together with Frankfurt, are key rivals for BAA’s London hub status.

Viewed in this light, T5 was to be a major trump card, turning the trick for Europe’s busiest airport, Heathrow. With 22,000 sq metres of retailing space, it provides the biggest shopping space in London’s aviatory hub. And a 50% boost, almost at a stroke, to Heathrow’s shopping capacity.

That capacity already generates considerable income. Heathrow accounted for not far short of half the 148 million passengers passing through BAA’s seven UK airports in 2006/7. So it’s reasonable to assume that, conservatively, it accounts for a similar proportion of BAA’s retail revenue. In the year to 2006 (before publicly-quoted BAA was subsumed into its current owner Ferrovial), total revenues were about £2bn, out of which £726m were retail, £820m airport and traffic charges, £242m property and £224m “other”.

And don’t forget that the aeronautical stuff, though the biggest single item, is subject to strict regulation by the Civil Aviation Authority; it can’t be arbitrarily hiked to satisfy earnings-per-share requirements. Retail, on the other hand, is limited only by the space available to it and the imagination of the BAA marketing department. Which was why the massive increase in retailing capacity at T5 was such a signal event for BAA…

…Though, unfortunately, in more ways than BAA could have imagined. It became a symbol of all that was wrong with the current airport monopoly system. What should be an efficiently-run public service, almost a utility, has instead turned into a palatial mall in which the requirements of ordinary passengers come a distant second to those of wealthy shoppers and premium brand franchises. The fiasco of T5’s debut merely made the conflict of interests more poignant.

And probably gave the Competition Commission the moral justification for recommending such a radical break-up. As things stand, and we’ll know for sure in the spring, Gatwick (35 million passengers a year) and Standsted (24 million) will have to go, and so will Glasgow (9 million). Heathrow, for above-mentioned reasons, is unlikely to be up for grabs if BAA has anything to do with it.

But will it make any difference?
Rather like petulant children who have had their favourite toys taken away from them, we should expect the senior management at BAA to throw a wobbly. And we have not been disappointed. But amid the apoplectic screeches of “Not fair”, chairman Sir Nigel Rudd and ceo Colin Matthews have also come up with some pretty lucid objections to the break-up.

The essence of them? The reforms won’t do what they are designed to do. They may conceivably make matters worse; they certainly won’t make them better.

The gist of the “scapegoat” argument is that spinning off Gatwick and Stansted as competition is irrelevant, because the real competition exists elsewhere. It comes from Paris, Schipol (4 runways each) and Frankfurt. Sooner or later, if we do not address the real issue, which is runways – and our conspicuous lack of them – London’s hub business, not to mention all those shoppers, will go elsewhere. But the key point is the depressing effect it will have on the economy generally: “… why then would a business want to be based in London, a city at the end of a branch line?” they ask.

Why indeed? And Rudd and Matthews go on to point out that the break-up will actually exacerbate structural economic damage, because the already long-delayed decision on new landing strips at Heathrow and Stansted will, as a result of the break-up, be delayed still further.

These are powerful arguments which deserve to be respected. They suggest a future which, like the privatisation of the railways under John Major, will only superficially be a marketer’s dream. To be sure, there will be an upfront “awareness” budget deployed by the new owner/s of Gatwick and Stansted to announce who they are and how much better they are. The rump of BAA will also have to sharpen up its marketing act at Heathrow, focusing a bit more on the passengers, as opposed to shoppers, they have thus far neglected.

The structural problems which have helped to undermine BAA will, however, continue to exist.

The coming of Airstrip One?
Tinkering round the edges with a marketing budget, or even making over a few retail spots to the departure lounge, won’t alter the appalling customer experience of passing through a major British airport while the fundamental problem of an ageing infrastructure bulging at the seams remains untackled.

 For Rudd and Matthews, the answer is clearly to arm-wrestle the government into introducing those two runways. For the airlines, that and a regulatory framework which prevents the prospective owners of Gatwick, Stansted and Glasgow from ripping them, and the public, off with extortionate new airport charges.

But it’s not that simple. These are purely pro-flight, pro-business arguments which choose to ignore, or at least subordinate, what has become a highly emotive environmental context. And one that becomes steadily more emotive with every year that passes. Should the growth of aviation be limitless? What about noise pollution? What about the carbon footprint?

Five years ago, the Institute for Public Policy Research, a Government-favoured think tank, came up with a somewhat contrary report whose conclusions may well have more resonance today than they did then.

The IPPR took the controversial view that aviation should be taxed more heavily to constrain growth in air travel and relieve congestion on our existing airport infrastructure, the aim being to create “a better-quality, premium service over (sic) a cheap and increasingly uncomfortable one.”

The IPPR’s reasoning was that flying was a “non-essential activity that is mainly the preserve of the better-off,” as “over 80 per cent of low-cost and scheduled leisure flights are by about 40% of the population from the three most privileged social classes. As a consequence, any environmental charges would be progressive, paid for in the main by those who can most afford them.”

It recommended an auction system for airport take-off and landing slots every five years, an end to subsidy of landing charges through the profits of airport shops and an end to airport duty-free sales. It was extremely critical of airlines being exempt from fuel tax and passengers not paying VAT on tickets.

Of course some things have changed in five years and budget airline tickets, given soaring aviation fuel costs and airport passenger duty, are not quite the free ride they used to be. But the report is a reminder of the complex policy framework surrounding an apparently simple decision to build more runways and ancillary facilities on a small, already overpopulated island. Britain, except in the dystopian world of 1984, is not yet Airstrip One.

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