BAA needs its next inspired departure

Regulatory uncertainties put pressure on privatised airports company to find a new area of growth

AS OUR chart shows, since the start of last year the 500,000 shareholders in BAA, the former state-owned British Airways Authority, have had their first cause for concern since the business was privatised nearly eight years ago.

The reason is that the chief executive, the ebullient and ever-positive Sir John Egan, has completed the cultural change that was necessary to transform management thinking at BAA from a near-civil service mentality to the more entrepreneurial approach the company needed in order to stand on its own feet.

The centrepiece of that process has been one of the few cases of a British privatised operation successfully unlocking a stream of unregulated income big enough to outweigh the core business. This has been the promotion of BAA's retail space, which has been so extensive that it has led to jibes that some of the group's outlets are really shopping malls with runways attached, rather than the other way round.

With the marketing expertise born of his five years running the Jaguar cars group, Sir John underpinned that expansion with a campaign to restore the airport shops' credibility. They had become a by-word among the travelling public for inferior goods and services that cost more than their high- street equivalents. Sir John straightforwardly promised that price and quality would be at least as good as elsewhere.

But the main benefits of that transition were squeezed out by 1993. This left BAA to rely for growth on increases in air traffic in the sure knowledge that its regulator, the Civil Airports Authority, would help its customers - the world's airlines - to keep landing charges under severe pressure.

The first and most obvious next step was to take the winning formula abroad. The question was, where? Sir John scored an early success with Pittsburgh airport in Pennsylvania, and there was much talk of other US outposts - JFK in New York and Chicago's O'Hare were mentioned. Italy and China were added to an increasingly ambitious itinerary.

The absence of deals from such exotic sources was underlined recently by the announcement that BAA was teaming up with local partners to bid for some of the airport contracts being privatised by the Australian government.

"I have always said that our aim in going overseas is to make money, not to put flags on a map," Sir John said last week. "The US is still our long-term goal, but the Democratic election success meant that a lot of privatisation there ground to a halt." According to some of the analysts who follow BAA, there have also been dark tales of backhanders being demanded by local fixers, but the company refuses to comment on such claims.

So in late 1993, it kept up the flow of good news with another initiative, entering into a joint venture with the US-based McArthur Glen Realty to develop and operate what it calls "designer-label outlet malls" in the UK and continental Europe. These will let manufacturers sell direct to the public. "Outlet malls might be the thing to replace our duty-free business, when it is abolished in 1998," Sir John mused. "And our property side is used to building shopping centres."

But that, too, has been slow to get off the ground. The first is to open shortly in Cheshire, and another is due to follow in France in the autumn.

In the past year or so, apart from continued growth in air traffic and sound financial results, the good news has been more scarce. Last March, tourists were put off flying in and out of London by the IRA's mortar attack on Heathrow.

Since then, BAA has been increasingly linked in the media with the row over the proposed fifth terminal at that airport. Sir John recruited the veteran campaigner, Des Wilson, as head of public affairs to lead the propaganda battle over that issue.

"Surveys we have carried out suggest that the local people want Terminal 5 to be built," claimed Sir John. "A lot of them rely on Heathrow for employment, and this will mean more jobs."

More jobs of a less welcome kind are being generated by the Channel Tunnel, which is already making inroads into the London-Paris air traffic.

The other issue that the group has increasingly had to contend with is regulation. In January last year, the Department of Transport initiated a review, followed by a consultative document four months later.

Although that exercise recommended no big changes, it created uncertainty, which has been prolonged by the forthcoming CAA price review this December.

That has made investors nervous, as demonstrated by the plunge in the BAA share price when Stephen Littlechild, the electricity regulator, let it be known he intended to toughen the electricity pricing regime.

The good news for Sir John is that the shares bounced back up again smartly after touching 420p a couple of weeks ago. But they are likely to remain vulnerable to squalls until the group can establish another significant income stream.

Activities

Airport owner and operator: Heathrow, Gatwick, Stansted, Glasgow, Edinburgh, Aberdeen and Southampton in UK; Pittsburgh in US.

Share price 487p

Prospective yield 2.5%

Prospective price-earnings ratio 18.7

Dividend cover 2.6 1992/3 1993/4 1994/5*

Turnover £952m £1.1bn £1.2bn

Pre-tax profit £285m £322m £366m

Net profit £211m £240m £274m

Earnings per share 21p 23.5p 26p

Dividend per share 8p 9p 10p (* forecast)