BAA threatens regulator with switch of investment overseas

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The Independent Online

BAA, the airports operator, is warning that it could divert investment from the UK to fund expansion overseas if it feels short-changed by negotiations on a new regulatory regime.

BAA's chief executive, Mike Clasper, made his comments as he unveiled details of the £1.25bn acquisition of a 75 per cent stake in Budapest Airport, including news that the company will keep 99 per cent of the airport's profits, despite sharing ownership with the Hungarian government.

Mr Clasper said that the profit split - which was kept confidential until yesterday - showed that BAA had not overpaid for what he described as one of the two most important assets in the new countries of the European Union.

BAA is also expected to be a keen bidder for Prague's main airport if the Czech government pursues mooted plans for its privatisation.

Mr Clasper said: "Our investors in the UK want us to use the knowledge and skills we have in areas where the regulator doesn't use our gains to subsidise landing charges for airlines."

His comments represented the opening salvo in negotiations with the Civil Aviation Authority which, tomorrow, begins consulting on the new five-year regulatory regime covering fees at BAA's three London airports, Heathrow, Gatwick and Stansted. The current regime expires in March 2008.

Mr Clasper said: "The core of the debate is over how to encourage investment. We have plans for the building out of a second runway at Stansted, and we have an idea to build a Terminal 5-quality project in the centre of Heathrow, which we are nicknaming Heathrow East.

"What we need from the regulator is a reasonable certainty of making an adequate return for our shareholders. This we are certain of doing in Hungary, and the regulator will have to bear that in mind."

BAA has committed to a £177m investment programme at Budapest in an attempt to squeeze more from ancillary services such as airport shopping, hotels, parking and cargo handling. These now account for about 37 per cent of revenues. Including the more significant source of income, landing charges, Budapest made pre-tax profits of £33m last year but is one of Europe's fastest-growing airports and is expected to double earnings in the next six years.

Low-cost carriers have been significant drivers of growth at the airport over the last few years. As a result, the dependence on Malév, the Hungarian flag carrier, for route development and traffic growth has declined with the airline now accounting for 44 per cent of passengers in 2004. EasyJet is Budapest's next most significant carrier. The Hungarian government hopes that privatisation will encourage long-haul airlines to use the airport.

As well as its three London airports, BAA also owns Glasgow, Aberdeen, Edinburgh and Southampton airports, and its overseas operations include management contracts or stakes in 11 airports in Australia, Italy and the United States.

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