View from City Road: BAA's feet don't touch the ground

BAA, the fund manager's favourite privatised monopoly, is three years away from its next pricing review. Its regulator, the Civil Aviation Authority, is unlikely to begin a preliminary examination of the business until the winter of 1995.

Sir John Egan, BAA's chief executive, seems to like an early start, however. BAA, a skilled political animal, is already marshalling the case for being left well alone by the CAA. It is planning to more than double the rate of capital spending on airport infrastructure and retailing space to pounds 1.4bn over the next three years compared with pounds 681m in the past three years.

Most of this will be spent on expanding retailing space - up to 70,000 extra square feet next year against 50,000 square feet last year - and on making BAA's airports more user-friendly.

With passenger traffic growing at 4 per cent a year - Channel Tunnel notwithstanding - and no new runway expected in the South-east until 2010, spending on extra terminal capacity is vital, BAA argues. So too is planning permission for the proposed fifth terminal at Heathrow, costed at an extra pounds 1bn.

The sub-text of BAA's spending plans is that the CAA should treat it leniently in its review of landing charges. The argument worked once before when BAA's promise to build a fourth terminal at Heathrow helped to secure an easy ride with the CAA. In the end, the terminal came in under budget and BAA was able to pocket the difference. As things stand, BAA's existing price cap slackens significantly over the next three years just as its retailing income growth is set to power ahead again. Loss of duty-free revenues in 1999, worth pounds 80m to pounds 100m, or a quarter of the total retail income, should be absorbed comfortably.

It all seems too good to be true. No wonder BAA shares, up 11p to 949p after an unexpectedly generous final dividend, are on a 25 per cent premium to the market.