BAA chief changes tack

John Egan has revised his strategy for Heathrow's Terminal Five. Peter Koenig reports

ENSCONCED at his table at London's Savoy Grill last week, the conversation dealing in generalities about the aviation business, John Egan was charming but detached. Then talk turned to specifics - to the jump in the number of passengers using Gatwick and Stansted airports last year - and BAA's 58-year-old chief executive changed gears.

"Nineteen ninety-seven was the year of Gatwick and Stansted," he said. "You're going to see continued growth at those airports in 1998. People should stop thinking of Heathrow, Gatwick and Stansted as separate airports and begin thinking about them as parts of a unified London air traffic system."

Mr Egan used the growth at Gatwick and Stansted as a point of departure for sketching out the privatised airport authority's corporate strategy for 1998: go for growth of 10 per cent a year. In pursuit of increased profits, lower the company's political profile.

Almost since its privatisation in 1991, BAA has been pushing for the construction of Terminal Five. Its plans have encountered fierce opposition from local residents and environmentalists. The future of Terminal Five hangs on the outcome of the longest planning inquiry in national history - and no decision is expected for another three years.

Mr Egan's tack this year will be to broaden the debate about Terminal Five into a discussion about the future of London's air transport system. But BAA's opponents over Terminal Five interpret his focus on Gatwick and Stansted as a climbdown. "I am extremely pleased to hear that BAA is finally doing what we have long recommended they do," said Jenny Tonge, the Liberal Democrat MP for Richmond.

"They're getting desperate, aren't they?" added Jim Bailey, head of the anti-Terminal Five lobby group, Airports Policy Consortium.

BAA argues that the growth at Gatwick and Stansted has followed directly from the company's investments there.

BAA had a tough year last year: in addition to the Terminal Five battle, the company had to

absorb a pounds 100m windfall profits tax. Its bottom line was also sapped by pounds 440m it has invested in building the Heathrow Express, due to begin service in June.

BAA has also been diversifying out of the pure airport business. Last year, the City gave its acquisition of Duty Free International mixed reviews. "People are worried about the quality of DFI's earnings," said Wynn Ellis, an analyst at SBC Warburg.

On top of all this, the Asian financial crisis has stirred fears of a collapse in air travel. "Between October and Thursday, BAA's shares fell from 600 to 470," said Mr Ellis.

The company remains confident that Terminal Five will be built but probably not before the present four terminals reach full capacity.

"The delay on Terminal Five triggered new thinking," conceded Des Wilson, BAA's political adviser. The fruit of BAA's strategic review was a decision to improve its links with the London community.

"They have upset people," said Tony Colman, Labour MP for Putney. "When they threatened to increase night flights at Heathrow if Terminal Five was not approved, people said: 'get your tanks off our lawn'."

BAA is now seeking guidance from the Government on what is needed to expand London's air system. Specifically, it is waiting for the publication in March of Deputy Prime Minister John Prescott's White Paper on integrated transport.

Last year, traffic at Heathrow grew 3.7 per cent, to 57.8 million passengers. Traffic at Stansted grew 11.5 per cent to 5.3 million passengers, while traffic at Gatwick grew 11.2 per cent to 27 million passengers. Part of this was due to the growth of discount airlines. The trend should continue this year, as BA launches its own-brand discount airline from Stansted.

BAA does not expect to reach its 10 per cent annual growth target in 1998. The company reported pre-tax profits of pounds 407m for fiscal 1997, down from pounds 418m in 1996. The year 1999 is likely to be tough, too, as duty free is scrapped on intra-European Union flights. But the aviation industry works on long cycles. Mr Egan is positioning the company now for a growth spurt in the longer term.

The company forecasts London air passenger traffic will double between now and 2015, to 180 million a year. It says it can accommodate this rise, assuming Terminal Five is built. Beyond 2015, however, it foresees a need for another runway in the London system. Since Heathrow is a political hot potato, and since BAA has a written agreement with Sussex County Council not to build a second runway at Gatwick until 2019, the odds must be it will push for a second runway at Stansted.

Mr Egan hopes that by this time BAA will have emerged both as the owner of three of London's five airports and as the company linking the network.

"We want to become a bigger part of the community," Mr Wilson said. Mr Egan summed up: "The decision on how London expands its air traffic system has grown too big for us. It must be made by the Government."