A message from our CEO
The last 12 months have been perhaps the most significant year in BAA's history. Our £11.6 billion acquisition of the company by a Grupo Ferrovial-led consortium was followed by major security disruption at our UK airports after the summer's alleged terror plot. In the autumn, UK's competition authorities started a review of the UK airports market.
Our new shareholders have taken ownership of BAA for the long term. This has been demonstrated by their backing for BAA's investment in improving customer service. Improved customer service means clean airports, run for the benefit of passengers, keeping them safe, secure and satisfied. The highest available standards of security. Minimal queues at security, car parks and shops. Clear signs, plentiful trolleys, friendly staff. My aim for BAA is a high quality passenger experience at all our airports, delivered more efficiently than ever before. I recognise we have some way to go.
It sounds simple, and in some ways it is, but there is also much stifling complexity. BAA's London airports are a regulated monopoly and that system of regulation has barely altered in the 20 years since privatisation. The UK approach to airports regulation involves not one economic regulator but two: the Civil Aviation Authority and the Competition Commission. Conducted across a sequence of five-year cycles, each price review takes a good two years of highly detailed work to determine. In the latest cycle, the CAA has proposed a return on capital of just 5.9% - 6.2% for investment at Heathrow. This process is ongoing, but shareholders should be in no doubt that we do not consider this an attractive return for their money, given the scale, complexity and risks involved in our investment plans for Heathrow, and we will pushing the regulatory authorities hard to provide genuine incentives to invest.
Under our new ownership, BAA is answerable to the strictures of financial markets, yet it has now been 20 years since airports regulation was put into place and in that time it has remained, conceptually, almost unchanged. This is why we have urged the UK's Office of Fair Trading, which has investigated the UK airports sector - to focus on reviewing BAA's regulatory framework as well as the ownership of BAA's airports. I do not consider that there is a case for the break up of BAA. That said, if the OFT and the Competition Commission do take the view that some or all of the London airports are competing in a substantial way with each other, then it follows that there is a case for lighter regulation or even deregulation.
Despite the summer's disruption, BAA delivered a good financial performance - as reflected in the numbers: UK passenger numbers up 2.5% to 148.3 million, underlying revenues increased to £1,833 million* and underlying operating profit rose to £577 million*.
BAA is also focused on long-term development and growth. In 2003, the UK Government published its White Paper on the Future of Air Transport, which called for two new runways to be built in the south-east of England, the first at Stansted and the second at Heathrow, if environmental conditions can be met, or, failing that, Gatwick. It also recommended that land around Edinburgh and Glasgow airports should be safeguarded for expansion. This policy, reconfirmed by the Government in 2006, gives BAA the prospect of growth for the next 25 years and we have already made considerable progress in planning the new runways.
BAA is in the business of delivering great service to passengers. We are ready for the challenges of today's marketplace. We own some of the world's most valuable airports and we intend to invest in their growth. Furthermore, we will do all of these things in a way which takes a far-sighted but realistic view of the environmental issues faced by our industry.
For more details about the year in review and the challenges that lie ahead, please watch my webcast.
Stephen Nelson, Chief Executive Officer
* All financial figures reported are for the nine months to 31 December 2006, with comparative figures against nine months to 31 December 2005.
