Buried near the bottom of the “world-class team” of advisers announced this week by London mayor Boris Johnson to develop a new hub airport for London is the name Ernst & Young, who will, we’re told, advise on “commercial viability”.
A rather unprepossessing term for what is actually a crucial linchpin of a new airport project: working out how it should be financed and if it will pay for itself or will need support from the taxpayer.
Unlike the other advisers mentioned, the Mayor’s office doesn’t spell out the track record in this field of E&Y’s infrastructure advisory team, headed up in the UK by partner Manish Gupta*. But the team has proved itself adept at getting the private sector to pay for airport infrastructure – even when they don’t want to.
In 2011, I discovered that Luton Borough Council wasn’t happy with the performance of London Luton Airport, which they thought could bring in more passengers and revenue. Unlike Heathrow, Gatwick and Stansted, which are privately owned, Luton is owned by the council and leased under a 30-year concession to a private operator, who pays annual fees in return. So the council hired E&Y to help draw up plans for a 57 per cent expansion on capacity by building new facilities (but not new runways). It wanted capacity to rise from 11 million (of which 10 million was used at the time) to 18 million.
Now, the plans weren’t covered by the concession contract, so the operators (a consortium of Spanish firms Abertis and Aena) didn’t have to agree to them. But a break clause in the concession was coming up in 2014, and if the council didn’t get an agreement out of the operator it could exercise the clause and find a new operator willing to carry out the upgrade.
So what did Abertis, as majority owner of the concession, do? It resisted. It complained. It issued a press release. It threatened to charge millions of pounds in termination fees. It issued its own plans, which would, it said, raise capacity to 15-16 million passengers a year. And then it threw in the towel.
Last June, the council and the operators reached agreement to merge their expansion plans. Luton Borough Council got its 18 million target at nil cash cost. Instead, Abertis and Aena got an extension to their contract (from 2028 to 2031). Clearly, they decided that although expansion wasn’t cost-effective for them, it was worth it if it meant holding on to the airport. If traffic does increase as forecast, the council will see its fees rise. This was amusingly reported at the time by the Telegraph, who missed the point completely (the 30 million target they refer to is separate).
The Mayor’s press release says that “under the right conditions, a new hub airport in London, could be delivered with private finance and be operated as a commercial viable business”. Well, Ernst & Young should be able to help him there.
*Gupta and his team also did a report for the Department for Transport on financing options for High Speed 2