Baa Plc Business Information, Profile, and History

Company Perspectives:

Our mission is to make BAA the most successful airport group in the world. This means: Always focusing on our customers' needs and safety; Achieving continuous improvements in the profitability, costs and quality of all our processes and services; Enabling us all to give of our best; Growing with the support and trust of our neighbours.

History of Baa Plc

BAA plc is a holding company for the world's largest organization of airports. BAA owns and operates seven major airports in the United Kingdom--Heathrow, Gatwick, Stansted, Glasgow, Edinburgh, Aberdeen, and Southampton. Originating as a government-owned enterprise known as the British Airports Authority, BAA became a private company in 1987 and has achieved a position of preeminence in airport development in the United Kingdom and around the world. BAA also provides management services for eight airports around the globe, including airports in the United States, Australia, Italy, and Mauritius. The company's retail services division, which includes restaurants and stores in airports, contributes more than half of BAA's annual revenues. BAA also is involved in property development.

Government Control: 1919-87

Great Britain's commercial airline industry began in 1919, when the Department of Civil Aviation was established as a division of the government's Air Ministry. When foreign competition nearly forced most British airlines out of business in 1921, the government provided temporary financial relief, and two years later, the Civil Air Transport Subsidies Committee was established to investigate long-term solutions to the airlines' economic struggles. The result was the 1924 formation of the government-owned and operated Imperial Airways, the first in a long line of British airlines under state ownership.

Although World War II brought a halt to commercial aviation, wartime aeronautical developments left the industry poised for advancement when hostilities ceased. Under the postwar Labour government, the expanding industry consisted of three state-run airways corporations: British Overseas Airways Corporation (serving the Commonwealth, North America, and the Far East), British European Airways (covering domestic and short European flights), and British South American Airways. Air traffic control facilities and the airports under development at this time also were run by the state.

Expansion in the industry was inevitable and remarkably swift during the 1950s, as air travel became a popular means of transportation. Faced with increasing numbers of passengers and technological developments in commercial aircraft, British airports strove to provide efficient, smoothly running, and attractive facilities that would lure the business of the country's most successful airlines.

As the boom in air transport continued into the 1960s, the burden of maintaining a network of state-of-the-art airports proved too complex and cumbersome a task for the government, and British airports began losing money. In 1965, the British government passed the Airports Authority Bill, which created a single statutory body to own and oversee operations of the country's airports while remaining answerable to Parliament. The following year, the new British Airports Authority officially took control of Heathrow, Gatwick, Stansted, and Prestwick. Under the direction of Chairperson Peter Masefield, the British Airports Authority transformed the industry from a bureaucratic operation, similar to that of a public utility, into a profitable semi-independent business.

Rapid Growth and New Challenges Following Privatization: Early 1990s

During the 1970s and early 1980s, airport profits rose dramatically and a program of expansion and refurbishment was undertaken. In fact, the industry's increasing success prompted the Conservative government to consider the Authority a prime candidate for a privatization program it was planning for some of the country's industries. Toward this end, the Airports Act of 1986 permitted the creation of a new company, BAA plc, a public holding company for airports. The ensuing advertising campaign for BAA stock was designed to appeal to a wide variety of investors. In one publicity stunt, the company hired people to dress up as Harry Heathrow--a teddy bear character created especially for the promotion--and carry placards around airport terminals advertising BAA's initial stock offering price of 245 pence per share. With nearly two and a half million applications, the stock was oversubscribed ten times and the flotation--on July 16, 1987--was a resounding success. BAA fared well since its public offering. From 1987 to 1993, passenger numbers increased by 42 percent, BAA's share price more than tripled, and profits increased by 130 percent.

Among BAA's established operations during this time, none rivaled the rapid growth and success of London's premier airport, Heathrow. Originally envisioned as a ring of city airports, the 'London Airport--Heath Row' was planned during the war and opened in 1946. At that time, tents served as Heathrow's terminals, while its offices were set up in vans. Eventually a more substantial terminal, the North Side Terminal, was established and remained in use through the 1950s, when it was replaced by the Europa terminal, later known as Terminal 2. The Heathrow Oceanic terminal (which became Terminal 3) opened in 1961, followed by two more terminals in 1968 and 1986.

By the 1990s, Heathrow was the world's busiest international airport. During this time, BAA proposed construction of a third runway at Heathrow. Whereas airlines welcomed the idea of expanded facilities, local residents and environmental groups, including the Federation of Heathrow Anti-Noise Groups, were strongly opposed to the plan, which would have involved the demolition of some 3,500 homes in surrounding villages. In the face of such protests, BAA withdrew the proposal in May 1994. Similarly, BAA's plan to build a fifth terminal at Heathrow met with opposition. The terminal, expected to increase Heathrow's annual passenger capacity from 50 million in the early 1990s to 80 million by 2013, was criticized as involving further noise pollution and traffic jams in the area. BAA argued, however, that new aircraft technology, including the development of larger aircraft, would allow more passengers without necessitating more planes and increased noise levels.

Although some remained skeptical of BAA's promises, the company maintained that it was simply planning to ensure that London's airports remained adequately equipped to keep up with increasing demand. With 30 percent of Heathrow's business consisting of connecting flights, rather than final destinations, BAA faced the potential threat of competition in this sector from airports in Amsterdam, Brussels, Paris, and Frankfurt, which were poised to accommodate customers. Public inquiry into the feasibility of BAA's fifth terminal was set to begin at the end of 1994; construction was not expected to be completed before the 21st century if at all. Nevertheless, BAA continued to expand services at Heathrow and worked on the construction of a new flight connection center in the mid-1990s.

The second largest BAA airport servicing the London area was Gatwick, located 27 miles south of the city. During the late 1940s and early 1950s, Gatwick was known primarily as an airport for charter flights or as an alternative in the event of bad weather at Heathrow. Major reconstruction completed in 1956, however, helped Gatwick develop into a popular international flight destination. Plans to purchase more land and add a second runway to Gatwick stalled in 1979, when the British Airports Authority agreed with the West Sussex County Council that it would not pursue expansion for 40 years.

When Stansted Airport, established in the London area in the 1940s, was designated for expansion in 1967, strong local opposition forced the Authority to relocate Stansted off the Essex coast, in Maplin Sands. In the early 1970s, plans for expansion at this site also were abandoned, when the oil crises and economic recession prompted predictions of declines in passenger volume. By the late 1970s, however, increasing air traffic was inevitable and the expansion of Stansted seemed imminent, particularly since competition from nearby foreign airports, especially in Amsterdam, had intensified.

Again, the Authority found itself embroiled in a lengthy public debate of the issue. In addition to environmentalist objections to the expansion, several airlines, including British Airways, protested the move, preferring their existing arrangements at Heathrow and Gatwick. Moreover, another interest group, the North of England Regional Consortium, representing northern regional airports and local authorities, lobbied to fill the growing market by developing provincial facilities rather than expanding Stansted. In 1985, a compromise was reached under which Stansted would undergo development in phases monitored by Parliament.

Despite its ambitious $400 million redevelopment program, which garnered numerous awards for architecture, environmental sensitivity, and marketing, Stansted did not meet expectations for increased capacity and profits. In fact, in 1993, American Airlines withdrew its services from Stansted, and the airport reported heavy losses. During this time, Stansted's direct competitor, Luton, claimed that BAA was unfairly subsidizing Stansted from profits derived from Heathrow, creating artificially low prices in an effort to attract customers.

In addition to its London airports, BAA also acquired facilities in Scotland, including airports at Prestwick, Edinburgh, Glasgow, and Aberdeen, during the 1960s and 1970s. Until 1990, Prestwick was the only Scottish airport allowed to accommodate transatlantic flights. Then, under the government's new 'open skies' policy, several airlines began gravitating toward the more popular sites of Glasgow and Edinburgh, boosting profits at these airports and prompting BAA to sell the relatively unprofitable Prestwick airport. Although BAA's Scottish airports service significantly fewer passengers than its London airports, the growth rate for Scotland's air travel industry surpassed that of London in 1993. Thus BAA expected its Scottish airports to play an increasingly more prominent role in U.K. commercial aviation.

Although a healthy percentage of BAA's profits reflected fees levied on the airlines that used its airports, the bulk of BAA's profits during the early 1990s was generated from an auxiliary enterprise: retail sales. Attracting many large retailers and caterers, BAA established vast shopping complexes at its airports, which featured outlets for Harrods, Yves St. Laurent, Burberry's, The Body Shop, Cartier, McDonald's, Burger King, and several others. Retail profits also were bolstered by companies providing car rental and parking lot operations.

Unlike most commercial operations, BAA's retail sales were unaffected, in large part, by the economic recession of the early 1990s. In fact, while retail chains across the nation suffered losses, their airport branches reported healthy profits. Analysts suggested two reasons for this surprising statistic: many shoppers at airport stores were from foreign countries mostly unaffected by the recession, and air travelers on the whole were likely to have more disposable income than the average consumer. To offset expected retail losses beginning in 1999, when Europeans would no longer be able to purchase duty-free goods, BAA increased retail space in its London airports by 50 percent between 1992 and 1994. Restaurant operations at the airports also were expanded and diversified. The phenomenal success of BAA's airport shopping facilities prompted its mid-1990s joint venture with the U.S.-based McArthur Glen Realty to develop and operate outlet malls--where manufacturers sell directly to the public--in the United Kingdom and Europe.

An acknowledged expert in the industry, BAA increasingly put its experience to use in a variety of consultancy roles. In 1992 the company won a contract from the Greater Pittsburgh International Airport to develop and operate that airport's shops and restaurants. Moreover, as a designer of modern facilities known for their efficiency as well as their aesthetic merit, BAA secured several consulting contracts throughout the United Kingdom, Australia, Japan, Mexico, Hungary, St. Lucia, and the Bahamas and played a prominent role in the planning of new airports in Hong Kong and Kuala Lumpur. Forecasting, engineering, computing, and market research were among the other skills that BAA offered its clients.

In response to increasing public concern for the environment, BAA created an Environment Department to address issues surrounding the airline industry's role in noise pollution, air quality, water quality, and wildlife preservation. The company published a policy statement, affirming its commitment to environmental conservation, and began the annual publication of a report on its performance in these areas. In the mid-1990s, BAA explored options to acquire equity stakes in airports around the world. Despite the strength of its retail and consultancy operations, BAA's commitment to this core business was evidenced by its plans to continue refurbishing and upgrading its airport facilities.

International Expansion and a Changing European Climate: Late 1990s

To prepare for the impending end of duty-free shopping in Europe, BAA focused on expanding its international retail operations in the late 1990s. In 1996 the company acquired Allders International, the international duty- and tax-free business of Allders plc, for about £130 million. Allders International operated stores in the United States, Europe, Canada, and Australia. The majority of its shops were located at airports, on cruise ships and ferries, at border crossings, and in city centers. BAA added to its duty-free holdings in 1997 with the acquisition of Duty Free International, based in the United States. A year later the company integrated its international duty-free operations and formed World Duty Free plc, a holding company. Duty Free International was renamed World Duty Free Americas Inc., and the U.K. operations were renamed World Duty Free Europe Limited. A new World Duty Free flagship store was opened in Heathrow Airport's Terminal 3 in 1998, and the company continued to open new stores and introduce new concepts, including a specialty wine store, cigar store, and watch store. By the late 1990s World Duty Free was the global leader of the $20 billion duty-free market, with a five percent share. European operations consisted of more than 70 airport stores, U.S. operations had more than 160 stores at airports and border crossings, and World Duty Free Inflight offered duty-free products on 28 airlines.

The duty-free operations made up only a portion of BAA's retail activities, however, and the company strove to grow its commercial businesses around the world. In 1998 the company secured a new contract to operate the retail, food, and beverage operations in two terminals at Newark Airport in the United States. In March 1999 BAA signed a 15-year contract with Eurotunnel to operate the retail facilities in terminals at Folkestone and Calais/Coquelles. In 1998 about 13 million people traveled through these two terminals.

Not only did BAA operate retail concessions and duty-free shops, but the company also, through joint venture BAA McArthurGlen, developed and operated designer outlet centers in Europe. In fiscal 1999, which ended March 31, 1999, BAA opened four new centers to push its total number to seven. Plans to open an additional four centers in 2000 and 2001 were under way as well. The partnership also sold interests in three centers in 1998 and 1999. Total retail revenue, including duty-free operations and concession and retail elements, reached £1,033 million in fiscal 1999, an impressive 17.8 percent increase over 1998 sales, which were £877 million. Of the total, 43 percent came from airport retail operations and 47 percent from duty-free businesses.

First and foremost, BAA was known for its airports, and the company continued to strengthen its airport operations in the late 1990s. According to BAA, 112.5 million travelers passed through its U.K. airports during fiscal 1999, a 7.6 percent increase over the previous year. With traffic projected to continue increasing, BAA invested time and money into developing efficient, safe, and exciting facilities. During fiscal 1999 alone the company spent £512 million to improve and expand current facilities. Traffic at Stansted increased by 35.4 percent, making it the fourth busiest airport in Britain. BAA opened a new international satellite building at Stansted in early 1999 and planned to invest more than £200 million over a five-year period to increase the airport's capacity. BAA's other airports enjoyed increased traffic as well. Gatwick saw about 30 million passengers, an 8.1 percent rise over 1998, and BAA's three Scottish airports enjoyed an increase in traffic of six percent, to 13.8 million travelers. Heathrow also served more passengers--61 million, a rise of 4.9 percent. To accommodate more travelers, BAA sought to expand capacity at Heathrow. Its plans for Terminal 5 met with opposition from the middle to late 1990s, and in March 1999 the public inquiry ended. The fate of Terminal 5 then went into the hands of the British government, which was expected to provide a decision in 2000 or 2001.

BAA's airport operations were given a significant boost in June 1998 when the Heathrow Express was unveiled. Owned and operated by BAA, the Express provided rail service from London's Paddington Station to Heathrow Airport, offering a convenient alternative to road travel to Heathrow. The trains traveled at speeds of up to 100 miles per hour. In other airport matters, BAA's property development arm, BAA Lynton, chose to focus more closely on airport-related properties and thus planned to sell its nonairport-related investments by the end of fiscal 2000. BAA Lynton worked on three developments at Heathrow in 1998, constructed an office building at Stansted, and finished a cargo warehouse at Glasgow.

Despite healthy revenues and continued growth, BAA hit a snag when duty- and tax-free sales in the European Union ended on June 30, 1999. Although BAA was committed to maintaining the duty- and tax-free prices for European travelers, sales dropped more severely than expected; BAA attributed the decline to confusion about the new rules--although only tobacco and alcohol sales were affected, many travelers believed the rules applied to other products as well, thus impacting their shopping decisions. In addition, BAA's duty-free operations in the United States continued to underperform. BAA blamed the poor performance on major renovations of several large U.S. airports and the decline in the number of border crossings in North America. For the first half of fiscal 2000, BAA's duty-free operations reported a £1 million operating loss. The company also announced that overall pretax profit before exceptional items for fiscal 2000 would probably be at least £30 million below the market forecast of £505 million. As a result of the October 1999 announcement, BAA shares fell more than 17 percent.

In October 1999 Sir John Egan, chief executive since 1990, retired and Mike Hodgkinson became the new CEO. Though BAA faced new challenges and difficult conditions, Hodgkinson remained optimistic about BAA's future. To educate travelers about the new duty-free rules, BAA launched a marketing campaign, coupled with sales campaigns at airports. Passenger traffic at BAA's airports increased 5.1 percent during the first half of fiscal 2000, and duty-free sales seemed to have slowed and reversed its downward spiral.

At the turn of the century, BAA remained committed as ever to the business of operating airports and specializing in travel retail operations. The company planned to continue growing its international presence and perhaps exploring new ventures--talk of privatizing Britain's air traffic control services led many to speculate on whether BAA would become involved. As a dominant force in worldwide airport operations, BAA worked to realize its avowed goal of becoming 'the most successful airport company in the world.'

Principal Subsidiaries: Heathrow Airport Limited; Aberdeen Airport Limited; Southampton International Airport Limited; Edinburgh Airport Limited; Gatwick Airport Limited; Glasgow Airport Limited; Stansted Airport Limited; World Duty Free plc; World Duty Free Europe Limited; World Duty Free Americas, Inc.; BAA Lynton; BAA McArthurGlen Europe Limited (50%); BAA McArthurGlen UK Holdings Limited (50%); Cheshire Oaks Limited (12.5%); BAA McArthurGlen Europe S.A. (50%; Belgium).

Principal Competitors: Lockheed Martin Corporation; National Express Group PLC; Serco Group plc.

Chronology

• Key Dates:

• 1924: British government forms its first government-owned and operated airline--Imperial Airways.
• 1965: British government passes the Airports Authority Bill.
• 1966: The newly formed British Airports Authority takes control of Heathrow, Gatwick, Stansted, and Prestwick airports.
• 1986: Airports Act paves the way for the formation of BAA plc, a public holding company for airports.
• 1987: British Airports Authority is privatized and carries out an initial stock offering.
• 1990: BAA acquires Southampton airport.
• 1998: The Heathrow Express rail link to London's Paddington Station opens.
• 1999: Duty-free shopping in the European Union ends.