GIP faces pressure to prove itself at Gatwick

22.10.2009   (Financial Times)
By Pilita Clark and Martin Arnold

When Global Infrastructure Partners, the new owners of Gatwick, bought London
City airport in late 2006, they inherited cramped departure lounges, long lines
at security and some of the poorest punctuality figures of any airport in the


Three years and £58m worth of investment later, punctuality has risen from 65
per cent to 87 per cent and average flight delays have been cut from 16 to seven
minutes.   Meanwhile, check-in and security queues have been reduced and departure
lounges have been doubled in size.

Both passengers and airlines will hope that GIP, which announced its £1.5bn purchase
of Gatwick from BAA on Wednesday, will be able to engineer a repeat of that success.

Paul Charles, head of communications at Virgin Atlantic, the largest long-haul
airline at Gatwick, is one of many who admire the job that GIP have done at London
But he also says: "City airport is a minnow compared to Gatwick" and the new
owners need to prove they are not going to be merely "BAA Mark II".

Andy Harrison, chief executive of EasyJet, whose 10m Gatwick passengers make up nearly 30% of the airport’s market, also
welcomed the change in ownership.   But he remains wary of what he calls an ineffective
regulatory system that saw BAA get approval for a 50 per cent increase in airport
charges at Gatwick over five years, "despite the fact that there will be no new
runways and no new terminals".

In other words, GIP is under enormous pressure to prove itself at Gatwick.

GIP partner Michael McGhee says that the group is aware of this and has clear
plans for the airport.

He says: "One key priority will be to transform the whole experience of arriving
at the airport, whether by train or car, through to the departure lounge." That
means addressing long check-in queues, perhaps using similar methods to those
used at London City.

It will also mean targeting different sorts of travellers inside the airport.  
For example, EasyJet is attracting more business class passengers as companies
cut back in the recession, but there are few places for them to sit quietly. Mr
McGhee says that GIP is looking at the problem.

Another plan is a takeaway food outlet near the departure lounge for no-frills
passengers who want a greater choice of food than is available on board.
Larger projects, such as a second runway, are unlikely to be a priority for GIP.  
Virgin’s Paul Charles says capacity is not such a big problem at Gatwick as at
Heathrow, making the runway issue less important.

Of more concern to customers are the questions of how much GIP can invest at
Gatwick, and whether it has the operational skills to take on an airport that
is much larger and more complex than City.

GIP certainly has heavyweight backing. Three of its six co-founders came from
General Electric and the US conglomerate provided it with $500m ( £305m) of financing.

It has a team of about a dozen (mostly ex-GE) operating executives based in Stanford,
Connecticut, who specialise in improving the performance of the companies it buys.

Four of these former engineers will be assigned to work at Gatwick.

"These [our investments] are typically monopolies or quasi-monopolies that have
not been exposed to the full effects of market competition," said William Woodburn,
the former GE executive who runs GIP’s operating team, and who is expected to
join the new Gatwick board.

The Gatwick purchase is a typical deal for GIP in many ways. Unusually for an
infrastructure fund, it uses low levels of debt to finance investments. The Gatwick
deal is being financed with bank debt accounting for only 45 per cent of the purchase

GIP has made nine investments to date, including Argentinian ports, US gas pipelines
and Indian oil and gas storage. But it has only used debt to finance the initial
acquisition of three: Gatwick, London City, and Biffa, the UK waste management

The group says that using less debt at the outset of its deals leaves it with
more room for manoeuvre later on to raise bank finance for investing in the companies
it buys.

Many of the biggest infrastructure investors during the credit bubble, such as
Australia’s Babcock & Brown and Macquarie, used record levels of debt for
their investments on the assumption that they were stable utilities and therefore
less risky. But they ran into trouble when the credit crisis started and the debt
became unfeasible.

"We don’t think the right way to think about these infrastructure assets is through
financial engineering, we think it is about operational improvements," said Adebayo
Ogunlesi, the former Credit Suisse banker, who chairs GIP.

The Gatwick deal means that GIP has invested about half of the $5.64bn fund it
raised last year. The investments it has made to date are carried at above cost.

Its hands-on approach is illustrated by management changes at the companies it
buys, including a new chief executive. A similar shake-up is likely in Gatwick’s

Stansted now on the block but Ryanair’s chief could be a sticking point

First Gatwick, now Stansted. Wednesday’s £1.51bn sale of Gatwick is only the
first of three such deals expected in the UK over the next two-and-a-half years,
writes Pilita Clark.

All have arisen because competition authorities deemed BAA, the country’s biggest
airport operator, has too much market power, an argument airlines and other airport
users agree with.

Until Wednesday, BAA’s seven airports included Heathrow, the country’s largest;
Gatwick, the second largest; Stansted, a big base for Ryanair, Europe’s largest
no-frills airline; Edinburgh, Glasgow, Aberdeen and Southampton.

In March, after a two-year investigation, the Competition Commission ruled that
BAA should sell three airports within two years: Gatwick, Stansted and either
Glasgow or Edinburgh.

BAA put Gatwick on the block the previous year in an attempt to meet competition
concerns. Gatwick was always regarded as the most appealing to suitors. It was
bigger with broader transport links and a better passenger catchment area.

And there was something else: it did not have Michael O’Leary, the outspoken
chief executive of Ryanair, a vocal critic of BAA’s charges and poor services.

As a number of people involved in the Gatwick deal said, Ryanair is an issue
for any potential buyer of Stansted. "Basically, do you want to be the next object
of public ridicule from Michael O’Leary?" said one. "It’s an important part of
due diligence," said another.

BAA this week began appealing against the Competition Commission’s March ruling.
If it wins, it hopes the commission will have to reconsider its whole ruling.
If it loses, it hopes the months taken up by the appeal will mean it ends up selling
Stansted and a Scottish airport in a more amenable economic and financial climate.