London City Airport sale could push leading carriers to leave

LONDON / Bloomberg

London City Airport’s sale to a Canadian-led group of investors at a steep premium received a cool reception from both its biggest user and the top UK airline, which said they won’t accept the higher fees that might be imposed to justify the price.
Willie Walsh, chief executive officer of International Airlines Group (IAG) SA, said that a deal reckoned to be valued at 2 billion pounds ($2.8 billion) could wipe out already-thin margins.
“We’re not going to be in a position where a new owner can just jack up prices and we’ll continue to do what we’ve done historically,” Walsh said. “If they do increase charges we
will carry out our strategy and reduce capacity. If the routes to London City are not profitable, then we won’t go there.”
While London City has increased its passenger tally by 50 percent in five years and is the closest terminal to the UK capital’s financial center, it’s a fraction the size of Britain’s leading hubs, faces opposition from leading politicians and is limited in its growth prospects by a runway that can’t take full-size jets. According to people with knowledge of the matter, the winning bid, from Alberta Investment Management Corp., Ontario Teachers’ Pension Plan and OMERS, is about 44 times London City’s earnings before interest, tax, depreciation and amortisation of 45.8 million pounds in 2014, the latest year with available data.

Top Dollar
The average multiple for airport deals in 2014 was 17, including debt, according to aviation consults ICFI. Investment funds are increasingly willing to pay top dollar for assets offering stable long-term returns after years of low interest rates.
The CityFlyer arm of IAG’s British Airways (BA) unit would most likely shift services to London Stansted, Walsh said.
BA has recently affirmed this month that the unit would start flights from the airport 30 miles north of London — which has direct rail services to the banking district — in order to better utilise London City-based Embraer SA planes unable to operate during a weekend flight ban there.
Runway limit
“I don’t think refinancing the purchase price with higher fees would work,” Intro Aviation CEO Peter Oncken said in an interview. “London has six airports, and passengers would think twice about how to get from A to B if one got more expensive. The owners know this and we expect them to come forward to tell the airport users how they plan to proceed.”
While London City, six miles from the main financial district and half that distance from the new banking hub of Canary Wharf, is favourite with passengers partly because of the modest size of its terminal, which means they can get from the curb to the plane more rapidly than at bigger bases, the ease of travel is partly a reflection of operational limitations.
Because City was built on a quayside on the banks of the Thames its runway is so short at 1.2 kilometers that only regional aircraft can operate with a full fuel load, limiting each flight’s passenger total and range.

POLITICAL DIMENSION
London Mayor Boris Johnson wants to limit operations at City and even close the airport on the grounds that its inappropriate for terminals to be located in urban centers because of the associated noise and air
pollution.
Johnson, one of Britain’s leading politicians and seen as a possible future prime minister, last year vetoed a 250 million-pound plan to add aircraft stands, an arrivals terminal and taxiway to help City make an already-authorised jump to 6.5 million passengers a year by 2023, compared with 4.32 million in 2015. An appeal in this regard is scheduled to be
held shortly.
London Heathrow, the capital’s biggest hub and the busiest in Europe, attracted 75 million travelers last year — or 17 times as many.
The airport’s sale is expected to close on March 10, according to a statement from 75 percent owner Global Infrastructure Partners. The Canadian-led group, which also includes Kuwait Investment Authority, had vied with China’s HNA Group and Cheung Kong Infrastructure Holdings Ltd. to acquire the facility.