Luton Airport capex tussle threatens Abertis lease

The local council wants to double passenger capacity at Luton Airport before 2020. But Abertis, the airport’s operator until 2028, is balking at funding the council’s plans, prompting the latter to publicly announce it may break the concession contract in two years’ time.

A storm is brewing over London’s fast-growing Luton Airport, with the local council and the airport concessionaire at odds over how quickly airport capacity should be increased and, more crucially, who should foot the bill for the proposed expansion.

The row emerged over Luton council’s recently announced plans to double the airport’s capacity to 18 million passengers a year through a series of optimisations to the airport’s existing infrastructure, since the UK government has precluded increasing runway capacity around London.  

As the council sees it, Luton Airport is well positioned to capitalise on a predicted shortage of airport capacity in south-east England by 2020, and wants to double the airport’s capacity “well ahead of time to meet this need”. At 18 million passengers a year, Luton Airport would be bigger than Stansted and Manchester airports.

But there is a problem: Spanish developer Abertis, the operator of Luton Airport until 2028, is not keen on footing the bill for the council’s expansion plans, which sources close to the company view as “unrealistic”. This has led a senior Luton council official, Steve Heappey, to tell The Times newspaper:

“The reality is that there is 16 years left on the [concession] and that leaves very little time to make a return on what would be a major investment to expand the airport. To grow the airport, we could consider breaking the concession and going to the market with a longer-term contract to support the development.”

On its website presenting the expansion plans, Luton council says it “has the opportunity to terminate the current concession agreement with effect from 2014,” although it stresses “no decision has yet been taken and will not be taken for some time”.

The public threat has prompted Abertis to respond with a statement outlining that “if the council decides to terminate our concession in order to implement its proposals, it will have to make a termination payment to us reflecting the value of the remaining years of the concession and certain other liabilities,” adding, without mentioning figures, that “such a payment would be very substantial”.

Sources close to Abertis pointed out that the compensation payment could be worth several hundreds of millions of pounds. They also expressed surprise at the council’s threat to break the concession agreement, but felt it may be a negotiating tactic in the battle to decide which side will foot the expansion bill. 

In its statement, Abertis points out that the “Department for Transport forecasts long term UK passenger growth at 2 percent per year,” adding that “its 2050 forecast for Luton Airport is 17 million passengers per year”.

The Spanish firm then goes on to ask who will foot the bill “to cover the cost if passenger numbers do not reach the level provided for in the council’s plan?” It also question how an expansion that will make Luton bigger than Stansted or Manchester airports – without increasing runway capacity – will affect congestion at the airport.

Abertis said it will present its own “sustainable” expansion plan for Luton Airport later this month. The firm, which has run the airport since 1998, has been responsible for trebling the number of passengers at Luton from 3.4 million at the start of the concession to 10 million today, it said in a statement. Abertis added that Luton was “the fastest growing London airport in 2011” and the UK’s fifth-largest airport.