Turbulence at Luton Airport

In previous issues of Infrastructure Investor, we’ve noted the increasing risks of contracting with governments and public authorities – risks that the private sector may not previously have taken into account. One obvious example was the Spanish government reneging on the tariff regime it originally put in place for investors in the country’s solar photovoltaic industry. It was greeted with outrage by the investors concerned, who have subsequently launched a legal action. But public counter-parties will argue – given the severe fiscal pressures they are under – that they simply have no choice than to try and save money, no matter how draconian the method used.

One fascinating situation to arise recently was the quarrel that blew up between the UK’s Luton Borough Council (the Council), the owner of London Luton Airport, and private Spanish infrastructure operator Abertis, which is running the airport under a 30-year concession agreement that commenced in 1998.

The Council called for a dramatic expansion plan involving the doubling of passenger numbers at the airport to 18 million – which would make Luton bigger than Manchester and Stansted airports. The  Council sees the opportunity to take advantage of burgeoning demand in the south-east of England, and also the restrictions on growth at other airports around London. But Abertis said the plan was unrealistic, pointing out in a statement that “only a small amount of new terminal build” was envisaged as part of the plan. It asked: “What level of congestion and throughput during the busiest hours does the Council think is acceptable to passengers?”           

While the Council may choose not to answer that question, it has been quick to point to a break clause in the concession contract with Abertis that could be triggered in 2014. While it has not come out and said, “back our expansion plan or you’ll lose the contract” (at least, not to our knowledge),
Abertis at least appears to be concerned about the possible implications.

Hence, its response referred to above. As part of the same statement, Abertis highlighted “airport developments and related improvements delivered by us to date” and urged that further development be “based on the core considerations of safety, feasibility, sustainability and environmental sensitivity”. It added that in due course it would be presenting its own plan for the expansion of London Luton (presumably a rather less eye-catching one in terms of projected growth).

At this point, you might think that the Council has played its hand rather well. After all, surely there’s little to lose in applying some pressure on Abertis to back its plans – with the break clause providing it with some useful leverage. Even if Abertis does not back the expansion plan in its entirety, it might be persuaded to at least deliver a compromise. There’s just one problem with this theory – Abertis has some rather powerful leverage of its own, to the tune of several hundred million pounds. That is believed to be the kind of sum that would be owed to Abertis in compensation for the remaining years of the concession were it to be terminated in a couple of years’ time.

Budget reductions

On the face of it, therefore, it’s hard to see why the Council has made its case so forcefully. You can certainly see why it would want to sweat its airport asset to the limit. Last year, the airport reportedly made a £23 million (€27.1 million; $36.4 million) contribution to the Council’s coffers – money which it reportedly spent on charitable causes and a new swimming pool. In a recent statement, the Council says it has been making budget reductions of £35 million over the last two years and that “ongoing government cuts will cause us further challenges over at least the next two years”. All the more reason why driving growth – and revenues – at the airport makes sense from a fiscal point of view.

Paying out a huge sum in compensation would almost certainly not make sense, however. It makes you wonder there’s something else that the Council has up its sleeve. A third party, perhaps, that might be prepared to pay the compensation itself in exchange for its part in a new commercial arrangement? That, of course , is pure speculation.