黑洞社区

For those with their ear to the ground, last week鈥檚 sudden announcement of the departure of BAA鈥檚 high-profile capital director Steve Morgan was not perhaps a great surprise. Not only has Morgan always maintained that three years is long enough to be in any job, but he was always unashamedly ambitious about the scale of projects he wanted to lead.

And the truth is, the days of megaprojects at BAA are over - for the time being at least.

A combination of economic turmoil, regulatory delays and - overwhelmingly - political paralysis, means that the client that in the last 10 years commissioned Heathrow Terminal 5 (T5) and Heathrow Terminal 2 (T2) will go into its next five-year spending cycle with no major projects on the boil. Instead the sixth quinquennium (Q6), as BAA calls it, starting in April 2014, will focus on getting the new facilities working properly, major maintenance programmes and improvements to existing buildings.

As Steve Morgan said last week, confirming his departure, 鈥淚 didn鈥檛 want to spend the next few years watching the paint dry.鈥�

It鈥檚 a situation that raises questions over what the future holds for BAA. Can it retain the scale to continue to be one of the UK鈥檚 most important and innovative construction clients?

The short answer to the first part of this question is a fairly unequivocal yes. The notion that it will stop commissioning large volumes of construction work is fanciful in the extreme, and in a world where construction output is running 10% below peak, clients the size of BAA are rare indeed. BAA is on course to spend 拢4.5bn over the fifth quinquennium (Q5), 2008/09-2012/13, which includes 拢2.5bn on the Laing O鈥橰ourke and Ferrovial-built T2, currently being fitted out and scheduled for completion in 2014. Confusingly BAA added a further year to the period (Q5+1) in order to deal with ongoing regulatory changes in the sector, covering 2013/14, and it plans to spend 拢879m in that year. Between 30-40% of that is still to be tendered. No small beer.

Shrinking workload

Looking further forward, BAA will not comment on the amount of capital expenditure which might occur in Q6, because it is still consulting with the airlines and the Civil Aviation Authority (CAA) over its five-year plan - the draft of which it published in August. However, 黑洞社区 understands that expenditure will be at least 拢3bn, and could be as much as 拢4bn, albeit with much of that money going on major refurbishment programmes and the completion of a couple of bigger projects, such as the 拢130m integrated baggage facility for Terminal 3. The exact amount will be determined by the airlines鈥� appetite to pay a higher fee to BAA for better facilities for their passengers.

Therefore, whatever the outcome, although the amount of work will shrink and the type of work will change, BAA will clearly not be withdrawing from the market. One contractor who currently works for BAA but asked not to be named, said: 鈥淥ur guys still see an incredibly healthy pipeline of work coming through. It鈥檚 not the 拢100m jobs that were being commissioned, it鈥檚 smaller improvements. But you look at the things that BAA thinks of as smaller jobs and they鈥檙e still 拢40m-odd.鈥�

In this political and economic climate it just doesn鈥檛 make sense for BAA to spend more expanding capacity

Source close to BAA

However, BAA鈥檚 importance to the construction industry has over the last decade been measured not just in the volume of work, but in the importance of one-off new-build schemes. And it is this that is likely to change. The decision by the government to oppose a new runway at Heathrow has meant that that project, potentially worth up to 拢10bn, is on hold indefinitely, along with its corollary project, the proposed Terminal 6 (T6) building that would have served it.

David Cameron鈥檚 decision to appoint the economist and former director general of the Confederation of British Industry Howard Davies to review the situation, reporting only after the election, means any resolution is at least three years away.

Indecision at the top

The cancelling of this scheme is just one consequence of the government鈥檚 indecision over its aviation strategy. Heathrow - and BAA - is facing a sustained political campaign which is not just about opposing an additional runway, but, if successful, could see a new hub airport constructed elsewhere in the South-east, and Heathrow鈥檚 capacity actually reduced.

Daniel Moylan, aviation adviser to London mayor Boris Johnson said last weekend that Heathrow should, over time, be reduced to a one-runway airport serving just 20 million travellers a year - it currently serves 70 million.

Heathrow is also under acute commercial pressure, with 25 million fewer passengers having travelled through Heathrow in the last four years than it had predicted. The lower numbers are down to a combination of global financial meltdown, snow, an Icelandic volcano and the slower than expected introduction of new larger planes such as the A380, with greater passenger capacity for each landing slot. All of which means any investment to expand capacity looks potentially very risky for BAA鈥檚 owners. One source close to the company said: 鈥淚n this political and economic climate it just doesn鈥檛 make sense for BAA to spend more expanding capacity. There鈥檚 no point building much more on the ground without more capacity in the air from a third runway.鈥�

This means that other major schemes, such as the further expansion of Terminal 2 - the so-called T2 second phase, worth between 拢1.5bn and 拢2bn - are now unlikely to be considered until the very end of Q6, which runs until 2019, at the earliest. It was originally hoped it might be finished by this date. Nothing can be finally decided until BAA鈥檚 plan has been agreed with the Civil Aviation Authority (CAA) in the next few weeks, but the published draft Q6 business plan excludes the expansion of T2. BAA said: 鈥淭here are on-going discussions with the airlines and the CAA on further plans and developments at Heathrow.鈥�

What impact the current changes have on BAA鈥檚 reputation for innovation as a construction client is even harder to tell. During the first decade of the century BAA was the shining example of the John Egan-friendly client, embracing collaboration, frameworks and partnering to deliver consistently more than 拢1bn in construction every year. With Morgan鈥檚 arrival in 2009 it also became one of the first to react to the grimmer reality of the recession, ripping up its existing frameworks, seen as too cosy by some, and re-introducing competitive tension. One contractor says: 鈥淪uddenly it wasn鈥檛 the soft, cosy, 鈥榳ho鈥檚 next?鈥� kind of framework environment that some people had got used to. He did a lot for Heathrow.鈥� Morgan claims to have saved BAA 拢300m by implementing the changes.

However, at both times BAA was seen by many as leading the pack in terms of construction procurement. Replacing Morgan will be John Holland-Kaye, BAA鈥檚 current commercial director, whose background is not in procurement. Holland-Kaye, also a member of BAA鈥檚 executive committee, arrived at the same time as Morgan from Taylor Wimpey, but has focused on increasing the firm鈥檚 commercial revenues from things like parking and retail space, rather than procurement. It is unclear whether Holland-Kaye, who declined to talk to 黑洞社区 for this piece and does not start in his role until 1st November, will continue Morgan鈥檚 approach. He said in a statement: 鈥淎lthough we鈥檝e made great strides, there is still a huge amount to do. Our next regulatory settlement is just around the corner [and] I鈥檓 looking forward to leading the team and continuing to improve the airport for our passengers and airline partners.鈥�

After a recent history at BAA that comprises megaprojects T5 and T2, and some of construction鈥檚 biggest names such as Crossrail chief executive Andrew Wolstenholme, former Laing O鈥橰ourke deputy chief executive Tony Douglas and, most recently, Morgan, it鈥檚 clear that Holland-Kaye will have a lot to live up to.

Key projects to April 2014