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 capital.
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 City.
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 per cent 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 price.
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 group.
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 management.
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