BAA braced for future bumpy landing

PROFIT growth at London airport monopoly BAA has soared above City expectations, but is likely to swoop lower this year with slower passenger increases and rising energy costs and business rates.

The operator of Heathrow, Gatwick and Stansted airports reported a 36% rise in pre-tax profits to £733m in the year to 31 March.

While this was inflated by property deals, even underlying earnings were 18% ahead, helped by increased charges to airlines - allowed by the Civil Aviation Authority to help pay for Heathrow's £4.2bn Terminal 5 - and better-than-expected sales in airport shopping malls.

Passenger numbers grew by 6.3% in the year, a better than average performance as air travel recovered after the previous year's slumps driven by war in Iraq and the outbreak of the Sars virus in Asia.

On the back of that, retail sales came in 7.3% higher, with passengers on average spending 1% more than in the previous year, a new high for retail spending at BAA's airports since duty free in the European Union was abolished in 1999.

In addition, income from charging the airlines for take-off and landing slots rose 13% in the year, or a charge on average of 6.4% more for every passenger which many airlines have been unable to pass on because of the current fare wars.

But BAA is unlikely to repeat such a strong performance. Passenger growth is likely to be pegged to 3.5% in the current year - the BAA forecast is between 3% and 3.5% per annum over the next decade - stymied by its airports hitting capacity ceilings with no more available peak take-off and landing slots.

Not only that, but BAA's investment at its terminals will mean an increase in utilities charges, while the group is also about to enter its five-year business rates revaluation which is expected to lead to significant increases.

However, that could in part be offset by a better retail performance. More shops, cafes and bars have been installed after an overhaul at Heathrow's Terminal 1, and the company believes its sales this year were held back by the weak dollar and the increase in the size of the EU, cutting off more dutyfree destinations.

Finance director Margaret Ewing said City analysts had undercooked their forecasts for BAA profits because they had failed to pick up on the earnings growth at the group's international interests in Australia, at Naples in Italy, and in airport management contracts such as the one at Baltimore in the US.

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