19th June 2005
Candour of BAA Directors questioned over Stansted Airport
Over 300 institutional investors and analysts with interests in airport developer BAA will tomorrow (Monday 20 June) receive a letter from Stop Stansted Expansion calling into question the candour of the BAA Board of Directors in opposing the campaign group’s special resolution Resolution 11 which will be voted on at the company’s AGM in July, notably in connection with claims about the performance of Stansted Airport to date.
Resolution 11, whose workability was agreed with BAA’s company secretary earlier this year, seeks to introduce the “50 per cent rule” which would force the Board of Directors of BAA to obtain shareholder approval for investments whose total cost would involve spending more than half of shareholders’ funds.
The commercial logic of proposals for an expanded Stansted remains unproven, a factor which has united airlines at Stansted, Heathrow and Gatwick who are opposed to the increased landing charges and cross subsidy that would be essential for the £4bn development to proceed. These include British Airways, Virgin and BMI as well as Stansted’s biggest customers Ryanair and Easyjet which together account for over 90 per cent of Stansted’s passenger. The need for safeguards to ensure that shareholder value is not compromised as a result of pressure on BAA from the Government to implement its aviation policy is therefore of paramount importance and a key driver behind the resolution.
The letter to institutional investors highlights the fact that despite an abysmal financial track record at Stansted the formal Directors’ Statement asserts that “Stansted has proved a very successful investment for BAA” even though Stansted Airport Ltd has never earned more than about 4% return on investment.
It appears that the basis on which the Directors makes their artful claim rests on the Civil Aviation Authority’s regulatory arrangements that prevailed until 31 March 2003 which allowed underperformance at Stansted to be compensated for by raising airport charges at Heathrow and Gatwick.
This will not however be the case for future investment. Under the new ‘standalone’ system of regulation which applies to all investment from 1 April 2003, cross-subsidisation is no longer allowed. Thus, if any future investment at Stansted fails to achieve BAA’s cost of capital, shareholder value will be destroyed.
Resolution 11 has been brought forward using Section 376 of the 1985 Companies Act. Stop Stansted Expansion used a similar procedure last year to challenge the company’s free parking passes to MPs as political donations. This led to BAA terminating the longstanding political perk.
A copy of the letter appears below. Relevant extracts from the Notice of Meeting including Resolution 11, the Directors’ Statement and the Statement Supporting the Resolution are available on request.
LETTER SENT BY SSE TO INSTITUTIONAL INVESTORS – 17 June 2005
BAA PLC AGM SPECIAL RESOLUTION
You should by now have received the Notice of Meeting for the BAA AGM on 15 July 2005 and I am writing to ask you to give serious consideration to supporting Resolution 11, details of which are contained in the Notice and are also attached here for ease of reference.
In seeking your support for Resolution 11, we are not asking shareholders to pre-judge the issue of major investment at Stansted or anywhere else. Resolution 11 is simply to provide a mechanism to ensure that shareholder approval is ultimately required for any investment project costing more than 50% of shareholders’ funds, i.e. in excess of £2.8 billion on the current calculation.
The rationale behind Resolution 11 is explained in the Notice and it is not necessary to repeat here but we would like to comment on certain aspects of the Directors’ Statement opposing the Resolution.
Contrary to what is implied in the Statement, halting all development at Stansted Airport is neither the aim of the requisitionists nor the purpose of Resolution 11; nor would this be its effect, if approved.
We do not agree with the Directors’ suggestion that adherence to the UKLA Listing Rules is sufficient to ensure that shareholder interests are safeguarded with regard to major transactions. The Listing Rules are not particularly suited to this purpose even for very large capital investment transactions. By way of illustration, we would point out that the Heathrow T5 project was not put to shareholders even though its projected cost was far in excess of the 25% materiality threshold for a Class 1 transaction and, indeed, far in excess of the 50% materiality threshold proposed by Resolution 11.
Some companies interpret the Listing Rules more liberally than others. A case in point is Ryanair [see Note 1], co-incidentally BAA’s predominant Stansted customer, which in the past three years has twice sought shareholder approval for large aircraft purchase contracts with Boeing. In each case the commercial logic was compelling and there was no difficulty in securing shareholders approval.
A requirement to obtain shareholder approval for very large investment decisions would only constrain the directors in circumstances where shareholders could not be persuaded of the commercial logic.
The Directors’ Statement concludes by stating that ‘Stansted has proved a very successful investment for BAA.’ This is a curious assertion given that Stansted Airport Ltd has never earned more than about 4% return on investment. However, under the regulatory arrangements which prevailed until 31 March 2003, the regulator allowed BAA to compensate for the underperformance of Stansted by raising airport charges at Heathrow and Gatwick. This is the only basis upon which BAA Directors can assert that Stansted has proved a successful investment despite its abysmal financial track record.
This will not however be the case in the future. Under the new ‘standalone’ system of regulation which applies to all investment from 1 April 2003, cross-subsidisation is no longer allowed. Thus, if any future investment at Stansted fails to achieve BAA’s cost of capital, shareholder value will be destroyed.
Finally, we would point out that the Company was consulted on the drafting of Resolution 11 and is satisfied as to its workability.
I hope you will give serious consideration to supporting Resolution 11.
on behalf of the requisitionists of Resolution 11
[Note 1] The Listing Rules for the Irish Stock Exchange replicate the UK Listing Rules in all material respects. Ryanair is also listed on the London Stock Exchange.