Financial Evaluation Of London City Airport: Ownership, Traffic Characteristics, And Future Changes In An Essay.

London City Airport in an international airport located in Silvertown in the east London. It is a public airport established in 1987. It is a hub for BA CityFlyer and CityJet. The length of Airport is 1508 meter or 4948 feet with grooved concrete. This airport is continuously expanding and developing in to provide better services to passengers for enhancement of their level of satisfaction (Honeywell, 2017). The present study is focused on the financial evaluation of London City Airport by considering its financial performance and traffic characteristics over the year.

The London City Airport began its operations in the year 1978. It is a business airport serving different destinations across the UK, many parts of Europe and the USA. It is a privately-owned organisation in which Global Infrastructure Partners held 75% stake Oaktree Capital held 25% stake until 2016. The private equity owners of the airport pocketed a profit of over £1 billion when they put the fast-rising facility for sale. Global Infrastructure Partners (GIP) which purchased the airport from an Irish businessman Dermot Desmond in 2006 for £750 million sold its 75% stake. City Airport was the longest held asset of GIP which also had Gatwick and Edinburgh (Graham, 2005). It's another private equity holder, Oaktree Capital also sold its 25% share in the company.

Is the airport managed by a group of operators?

On behalf of its clients, the Alberta Investment Management Corporation (AIMCo), acquired 100% share in the company owning and operating the London City Airport. The Consortium includes global infrastructure investors such as Ontario Teachers’ Pension Plan (OTPP), OMERS and Wren House Infrastructure Management Limited. All these investors have a credible track record that has brought substantial operational and financial expertise to the City Airport (Caves and Gosling, 1999).

Since the purchase of its controlling equity by GIP in 2006, the airport has effectively increased passenger numbers to 4.3 million in 2015 from 2 million in 2005. The Consortium is dedicated to the prudent, long-run ownership as well as development of the airport to guarantee its consistent, powerful position and status of an important airport for London (Johnston, 2017). Collaborating with the local authorities and management, the Consortium is supporting the development of amenities and contributing to the successful track record of the London City Airport (Anna, 2017).

The airport has always been owned by group operators; previously the GIP and currently the Consortium. The Consortium has a sound experience as long term operators and owners of European and UK airports. This is apparent through the members’ existing ownership of the Copenhagen Airport, Brussels Airport, Bristol Airport, Birmingham Airport and the Belfast International Airport. The Consortium has also made some historical investments in Sydney Airport and Rome Airport. The group has a proven record of investing in and developing remarkable businesses, building great relations with management, staff, regulators, customers and other relevant stakeholders (Ontario Teachers’ Pension Plan, 2016).

Ownership and Organisation

It is a common fear that when airports are privatised, they will misuse their market power and will not every time operate keeping the interests of the users in mind, reducing the service quality, increasing charges and compromising with the facilities. This has led to the frequent introduction of formal economic regulations simultaneously with privatisation. Though these official systems are not only restricted to privatised airports, but it is common to spotless formal processes only needing government approval of charges at publicly controlled airports (Kay, 2017). Evidently, the process of formal economic regulations adopted by a government has a significant impact on how the airport charges its services, the degree of control exerted by the regulator, in addition to the kind of relations that can be formed between the operators and their customers. Nonetheless, only three co-owned London airports are subject to economic regulation. The London City Airport is not subject to any formal economic regulation because it does not meet the MPT (Market Power Test) of the Civil Aviation Authority. Airports like Heathrow and Gatwick met the MPT and hence, their operators need a license to operate. Such licenses entail conditions pertaining to operational resilience, price controls and service quality among others (Martin, 2017).

The airport does enjoy some autonomy from the state because it is not subject to formal economic regulations. However, LCA is obligated to operate as per the terms of agreements with the regional planning authority. The operator of the airport must provide all the information to the Airport as mandated by local planning agreement, sustenance of community projects and all such future planning schemes. The expansion plans of the airport also suffered a setback when this plan was blocked by the then-London Mayor, Boris Johnson. Expansion of airport faced disapproval on environmental grounds and became a politically contentious matter. However, the plan was given a green signal in July 2016 (Nang Fong and Law, 2014).

The London Assembly intends to view an increasing need for inter-relationship between London City Airport and Heathrow’s consultative committees and contemplate that there would be a benefit in augmenting arrangements for inter-airport liaison. Residents of east and south London are growingly being impacted by aircraft noise leaving and arriving London City Airport. The Assembly seeks to welcome the Government’s proposal of creating a framework that incentivizes noise mitigation more strongly and motivates higher transparency and engagement between local communities and the airport. These proposals of the Assembly and the Government will result in drawing of joint contours for both Heathrow and LCA and other such indicators like flight path density plots etc. Moreover, the LCA will have to adopt a lower threshold than its current 57Db LAeq contour (Neufville and Odoni, 2013). The government is also planning to incentivize the usage of renewable transportation fuels besides the biofuels.

Formal Economic Regulation

There is a single 1500 meters long runway at the LCA and a Public Use Aerodrome License which enables flights for the transport of passengers. The runway length restricts the types of aircraft that can use the airport. Due to its nearness to central London and its location in the Docklands zone, LCA is relatively small in comparison to other airports like Stansted, Gatwick or Heathrow (Ontario Teachers’ Pension Plan, 2017). There is a single passenger terminal building of two stories. Its main passengers are business travellers. However, the number of leisure destinations served has risen in the past few years. The airport is its busiest during the winters, when several airlines, especially City Jet, British Airways and Swiss fly to ski gateway destinations. LCA attained planning approval from the government to start its expansion project. This will raise the yearly flight movements from the present capacity of 70,000 to 111,000 a year (Percival, 2017). It will also give LCA with extra short-haul aviation capacity. A figure demonstrating the top airlines at LCA shows that British Airways has not only maintained its standing at the airport, but it also continues to spread its presence at LCA – having introduced flights to Hamburg, Dublin, Rotterdam and Florence.

Figure 1: Top 10 airlines at LCA

(Source:Anna.Aero, 2015)

The LCA served more than 4.3 million people in the year 2015, which was an 18% hike as compared to 2014. In fact, this was the highest percentage increase among the airports of London. In fact, it is the only airport in the city that achieved its 5^th consecutive year of growth. The London City Airport was the 5^th busiest airports in terms of aircraft and passenger movements serving the London zone and the thirteenth busiest in the United Kingdom (Powley, 2017). This performance is contributed by various things: the busiest summer ever of British Airways; increased rotations on several routes like Luxembourg (Lux Air) and Milan (Alitalia); the first complete year of services by Flybe; and novel destinations like Bern and Basel (Skyworks), Santorini and Mykonos (British Airways) and Cork (Cityjet). With 52% users travelling for business, the growth of 5% year-on-year shows that the trend of business travel to and from London stays kaput in spite of the uncertain political climate. 

A number of passengers witnessed a fast increase from 2003-2008, doubling from nearly 1.5 million every year to nearly 3mn during that time. The numbers reduced during 2009 and 2010 but have since recuperated.

Autonomy From the State

The most popular destinations of the airport were Rotterdam, Zurich, Dublin, Amsterdam and Edinburgh, portraying the rising popularity of London City for both leisure and business customers travelling within the UK as well as to Europe. The year 2016 was also a crucial one for LCA with the completion of its West Pier expansion plan and the request for its City Airport Development Program which was heard later in the spring at a public inquiry. By means of fundamental infrastructure enhancements – an extension of its terminal building, extra aeroplane parking lots and a new lane for taxis – the airport grew more successful, driving East London’s regeneration and improving connectivity within Europe and UK (STARKIE, 2004).

The CEO of LCA is now targeting more inbound customer rise from Dublin. He intends to have renewed services between the regional Irish bases such as Cork and the airport. The importance of London airport, regarding connectivity, is only slated to rise in a post-Brexit, overfilled world, with extra runway facilities at Heathrow at least 15 years away. LCA is about to invest £400 million in expanding its services in the coming four years. This will allow 6.5 million passengers to travel through the airport by 2025. The majority of this business will arrive from Turkey and the Middle East (Topham, 2017).

There is a high level of intersection of general catchments for passenger traffic, and in this respect, the UK airport industry seems to possess a likely competitive structure. There is certainly a level of differentiation in the market: not every airport has the infrastructure for serving long haul flights (though an astonishing number hold this capability), for environmental concerns some have limitations on their operational hours, and the marketplace for freighter operations is concentrated in just some airports. The London City Airport competes with Heathrow, Gatwick and Stansted (Desfor and Schubert, 2010). London City Airport has surpassed the intensifying rivalry in the London market, besides the political impediments. Despite such obstacles, it emerged as one of the fastest mushrooming UK airports in 2015 recording a traffic growth rate of three times the country average.

Table representing revenue and profitability of London City Airport over the years:  

In accordance with the above table, it can be analysed that company is underperforming not only in comparison to its competitors but also the manner in which it performed last year. Reduction in revenue was expected, and same was intimated in last year’s annual report, and it affected its prices for the UK en route and airport services. The revenues of present year are £24.3 m lower in comparison to previous year. These reductions are set off by growth in engineering income, majorly related to Project Marshall Contract.

Future Changes and their Impact on LCA

In accordance with the above financial figures it can be noticed that financial performance of company is not strengthen due to their ineffective operational strategy and increasing cost for airports. However, London Airport is planning to make improvement in their financial performance through their future expansion strategies.

In comparison to global terms, London City Airport is not performing so well in financial terms however Airport is providing exceptional facilities to customers. With their performance, they are able to attain growth of 7.9% in passengers further this percentage is proposed to be increased in near future.

By considering financial statements of London City Airport, it can be noticed that major reason of declining profits is continuous increase in cost. In order to mitigate this aspect, management is investing in updated technologies and quality aspects to reduce cost and make increase in their profitability. With association with government, airport is planning to incentivize the usage of renewable transportation fuels besides the biofuels (Halpern and Graham, 2013). These proposals of the Assembly and the Government will result in drawing of joint contours for both Heathrow and LCA and other such indicators like flight path density plots etc. Moreover, the LCA will have to adopt a lower threshold than its current 57Db LAeq contour to manage their cost structure.

In present era, Airports in world are having diversified sources of revenues through which they do not have to rely only on customary aeronautical revenues such airport charges. As they are continuously developing additional resources such as retail, parking charges, real estate sector, and other related commercial activities. By following global trend LCA had also developed additional resources in order to make increase in revenues. Further strategy of privatization will also assist them in making optimum utilization of available resources to enhance their profitability.

Due to the propinquity of the airport to the residential, commercial and business properties, the LCA has been facing complaints of noise from flights leaving and arriving at the airport. However, the airport acknowledges that this is a critical concern for communities working and residing near the Airport and its Noise Action Plan aims to ensure that it operates accountable for managing the impact of noise on its surrounding areas.

Besides this, the layout and size of the LCA and the overall complications caused due to a shortage of taxiways imply that it becomes highly busy during rush hours. The air traffic controllers ought to handle more than 38 flights per hour on a single runway. In addition to this, the airport’s size, restricted by the water-filled docks imply that there does not exist any covered maintenance facilities for aeroplanes. The LCA cannot be used by single-engine aircraft and helicopters (Mills, 2016).

Conclusion

In accordance with the present study, the conclusion can be drawn that London City Airport is expanding in order to provide better services to customers. In terms of competency, the London City Airport competes with Heathrow, Gatwick and Stansted. London City Airport has surpassed the intensifying rivalry in the London market, besides the political impediments. Further, the airport is required to work on their financial position in order to strengthen their position by making increasing in profitability as well as net worth. 

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