London City Airport’s sale to a Canadian-led group of investors at a steep premium received a cool reception from both its biggest user and the top U.K. airline, which said they won’t accept the higher fees that might be imposed to justify the price.
Willie Walsh, chief executive officer of British Airways owner IAG SA, said Friday that a deal reckoned to be valued at 2 billion pounds ($2.8 billion) could wipe out already-thin margins.
“We’re not going to be in a position where a new owner can just jack up prices and we’ll continue to do what we’ve done historically,” Walsh said. “If they do increase charges we will carry out our strategy and reduce capacity. If the routes to London City are not profitable, then we won’t go there.”
While London City has increased its passenger tally by 50 percent in five years and is the closest terminal to the U.K. capital’s financial center, it’s a fraction the size of Britain’s leading hubs, faces opposition from leading politicians and is limited in its growth prospects by a runway that can’t take full-size jets.
According to people with knowledge of the matter, the winning bid, from Alberta Investment Management Corp., Ontario Teachers’ Pension Plan and OMERS, is about 44 times London City’s earnings before interest, tax, depreciation and amortization of 45.8 million pounds in 2014, the latest year with available data. No price was given when the deal was announced Friday.
The average multiple for airport deals in 2014 was 17, including debt, according to aviation consults ICFI. Investment funds are increasingly willing to pay top dollar for assets offering stable long-term returns after years of low interest rates.
The CityFlyer arm of IAG’s British Airways unit would most likely shift services to London Stansted, Walsh said. BA said this month that the unit would start flights from the airport 30 miles north of London — which has direct rail services to the banking district — in order to better utilize London City-based Embraer SA planes unable to operate during a weekend flight ban there.
CityJet Ltd., the airport’s biggest carrier, share’s IAG’s doubts about the deal, according to owner Intro Aviation, where CEO Peter Oncken said it had provoked “some concern.” Intro bought CityJet in 2014 after Air France had struggled for 18 months to sell the unprofitable business, and said in October it would bring in 15 Russian Superjet 100s to refresh the fleet.
“I don’t think refinancing the purchase price with higher fees would work,” Oncken said in an interview. “London has six airports, and passengers would think twice about how to get from A to B if one got more expensive. The owners know this and we expect them to come forward to tell the airport users how they plan to proceed.”
While London City, six miles from the main financial district and half that distance from the new banking hub of Canary Wharf, is a favorite with passengers partly because of the modest size of its terminal, which means they can get from the curb to the plane more rapidly than at bigger bases, the ease of travel is partly a reflection of operational limitations.
Because City was built on a quayside on the banks of the Thames its runway is so short at 1.2 kilometers that only regional aircraft can operate with a full fuel load, limiting each flight’s passenger total and range. BA operates the Airbus Group SE A318 fitted with 32 lie-flat business seats there, though must refuel in Ireland in order to complete the trip to New York.
London Mayor Boris Johnson wants to limit operations at City and even close the airport on the grounds that its inappropriate for terminals to be located in urban centers because of the associated noise and air pollution.
Johnson, one of Britain’s leading politicians and seen as a possible future prime minister, last year vetoed a 250 million-pound plan to add aircraft stands, an arrivals terminal and taxiway to help City make an already-authorized jump to 6.5 million passengers a year by 2023, compared with 4.32 million in 2015. An appeal is scheduled to be held shortly.
London Heathrow, the capital’s biggest hub and the busiest in Europe, attracted 75 million travelers last year — or 17 times as many.
The airport’s sale is expected to close on March 10, according to a statement from 75 percent owner Global Infrastructure Partners. The Canadian-led group, which also includes Kuwait Investment Authority, had vied with China’s HNA Group and Cheung Kong Infrastructure Holdings Ltd. to acquire the facility.
Opened in 1987, City was sold to Irish businessman Dermot Desmond for 23.5 million pounds in 1995 before being acquired by GIP American International Group Inc. in 2006. Reports at the time said the companies paid 750 million pounds, though terms weren’t disclosed. Two years later, AIG sold its stake to GIP and Highstar Capital, which will also dispose of its 25 percent holding.