Now boarding: The aviation sector

It might not be a bad time to head for the airport - and not just because of the distinct December chill in the air. The airline industry in the UK carries 235 million passengers each year and over 2.3 million tonnes of freight. In terms of construction, BAA will spend over £16bn at Heathrow over the next 10 years, and £1.1bn will be spent on refurbishing and improving Gatwick over the next five. Birmingham airport is looking to extend its runway and there is about £300m of work in the pipeline at Stansted, as BAA looks to improve the airport’s assets before selling it off in the next 18 months.

It’s an exciting time in aviation at the moment. There is a lot happening, particularly around Heathrow, and there is a lot to look forward to there and at other airports

Sean Kelly, Wilson James

Then there is the fact that the airport and aviation sector is not reliant on government spending: “In the middle of a recession or in tough economic times, any sector which is not subsidised and where investment comes from outside government sources is worth looking at seriously,” says Michael O’Callaghan, director of aviation at Morgan Sindall. “And the aviation sector in the UK is the second biggest in the world after the US.”

While the sector doesn’t rely on government funding, it does need backing for projects. And in last week’s autumn statement, chancellor George Osborne suggested that this would be the case for all airport projects bar the third runway at Heathrow. His implicit support for a £50bn airport in the Thames Estuary, designed by Foster + Partners, was particularly well received by industry.

But with the opportunities, so too must come the challenges. The economic crisis has had a dramatic impact on passenger numbers, particularly across Europe - in Athens, they are down by as much as 30%, while in the UK the drop is nearer 10%. It could also be argued that the renewed talk of a Thames Estuary hub and the shelving of Heathrow’s third runway has merely increased uncertainty over the future of the airports sector in and around London. And with the major airport operators still using frameworks for a proportion of their major construction projects, just how much of this work is available to be won anyway?

We spoke to some of the key clients and major companies operating in the aviation sector to find out where the opportunities were, and how easy it was for other - particularly smaller - firms to get involved.

‘An exciting time’

With the lion’s share of the upcoming work in this sector based at Heathrow, BAA’s programme control director, Stephen Livingstone, explains a bit about what’s in the pipeline: “Our shareholders have continued to secure funds to continue with the investment plans we set in 2008 which was a spend of £4.3bn up to 2013. In 2012 we will invest in excess of £1bn and in 2013 we will spend around £700m. Although a lot of the works for 2012 are now under contract with the main contractors, there is still a great deal of subcontracting work for tier two, three and four companies in 2012. And in 2013 and beyond, all of our works will be tendered and everything is still available to be won. Next year we will see a lot of major projects going into fit-out and refurbishment phases which will create a lot of opportunity for companies with this sort of expertise.”

Much of this fit-out work is at the new Foster-designed Terminal 2 building, but BAA has hinted that, from 2013, attention will turn to the upgrading and refurbishment of the 99 million m² Terminal 3, estimated to be worth £1bn over the next 10 years.

At Gatwick, meanwhile, there is a £5.5bn programme in the pipeline covering the next five years, with a large proportion yet to be tendered. The airport, which was bought by US investment fund Global Infrastructure Partners from BAA back in 2009, is also in a comparatively rude state of financial health, bucking the trend of many of its rivals as they suffer from declining passenger numbers. Last week it reported a 43% rise in operating profit to €139m (£119m) in the six months to the end of September, while passenger volumes rose by 8.5% year on year to 19.7 million. Announcing the results, Stewart Wingate, the airport’s chief executive, said: “We continued to implement our €1.4bn investment programme during this period, investing in excess of €23.4m each month to deliver improved facilities for our passengers and airlines.”

It is expected that this investment will continue throughout 2012 and beyond, particularly against the backdrop of such strong results.

“It’s an exciting time in aviation at the moment,” says Sean Kelly, aviation operations director at Wilson James. “There is a lot happening, particularly around Heathrow, and there is a lot to look forward to there and at other airports. Sensible long-term planning and appropriate expertise has seen this sector become significantly more resilient in recent years.”

Morgan Sindall is currently working at Heathrow, Gatwick and at some of the UK’s other regional airports, including Birmingham and Manchester. Director of aviation O’Callaghan agrees that there are plenty of opportunities, especially for SMEs: “Every airport in the UK is almost an infrastructure hub or small city in its own right. There are about 76,500 people working at Heathrow every day - it really is a small city. So much needs to be provided - not just the airports but the supporting infrastructure, the pavements, runways, stands, hangars, factories, shops, hotels, pubs, food outlets, car parks. And main contractors like us need specialists to make this happen - lots of them.

“To put it into context, we are working on one £50m building at Gatwick and we will need to work with in excess of 25 major subcontractors and another 70 smaller firms on this scheme alone. The majority of that work is still available. In terms of how much work we have available as one firm, across the UK at the moment - I would say £2bn.”

He adds that there is likely to be a spate of additional refurbishment and improvement work as airports respond to the proposal that the airport regulator, the Civil Aviation Authority, will have the power to fine airports for poor performance - for example, if there was a repeat of the problems caused by the snow last year at Heathrow.

Beyond the capital

And it’s not just the major London airports with work up for grabs. Paul Willis, head of aviation at consultant EC Harris, says: “Birmingham is looking to extend its runway, Edinburgh is looking set for sale formally next year, which will create opportunities as a result, Stansted will be sold [after the Competition Commission ruled that BAA had to offload it, along with either Glasgow or Edinburgh], probably in a couple of years, and so will be investing around £300m in its assets before then. And there is ongoing development work happening at Manchester airport, too.”

He adds that opportunities overseas should not be discounted, as UK firms with previous experience in the sector are well received by foreign clients and developers. And while the European market is being hit hard by the current economic situation, it’s a different story in Asia and South America: “Europe is under pressure at the moment with passenger numbers right down. But in Asia there has been an explosion of opportunity in the airports sector as countries are responding to dramatic growth. China and India are the particularly active areas - the second airport in Beijing, which we are working on, will be the biggest in the world at 700,000m2. That’s compared to 450,000m2 at [Heathrow] T5, so you can see just how big this project is. And the design and construction work is all still available and very much open to UK companies as far as I can tell. There has been no concern over us working on the scheme. Generally in the UK we have a lot of good British firms in this sector working overseas as expertise is welcomed by the international clients.”

Gridlock fears

While the opportunities sound tempting, this sector does need to be approached with some caution, particularly at a time when the global economic situation is dissuading people from spending on overseas travel. “There is some nervousness in the sector,” concedes EC Harris’ Willis. “We are seeing a slowdown in traffic numbers as less people want to spend money on flights and we will be keeping a careful eye on what happens over the Christmas season. Then there are the ongoing challenges around the future of the London airport portfolio. Personally, I feel that the Heathrow expansion plans are paramount to aiding the UK economy, but it appears a state of gridlock has been reached with government on that one.”

The drop in passenger traffic has, inevitably, had a knock-on effect on how this sector is faring and Nigel Cole, head of aviation at Mace, says that as airport clients are desperate to cut back on spending, winning work is becoming increasingly competitive - with inevitable consequences: “Clients are looking for exceptional value and for the contractor to take on as much risk as possible at the moment. This means that one or two contractors are pricing extremely low, and they are likely to win the work as a result. It’s not something we’re prepared to do but we have 20 years’ experience and expertise in baggage systems, which puts us in a slightly stronger position than some others who might be priced out.

Every airport in the UK is almost a small city in its own right. So much needs to be provided. and main contractors like us need specialists to make this happen - lots of them

Michael O’Callaghan, Morgan Sindall

“In terms of how contractors are, or could respond to this I would recommend looking at each project individually and making a decision based on the situation, scheme by scheme. If you have a general statement saying you’ll deliver certain things across all projects, this is where you’ll come unstuck.”
Cole adds that tendering for work is not the only challenge in the market at the moment. there’s also the small matter of delivering schemes to clients’ exacting criteria: “Clients are very tough in aviation and airports. They have significant expectations regarding the delivery and quality of each and every job, which is quite arduous in terms of time and manpower. You have to abide by the rules and regulations and you have to make sure you have the resources to deliver the scheme you have promised to the client’s standards. You have to perform excellently every time and all the time. I think this high level of pressure will continue through 2012 as passenger numbers are unlikely to rise significantly over the next year.”

Winning the work

The trick, as in any tough market, is to know exactly what the client wants. Industry figures are quick to identify many of the usual suspects: experience of similar projects, the ability to demonstrate value for money, and to deliver on time and on budget. BAA’s Livingstone adds: “We want our supply chain to understand exactly what we’re aiming to deliver. My advice to firms wanting to get involved would be to research us, understand exactly what we do and talk to our ombudsman. Then we can ensure we contact the existing supply chain at the right stage to ensure the best possible chance.”

Perhaps the key phrase here is “the right stage” - companies may need to wait until there is a requirement for their particular expertise. For example, 2012/13 is likely to be a good year for refurbishment and fit-out specialists to approach tier-one contractors at Heathrow and Gatwick, as many major projects are reaching their final phases.

Livingstone also stresses the importance of fresh approaches, and suggests that this may offer a way into the BAA fold for new companies: “There needs to be a focus on new technology and innovation, from BIM through to LEED. And of course, our key challenge is to always offer absolute value for money - we want our supply chain to come up with new, fresh ideas on innovations that will help us achieve this.
“We are looking for firms with a clear differentiator - what can you bring that nobody else can?”