Deloitte proposal revamps aviation industry

Date: 16-05-2008
Source: Financial Times

Advisory giant Deloitte has prompted a novel move in the airline sector.

BMI British Midland is expected to become the first airline to place a balance sheet value on its holding of take-off and landing slots at London Heathrow airport.

The change, which will break new ground in airline accounting, could greatly lift its value ahead of an expected move by Lufthansa, the German flag carrier, to acquire majority control late this year or in the first half of 2009.

BMI is the second-largest operator at Heathrow and controls about 11 per cent of the slots, which could be valued at more than £700m.

Lufthansa holds a call option, which would allow it to acquire the controlling stake in BMI of 50 per cent plus one share held by Sir Michael Bishop, BMI chairman.

BMI is one of several UK airlines including British Airways and Virgin Atlantic, that are studying whether to capitalise their slot holdings in response to proposals put forward by Deloitte, the audit, financial advisory and consultancy group.

If the Deloitte initiative is adopted, it could have a big impact on the value of some airlines, in particular on BA - the leading airline operating at Heathrow, where it controls about 41 per cent of take-off and landing slots.

Deloitte said that according to its analysis the value of BA's landing slots could be at least £2bn compared with a current market capitalisation of £2.6bn.

BA said yesterday: "We have reviewed the study by Deloitte regarding the capitalisation of legacy slots. We have no plans at this stage for capitalising ours."

BMI, expected to release its results for 2007 in the next few weeks, said it had no comment to make on the Deloitte report.

Virgin Atlantic, controlled by Sir Richard Branson, said: "Our initial thought is that we will not be including slots in the balance sheet, but we are continuing to study whether it is sensible to do so."

Singapore Airlines repeated yesterday it was seeking to sell its 49 per cent stake in Virgin Atlantic, which Chew Choon Seng, SIA chief executive, said was an "underperforming investment".

Graham Pickett, aviation partner at Deloitte, said "with such high demand for landing slots, many airlines have realised the slots they hold are very valuable. It is important this value is fairly recognised, so airlines have the potential to use them as security against borrowings".

The issue of accounting for existing slot portfolios has long been a grey area for airlines and their auditors, although British Airways did take a lead six years ago, by including in its balance sheet a value for newly acquired slots. Airlines had previously shied away from capitalising their legacy slots because of uncertainty over accounting rules.

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