FOR any businessman, it would be difficult to imagine a more exalted occasion - a black-tie dinner at Mansion House, the spiritual heart of the City, with 150 of the great and good for company. Alderman Alan Yarrow, vice-chairman of Dresdner Kleinwort, on your right, John Young, senior partner of law firm Lovells, across the table, and a few feet away David Lewis, the Lord Mayor, and John Hutton, secretary of state for business. Decent wines, of course - a 2006 Pouilly-Fume to start, and a 1998 Chateau Grand-Puy Ducasse to follow.

Not the kind of place to be if you have just lost a high-profile job in a very public fashion. Yet on Wednesday night Stephen Nelson, chief executive of BAA, gamely took his seat at the annual Mansion House trade and industry dinner.

That morning, his departure from BAA, which owns and runs seven of the UK’s biggest airports, Heathrow, Gatwick and Stansted included, had been splashed across the front page of the Financial Times, together with the familiar litany of complaints about lost bags, delayed flights and long queues.

The implicit message was clear. Nelson had been forced to walk the plank for failing to bring the airports up to scratch.

As it turned out, Nelson, a tall, youthful-looking 45-year-old with a background in retailing, had little to fear at the Mansion House dinner. Fellow guests were eager to chat, and one even sounded him out for a new job.

Approached by The Sunday Times, Nelson was his usual polite self, but gave little away. “I can’t really talk about it, sorry. But I will read what you write with interest,” he said.

Had he talked, he might have admitted that, having been dealt a difficult hand at BAA, his departure was inevitable. As well as the public vilification, financial and regulatory pressures were steadily mounting on BAA. With Sir Nigel Rudd, a well-known catalyst for corporate change, coming in as chairman before Christmas, Nelson was the obvious scapegoat.

He might have said - though probably not, given his loyalty to BAA - that his departure could be the precursor to something more significant. By the end of the year the system of regulation that has governed Britain’s airports since privatisation in 1987 may be swept away, and with it BAA’s long-held and fiercely defended monopoly in London.

Colin Matthews, his replacement, appears to have an ideal background. A former technical director with British Airways, he knows aviation, and garnered broader business experience at Hays, the logistics group. And he learnt to work in a regulated industry when he was boss of the water company Severn Trent.

But time is not on his side. BAA, owned by a consortium of investors led by the Spanish infrastructure group Ferrovial, faces a difficult six months. The fun will start before Matthews officially takes up the job on April 1.

The Civil Aviation Authority (CAA) is next week expected to set the prices that BAA can charge at Heathrow and Gatwick for the next five years, and is likely to stick closely to recommendations made last year, which gave the airports group big one-off increases in charges, provoking outrage from the airlines.

BAA, however, thinks the price increases are not enough to pay for the £10 billion investment programme it has lined up to revitalise Heathrow and Gatwick - and analysts think they will not stave off wider questions about the group’s finances.

BAA is focused on one key figure, the amount it is allowed to earn from airport assets. The CAA is likely to set this at 6.2% a year. When the Ferrovial-led consortium paid £10.3 billion to buy BAA last year, it was assumed it would get 7.75%.

The difference is crucial. The consortium took out big loans to buy BAA and planned to quickly refinance the deal. It could have cut the cost of its borrowings by issuing bonds backed by the future revenues of Heathrow and Gatwick, a common financial process called securitisation. But events conspired against it. First the uncertainty over the CAA’s decisions put the refinancing on hold; then it got caught in the wider credit crunch.

Matthews and his shareholders will have to find a solution soon. Analysts point out that BAA’s finances are extremely tight. A recent results statement said BAA generated cash of £800m in the first nine months of this financial year, but paid out £890m on its capital spending plans. It had an interest bill of £329m.

Robert Crimes, an analyst at JP Morgan, estimates that BAA could run out of the cash to fund capital spending halfway through next year – a forecast insiders at the group dispute.

Before then, it needs to either complete refinancing or find money elsewhere, perhaps from the sale of assets or a fresh injection of shareholder funds. Joaquin Ayuso, Ferrovial chief executive, said last week: “We have to study alternatives, that’s natural. Even though we do think the refinancing is possible, it is difficult because of the current state of the markets.”

Crimes said in a note to clients last week that he expects the refinancing to begin in April to avoid looming increases in interest rates on the acquisition loans.

The financial tangle would by itself probably be enough to keep management and shareholders busy. But there are potentially more challenging issues just round the corner. BAA’s dominance of the London and Scottish markets (it owns Glasgow and Edinburgh airports) is being examined by the Competition Commission. It is expected to publish its interim findings toward the end of next month, with the full report to follow in August.

Many predict the break-up of BAA. It could be forced to sell one or more of the London airports - with Gatwick the most likely candidate for disposal.

That may not be the end of the competition watchdog’s interest. In a paper on the issues in the inquiry, published last year, it queried the entire basis of airport regulation, questioning whether it provided the right kind of incentives for efficient operation and investment in new capacity. Worryingly for the Ferrovial consortium, it also asked whether the highly indebted nature of the business was a matter for public concern.

Former BAA executives expressed sympathy for Nelson, saying he had faced a difficult task taking on the chief executive’s role after the Ferrovial takeover.

Brian Ross, economic adviser to the Stop Stansted Expansion campaign, which is trying to thwart plans for a new runway at the Essex airport, believes Matthews will struggle under the sheer weight of challenges the company faces.

“Matthews is a tougher cookie but will find, just as Nelson found, that the sheer scale of problems facing BAA renders the current business model unworkable and unsustainable.”

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