BA reveals bold ambitions, but realistic ones

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The Independent Online
Has Sir Colin Marshall been at the aviation fuel again or what? Profits doubled by the turn of the century? Scope for pounds 1bn worth of efficiency gains? What does the man think he's running, a privatised utility?

The sceptics will no doubt pour scorn on the impressive and admittedly ambitious efficiency programme set out yesterday by British Airways. And indeed an element of caution probably is appropriate. There are few industries more cyclical than air travel and there are few businesses more prone than airlines to being blown completely off course by extraneous influences such as moustachioed Middle Eastern tyrants.

But the proof is, as they say, in the pudding. In the last five years BA has carved pounds 900m out of its cost base without any adverse impact on service. At the same time the main airline has achieved remarkable organic growth while also managing to bolt on new capacity in the shape of Qantas, USAir and a pair of regional European airlines.

Not all of this has fed through to the bottom line by any means because of the curious economics that dictate airline performance. To stay at the top of the heap BA has had to invest massively. Making more seats available, particularly if they are to far-flung parts of the globe, can hurt yields in the short term because the further a passenger flies the less an airline makes out of them per mile.

But if any airline is capable of delivering then it is BA. It possesses a priceless asset in the shape of a third of all the take-off and landing slots at Heathrow, the world's busiest international airport. For that reason the rest of the world airline industry is constantly knocking on its door. Provided the anti-trust objections can be overcome, BA might be about to secure a transatlantic alliance of mouth-watering possibilities with the last of the great unclubbable carriers - Bob Crandall's American Airlines.

Some passengers, however, are hard to please. The market took one look at BA's grand vision - alongside a set of record pre-tax profits - and reacted as if it had just found a cockroach hidden under the creme brulee. That is a pity because, if nothing else, Sir Colin is doing what the fund managers would surely want of him - setting targets against which the company's performance and that of its management can be tested and demonstrating by similar means how well it has so far done. More companies should be following BA's lead.

This season's fashion: the share buy-back

From Barclays to Safeways, PowerGen to Reuters and Guinness, share buy- backs and whacking great special dividends seem to be all the rage. If you cannot think of anything worthwhile to do with your money, give it back to shareholders, seems to be the latest corporate mantra. Among the utilities, it has a special piquancy, for if the company cannot think of proper uses for its money, the regulator sure as hell will; he'll take it away from you.

Is there anything wrong with the craze? Certainly it is possible to see it as a symptom of unimaginative and unadventurous management. Outside the Anglo-Saxon world it is virtually unheard of for companies to pay back their capital; somehow or other, Continental and Japanese companies always seem to find a use for it. Despite Britain's new low-inflation environment, British businessmen still seem to require impossibly demanding returns from any commercial investment. Their failure to invest on a scale necessary even to ensure existing capacity is updated is a real cause for concern.

But there is an alternative and more benign way of looking at the phenomenon. To begin with, it tends to be confined to cash-rich sectors. There has yet to be a buy-back in the manufacturing industries so often accused of under-investing. Moreover, share buy-backs and special dividends are, in essence, rights issues in reverse. For years, the tendency among British companies was to raise money on the stock market just to pay it back in dividends, or worse still, as happened in the case of Barclays in the late 1980s, to blow it on profligate and costly expansion.

Seen in this light, the share buy-back is a healthy development, ensuring that companies focus themselves and their capital on the things they do best. If the markets are doing what they are supposed to, the excess capital gets redistributed, ultimately finding its way into better and more deserving investment opportunities. Enterprise, innovation and proper commercial investment, far from being damaged by the buy-back, all get to benefit from it.

There is no denying the size of the phenomenon. Taken together with the very substantial number of cash takeovers of the last few years, there has been a sizeable transfer of cash from the corporate to the institutional sector. The amount of capital being taken out has exceeded the amount being raised. It will not always be thus, however. The corporate sector as a whole turned cash-negative towards the end of last year. As a result, the trend could soon be reversed; the amount of capital being sought might exceed that being paid back. We can but trust that once the begging bowl does come out again, the institutions will be there and ready to help. The City can expect little mercy from Labour if they are not.

Time to flog off the family plutonium

Think of the most mistrusted industry in the land and privatise it. Slice the odd billion or two off its debt and write the assets down by a half. Make sure the advertising campaign contains only the most subliminal references to what it actually does. Finally, under-price it so that even Sid can't look this gift horse in the mouth.

Yep, the sale of British Energy is almost upon us. No sooner has Railtrack gone to a runaway first-day premium than the Government is preparing to foist a collection of second-hand nuclear power stations upon us.

The predictability of these privatisation exercises has become so remorseless that the Government's highly paid entourage of advisers must surely these days tell the time not by the sun, the stars or a clock but by what stage the marketing campaign has reached.

We have had the ritual row about the balance sheet. We have had the ritual tome of in-depth research from the Government's investment banking advisers.

Let's see. That means it must be time to start massaging price expectations down. What did we first think it might fetch? Really, as much as pounds 2.8bn. Let's slice pounds 1bn off that, run it up the flagpole and see how quickly the saliva glands start working.

What do you mean that's less than it cost to build just one of these wretched stations? With a bit of luck Labour will soon be kicking up a fuss - family plutonium being flogged off on the cheap and all that. Nothing better than a bargain, is there?

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