A state bail-out for airlines? Strange days indeed

MPC under attack; Interbrew/Bass; Corporate jets
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The spectacle of British Airways going cap in hand to the Government for financial assistance is not one that many of us thought we would ever see. But these are strange days. BA has long been the scourge of state-owned European airlines seeking huge subsidies from Brussels. And yet there they all were yesterday – Rod Eddington alongside Virgin Atlantic's Sir Richard Branson and British Midland's Sir Michael Bishop, making their case for a helping hand from the taxpayer. They didn't, of course, use the word subsidy, preferring to call it a way of ensuring a "level playing field" with others.

In the US, where the industry is suddenly heading for a $5bn loss this year, they don't have time for such linguistic contortions, preferring to call a spade a spade. No one in America is pretending that the $24bn bail-out Congress is being urged to pass by the end of this week is anything other than a straightforward Federal rescue package. Just in case anyone is in any doubt about the urgency, the US carriers are lining up to file for bankruptcy protection, with Continental at the head of the queue.

Faced with such a gigantic safety net for overseas competitors, it is hard to see how the British government can resist the demands of UK carriers for similar treatment. In any case, Stephen Byers, who is now at transport, set a precedent for state subsidies while he was at trade and industry, doling out cash to any industry which came along, be it coal, cars or commercial aircraft.

In the case of the airline industry, it is impossible to know how many of the job cuts and capacity reductions announced since last Tuesday would have been implemented anyway. It is also the case that the US airlines, in their stubborn resistance to tougher security precautions for domestic passengers, have in part been the authors of their own misfortune.

What is clear is that the attacks on the World Trade Centre and the Pentagon have changed the economics of aviation industry in a fundamental and permanent way. Everyone – passengers, airline employees, shareholders and taxpayers – will end up paying some of the price for that. Extraordinary circumstances such as these demand unusual solutions, some of which would have seemed anathema the week before last. Even so, Mr Byers ought at least to wait for the dust to settle before deciding just how dire the airlines' position really is.

MPC under attack

After Monday's decisive action from both the Fed and the ECB, yesterday's quarter point cut from the Bank of England looked limp wristed and half hearted by comparison. The Bank of England was nearly 24 hours behind the others, and the quarter point hardly seems a significant enough order of magnitude to make a real difference to either consumer or business confidence, if indeed that is what the Bank is trying to achieve. To know the answer, we are going to have to wait until the minutes are published, which is not until 17 October. Yesterday's statement from the Bank cast little light on the darkness. A more fulsome explanation would have been welcome.

What this tardy rate cut did lay to rest, however, was the idea that this latest round of policy action was part of a coordinated approach initiated by G7 finance ministers. In fact, each bank seems to have acted entirely independently both of the politicians and each other. The fact that central banks tend increasingly to react to events in a harmonised manner tells you more about the now global nature of most economic problems than it does about attempts to coordinate policy.

The Bank's Monetary Policy Committee is plainly being more cautious than the others, but with the inflation rate unexpectedly rising above the Government's 2.5 per cent target last month, and the UK economy still performing better than any other G7 country, it may be justified. This column has warned repeatedly of the possible dire economic consequences of last week's horrific events, but the truth of the matter is that no one yet knows, and the MPC's wait and see approach may in the end be vindicated. If it is not, then the MPC will certainly have some questions to answer, but it's too early to jump to conclusions quite yet.


Patricia Hewitt's decision to let Interbrew opt for the sale of just Carling, rather than forcing the sale of the whole of the Bass Brewers, seems to allow all parties to retreat with some degree of honour intact, but in truth it's not a satisfactory outcome for anyone – anyone that is except perhaps Heineken, which, with no other logical buyer for the assets around, might secure Carling for a knockdown price.

Take the beer drinking public to start with. The Competition Commission may have been at fault with its procedures when it recommended Interbrew be required to dispose of Bass Brewers in its entirety, but it was right in principle. That disposal would have ensured the continued presence of four major brewers in the UK market, since none of the other three could have bought Bass outright for the same reasons that Interbrew is not being allowed to keep it. Instead, Bass Brewers would have gone to a big brewer not at present represented in the UK market – say South African Breweries or Anheuser Busch – a brewer with enough money and new ideas to make a real difference.

As it is, Carling is highly likely to be sold to Heineken, which as a result is likely to withdraw its own low-strength, Heineken brand from the UK market to concentrate on Carling and premium brands. Some sort of a consolidation will therefore have been achieved, which is good news for the industry, but not for consumers, who are always best served by the largest possible number of serious competitors snapping at each other's heals. With the Carling solution, there is a real danger of the industry settling into a comfortable oligopoly. Furthermore, it allows the concentration brought about by Interbrew in the Scottish market to go unchallenged.

Nor in truth is this a great outcome for Hugo Powell, Interbrew's chief executive. His bet that he would be allowed to keep both Bass and Whitbread doesn't look quite as bad as it did, but it is still bad enough, since Carling is by far the biggest and best of the Bass brands. Mrs Hewitt has settled for a messy and unsatisfactory fudge.

Corporate jets

Just as bad weather is good news for the umbrella and wellington boots industries, there's one corner of the aviation sector for which last week's events are a big boost. No, not fighter jets, but corporate jets. For the last week it's been impossible to charter one for love or money, and the industry is anticipating a big increase in orders. That will pile on the agony for the established airlines, for if this is more than just a short-term dash for the convenience and security of your own private jet, it will eat deep into first class travel. So who's big in corporate jets? Warren Buffett, of course, through NetJet. Not for nothing is he known as the Sage of Omaha, it would seem.