BA's house broker forecasts life-threatening loss

It's Duffield again
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The Independent Online

It's hard to make much sense of what's going on in the global airline industry right now. On one side of the ledger we have the big US and European full-service airlines announcing dramatic cuts in capacity and ever more scary levels of operating losses. Ahead of half-year figures today, British Airways' house broker, Merrill Lynch, forecasts that for the year as a whole, the airline will be an astonishing £775m in the red before exceptionals, a level of loss which without urgent and dramatic remedial action would seem to put the company's financial viability in some jeopardy. Certainly BA's position in the FTSE 100 will be history at the next review of constituents, and a rescue rights issue looks like more and more a possibility at some stage in the next year.

Meanwhile, on the other side of the ledger, the discounters are piling on the passengers, buying up aircraft and talking confidently of more to come. Then there's that whopper of an order for new Boeings and Airbuses from Emirates, a comparative tiddler on the world stage but with ambitions to more than double its fleet to over 100 aircraft by the end of the decade. At around $15bn of new aircaft, its order is said to be one of the biggest in the history of the industry.

The Europeans and Americans talk about chronic overcapacity, highlighted by the events of 11 September, but few experts argue with industry forecasts suggesting that air travel will double over the next 15 years. Emirates and the discounters are looking beyond the present collapse in demand for air travel to the sunlit pastures they believe lie just beyond the horizon. The established airlines are not.

There is always the possibility that airline traffic won't recover to past levels, that the threat of repeated terrorist attack becomes becomes a permanent deterrent to air travel, and that the travelling public may not as a consequence recover its nerve. But no company in its right mind would unambiguously bet on such a long-term contraction in the market.

The history of air travel is that the industry always recovers from every setback thrown at it and eventually grows afresh. The terrorist atrocities in New York and Washington were plainly more serious in their psychological impact than anything that has gone before, but time is a great healer and it seems much more likely than not that the market will in time recover. The only questions are when and, perhaps, in what form. What the burgeoning losses, layoffs and capacity reductions for the full-service airlines tell you is not so much that they they don't think there's a market any longer for airline travel, but that there may not be one for the type of service they have been offering.

Most of the travelling public would much prefer the sort of cheap, no-frills air travel the discounters have begun to offer to the uniformly more expensive proposition served up by the national flag carriers. Nearly every country in the world has one of these national totems which, because of the way they confer landing rights elsewhere, have become like another branch of international diplomacy. They only exist because they are both subsidised and charge too much for their seats. So here's the overcapacity problem the established airlines talk about. It is not a real overcapacity problem at all, but only one of the industry failing to deliver what the market requires.

There will, of course, always be some sort of a constituency for full-service airlines. The frequent business traveller is one, and the richer, price insensitive traveller is another. BA, with its deliberate strategy of moving out of bigger aircraft towards smaller ones servicing mainly the upmarket business traveller, has been trying to address this shift from well before the events of 11 September. But the strategy wasn't complete and, as it happens, the terrorist atrocities seem to have hit already weak business demand even harder than the tourist market, particularly on the all important transatlantic routes.

There was a sharp rebound in the share price yesterday after the group reported a smaller-than-expected fall in passenger numbers for October and made some encouraging noises about demand for December. Nobody's banking on it, though.

BA has stripped out huge amounts of cost over the last five years, but nowhere near enough to cope with the present catastrophic collapse in demand. The discounters seem to be equipped with the business model to survive. Many of the flag carriers are not. At this stage, it still seems rather unlikely that BA would be among the casualties. The general assumption has been rather the reverse – that BA might act as a focal point for consolidation in Europe and beyond. But then few predicted the collapse of Marconi either, and the loss for BA forecast by Merrill is big enough to cripple all but the world's largest corporations. Rod Eddington, the man behind the joy stick, faces a huge challenge in pulling the airline out of its nose dive.

It's Duffield again

Carol Galley put on a masterful display of cool headedness on her first day of cross examination at the High Court yesterday, but elsewhere in the normally grey and eventless world of City fund management, tempers were becoming more than a little frayed. This was in the industry's other big public washing of dirty linen – John Duffield's acrimonious and very public divorce from Jupiter Asset Management.

Brunswick, a public relations firm employed by Mr Duffield, has been attempting to blacken Jupiter's name by circulating journalists with Companies House records drawing attention to the £47m loss Jupiter suffered in calender 2000. The association might not have come to light but for the fact that Brunswick helpfully attached a complements slip to every brown paper envelope sent out. This newspaper, by the way, elected to ignore the material on the basis that it didn't tell us anything new. Others were less choosy.

Who knows what purpose was meant to be served, but presumably the idea was to demonstrate that Jupiter is not to be trusted with other people's money and that perhaps they should instead switch their money to Mr Duffield, who has set up a rival business called New Star.

All's fair in love, war and business, Mr Duffield might argue, and certainly it's the case that in the back-biting world of personal finance, there's nothing new in off-the-record rubbishing of the competition. Accept that this one really is a bit below the belt. Jupiter's loss is entirely explained by write-offs that Mr Duffield authorised before he left, and in any case operating profits have since improved markedly.

Mr Duffield's record as a fund manager and entrepreneur is impressive, but this latest episode displays an unbecoming level of petulance and bitterness which has little place in a business who's prime purpose should be to serve investors, not pursue personal vendettas. Jupiter understandably takes the view that enough is enough and is consulting its lawyers, which will be the third time it has been to law with Mr Duffield since he left.

But perhaps the grown-up thing to do is simply ignore it. As it happens, New Star's performance with the two funds it has so far launched has been average to poor. In one of the two cases, European Growth, New Star is being outperformed by Jupiter's equivalent fund. There is as yet little evidence of the "star" touch promised.

j.warner@independent.co.uk

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