Eddington axes Ayling's legacy. But will it work?

Powder-dry Brown; Amerada/Lasmo
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The Independent Online

Rod Eddington, the new chief executive at British Airways, has wasted little time in axing a key part of his predecessor's strategy, the no-frills airline Go. Few in the City would disagree with the change in approach. The idea behind Go when it was conceived three or four years back by the then chief executive, Bob Ayling, was that it would act as a buttress against the discounters while BA continued to make hay in the traditional full-service market.

Rod Eddington, the new chief executive at British Airways, has wasted little time in axing a key part of his predecessor's strategy, the no-frills airline Go. Few in the City would disagree with the change in approach. The idea behind Go when it was conceived three or four years back by the then chief executive, Bob Ayling, was that it would act as a buttress against the discounters while BA continued to make hay in the traditional full-service market.

In practice, it hasn't worked out that way. BA has long maintained that the no-frills airlines are creating an entirely new market, capturing customers from road, rail and charter, but there is no doubt that at the margins there has been some cannibalisation of traditional full-service customers too. It may always have been wiser to concentrate on the core full-service business, as Mr Eddington is now planning to, than attempt to beat the discounters at their own game.

Even so, Go has not been without its reward. If the mooted sale price of around £500m proves achievable, it will represent an exceptionally good return on BA's original investment. A stock market flotation looks unlikely, if only because it would offer only a partial exit for BA. Go has also only recently broken into operational profits. Though the airline is meeting every aspect of its business plan, its track record is not yet as convincing as that of easyJet, which itself is struggling to get more than a lukewarm response to its own IPO plans.

Barbara Cassani, the present chief executive, would dearly love to run her own show, so will undoubtedly be attempting to cobble together a credible buyout proposal. But a trade sale continues to look the most likely disposal route. Here there are any number of American and European airlines that might be interested in bidding, as well as easyJet, though it is hard to see where it would get the cash from. It is also not clear that easyJet would gain any economies by buying Go. Both are low-cost airlines, but they are based at different airports and on different business models.

But what of BA? Yesterday's second-quarter figures were impressively good, given the backdrop of high fuel prices and the withdrawal of the profitable Concorde service. The strategy of smaller aircraft focused on premium-rate travellers, rather than commodity air travel, seems finally to be paying off. Whether it can continue to do so is still an open question. Much depends on whether other airlines opt to follow BA's lead.

BA's strategy in its core full-service business has long been to fly fewer passengers more profitably. Under Mr Eddington, this approach is being accelerated. Capacity is being shed much more rapidly than previously planned. The closure of unprofitable European routes will take the company further in the same direction.

But if rivals don't follow suit, and instead continue to flood the market with cheap seats, then the revival in profits and share price may prove short lived. It is hard to disagree with what Mr Eddington is doing, but it is a tough old world he is operating in and a return to BA's post-privatisation glory years continues to look a long haul.

Powder-dry Brown

Gordon Brown so often looks across the Atlantic for inspiration that there is a cruel irony in the fact that he seems to be getting as little credit with the voters for the UK's solid macroeconomic performance as presidential candidate Al Gore is in the US. Despite a UK economic expansion of record length, low inflation and mortgage rates a full 4 percentage points below their 20-year average, attention is focused on how little the Government has done for pensioners, the sorry state of Britain's public services and of course the cost of a tank of petrol.

The Chancellor was at pains yesterday, in his speech to the CBI conference, to insist that he would not sacrifice long-term macroeconomic stability for short-run gain. Tomorrow's Pre-Budget Report will find a few billions to pay for concessions to pensioners and hauliers as well as a boost for inner cities, small firms and savers, but revenues have been so good this past year that the headline figures on public borrowing will remain largely the same as in March's Budget. Instead, Mr Brown put an emphasis on trying to achieve American-style productivity performance, and laid much of the responsibility for building a New Economy on this side of the pond on his audience - British business.

A Treasury report issued to flesh out the speech spread the blame for the UK's poor productivity performance even-handedly between government, managers and unions. It also set out a sensible framework for government policy, including getting out of the way when necessary.

But the big question is still whether the Chancellor will be able to remain so prudent all the way up to the general election. The kinds of measures that deliver higher productivity and sustained economic growth work very slowly. Many can take a decade or more to show any noticeable result, and they are incredibly easy to throw away in a binge of public spending and tax cutting. There is a danger the voters will turn out to be much less long-termist than Mr Brown about the economy.

Of course, the conspiratorial view is that with an eye on the general election, the Chancellor is keeping his powder dry for some explosive surprises in the real Budget next March. The timing of the statement - the day after the US election, when the splash story in every national newspaper the following morning will not be Mr Brown's Pre-Budget Peport, but the new President - cannot be anything other than deliberately low key.

Amerada/Lasmo

Ever since successfully fighting off a hostile takeover bid from Enterprise Oil nearly seven years ago, Lasmo has limped along going nowhere in particular. Somewhat disastrously, it overpaid for assets in Venezuela in 1997 and has been floundering ever since. Attempts to revive talks with Enterprise came to nothing.

Now Amerada Hess has stepped into the breach and put the company out of its misery. The price is not a generous one - no more than net asset value - and it is partly in unwanted Amerada paper. That might be enough to tempt a rival, but don't count on it. Earlier this year it would have been possible to buy Lasmo for little more than half today's price, so shareholders haven't done too badly. For Amerada Hess, the main attraction seems to be the Indonesian and Venezuelan assets, but the deal will make it the largest independent oil exploration and development company in the North Sea as well.

Whether this is entirely wise at a time when the Chancellor is known to be considering a change in North Sea oil taxation remains to be seen. Britain has one of the most generous oil taxation regimes anywhere in the world, and with the oil price so high, the profiteering North Sea oil companies make an easy target.

In the end, however, the politics of fuel prices may come to the industry's rescue, at least for the time being. It would be hard to hold the line on fuel duties while simultaneously adding even more to the Chancellor's bulging coffers with a hike in Petroleum Revenue Tax. The Treasury has been tellingly quiet about the issue, which may mean that the worst the industry can expect from tomorrow's Pre-Budget Report is another consultation. We'll see.

* outlook@independent.co.uk

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