Jeremy Warner's Outlook: Now there's a surprise. Inside Northern Rock, there is a perfectly viable business

Headwinds buffet BA amid Terminal 5 woes
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Forget Adam Applegarth's payoff, and the furore over the fact that Northern Rock is footing the bill for security around his home. Forget also the £41m of City fees expended in seeking alternatives to nationalisation.

Infuriating though it might seem for one on the architects of Northern Rock's demise to have been insulated from its pain in this way, or for the City to be profiting from it, these are side issues of little long-term importance.

The real news from the publication of the accounts yesterday is that, despite the kitchen-sinking of the results, Northern Rock remains a company with a quite considerable book value which will be largely unaffected by the plan to halve the size of the balance sheet over the next three years.

The accompanying statement paints a picture of a company in dire straits, and of a high-risk strategy for extracting it from the mire. The truth looks a good deal less challenging than presented and provides powerful ammunition for shareholders claiming the company has been unfairly sequestrated from them.

In almost every particular, the plan outlined yesterday by Ron Sandler, the Government-appointed chairman, is exactly the same as that which the previous management was proposing as a private-sector solution.

Broadly speaking, it involves paying off the Government's £24bn of loans through mortgage redemptions. Northern Rock expects to have completed this process by the end of 2010, but in fact it could be much sooner, as £25bn to £30bn of mortgages are set to mature this year alone.

Once the Government and other short-term creditors are paid off, the job of rebuilding the deposit base and the rest of the business can begin in earnest, with return to the private sector possible towards the end of 2011.

Assuming the Treasury doesn't cock it up – which is all too possible – the Government will then realise a big fat profit out of the endeavour, and Gordon Brown, assuming he is still in power, will be made to look extremely clever.

Yet the only real cleverness has been in persuading the public that stealing the company from its owners is a perfectly reasonable course of action. The Government's defence is that the company would not have been able to carry on trading without its support, and otherwise would have gone into administration.

What is conveniently ignored is that it is the Bank of England's duty as lender of last resort to provide facilities to otherwise solvent banks which have run into funding difficulties. Northern Rock availed itself of these arrangements, and, with the markets for mortgage securitisation remaining closed for much longer than anyone anticipated, has paid a terrible price for so doing.

Yet, as is now evident from the plans unveiled yesterday, it is going to be easily possible to repay all the Bank of England support together with a penalty rate of interest and still have a perfectly viable business at the end of it simply by shrinking the book.

Shareholders come in all shapes and sizes. The employees, encouraged to sink their savings into Northern Rock shares through share-ownership schemes, are obviously more deserving of sympathy than the hedge funds, who in an attempt to turn a fast buck took a high-risk punt.

Nobody is going to be cheering the hedge funds from the stands in their campaign to extract the greatest possible compensation. Yet even assuming they don't succeed, the judicial review of the decision to nationalise is going to make eye-opening stuff which by exposing the true story of what occurred in the run-up to nationalisation will perform an invaluable public service.

The Financial Services Authority has already admitted a degree of negligence in its supervision of Northern Rock. There is going to be a lot more of this kind of thing to come as the courts perform the effective role of public inquiry into the detail of the Northern Rock debacle.

Headwinds buffet BA amid Terminal 5 woes

Well I never. Having rated British Airways a "buy" back in January, analysts at Goldman Sachs reckon that, with the price having since fallen by more than 17 per cent, the stock is now a "sell". Everyone is entitled to change their mind, and, to be fair, quite a bit of water has flowed under the bridge between now and last January.

The revenue outlook has weakened considerably, fuel prices have remained stubbornly high, the onus of air passenger duty has been swapped from the passenger to the aircraft, further increasing the pressure on BA's costs, and, to cap it all, there has been the disaster of Terminal 5.

Most of the blame for this latter fiasco has to lie with BAA, the airport operator, but, whether BA is culpable or not, Terminal 5 was built for the airline's exclusive use, so the public relations damage will fall equally if not fully on its shoulders.

After the years it took to build Terminal 5 and the months of preparation for its opening, it beggars belief that the pair of them could have fouled up on such a scale.

I was away from the cut and thrust of British news last week, but, wherever you were, as a Brit you couldn't have failed to notice this extraordinarily embarrassing story. It was broadcast around the world by CNN, where it was the lead item on the news bulletins.

The contrast with the smooth opening of Lord Foster's new terminal at Beijing airport could hardly have been greater. Needless to say, the comparison is being widely made by those who would challenge London's position as an international hub.

All that said, once Terminal 5 lives up to its promise, the disaster of its opening ought to be quite quickly forgotten. The more serious long-term threat to BA is the rapidly deteriorating economic climate. Open Skies will also mean more competition for BA on crucial transatlantic routes at a time of fewer passengers in the air.

Since the last serious downturn in the aftermath of 9/11, BA has radically remodelled itself, and now supposedly has the flexibility easily to switch capacity to routes where demand remains strongest. BA has already begun to feel the chill on transatlantic routes, but premium travel to Asia remains strong.

But whatever Willie Walsh, the chief executive, has done to reduce the bumps, no airline can fully insulate itself against the double whammy of rapid economic slowdown and exceptionally high fuel costs. Hedging operations will have been only partially successful in protecting BA against the high price of oil.

Goldman Sachs has reduced its earnings forecasts for 2009 and 2010 by 43 per cent and 46 per cent respectively. Much of this downgrade may already be in the price. As you can see from the table of FTSE 100 movers on page 39, BA has been one of the worst performing share prices in the index since the stock market peaked last June, having tumbled nearly 50 per cent.

As the earnings outlook crumbles, so too have share prices across the board. About the only ones to have held up are defensives, oils and those few still attracting bid attention. Carlsberg and Heineken must be regretting their decision to pay top-dollar for Scottish & Newcastle. They could have got the comp-any a lot cheaper had they delayed their approach.

Share prices have had a truly dreadful start to the year, the worst on record. True, there have been steeper falls in the past, but nothing quite as bad as this before in the first quarter. A serious correction is getting perilously close to turning into a full-scale bear market.

The crisis in credit markets again seems to be in remission, but nobody is betting it has gone away for good. As long as conditions remain so uncertain, the buyers will stay away. Share prices may need to fall further still before the cash currently being hoarded is reinvested in productive assets. The nightmare would be if we fall into a Japanese-style deflation, where nobody spends or invests at all. This remains an unlikely outcome, but then most of us were still saying that about a US recession this time last year.