Jeremy Warner's Outlook: BAE's Mike Turner is doing the right thing in baling out of Airbus, even at a cut-price rate

Sarin gets his man at Vodafone; Fence-sitting by CBI on immigration
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The Independent Online

Mike Turner, the chief executive of BAE Systems, is going to get an awful lot of flak for it, but here's why he should, and almost certainly will be accepting the Rothschild valuation and offloading his 20 per cent stake in Airbus after today's board meeting formally to decide the matter. Expect news of the disposal to be confirmed by the end of the week and possibly as soon as today.

The case against is easily enough made, if only on the sentimental grounds that it severs all ownership links between Britain and its proud history of civil aviation. Parts of the Airbus programme will continue here, for the time being at least, but ownership will lie wholly with the Franco-German aerospace goliath EADS, which bizarrely has itself recently become partly Russian owned. Not much cause for celebration there then.

What's more, the £1.9bn BAE is poised to accept for its interest is a pale shadow of what it was originally hoping for. BAE doesn't need the money. Should it wish to go shopping for more US defence assets, it already has quite enough unspent credit to fund whatever it fancies. In which case, wouldn't it be better for BAE to bide its time in the hope that the valuation eventually improves?

And there's the rub. The harsh reality is that we are already at the top of the aviation cycle, making further improvement highly unlikely. In cyclical terms, it may well be all downhill from here on in. The Rothschild valuation is plainly a disappointment, though hardly a surprise after the EADS warning of delays to the superjumbo, but it still represents a tidy £1bn profit on book value, all or some of which will be available to return to shareholders.

BAE is these days a highly successful defence contractor in which the Airbus interest sticks out like a sore thumb. Strategically, it has no value to BAE, which for better or worse has chosen its course and intends to stick to it. It makes no sense to have capital tied up in a business over which BAE has no operational, management or strategic control. The point was powerfully underlined by the warning of delays to the superjumbo, which were as much a surprise to BAE as everyone else. BAE was neither responsible for the management shortcomings that created these problems nor did it have any inkling of them until it was too late.

Nor do concerns over the passive use of capital stop at the £1.9bn already tied up. Airbus remains an intensely capital-hungry business, which would require BAE as a 20 per cent stakeholder to continue funding its share of future development needs. As essentially a Franco-German alliance, Airbus's approach to the battle of the skies being fought with Boeing is likely to be decided more on grounds of political expediency than commercial reality. It was only quite recently that Airbus triumphantly announced that it had overtaken Boeing in terms of production and sales, yet there are plenty of reasons for thinking this just a temporary success soon likely to be reversed. The smart money is on Airbus already being a busted flush.

The superjumbo looks more like a white elephant by the day, the development costs of the A350 have doubled, the A320, which historically has been been the workhorse for Airbus, is out of date and will soon have to respond to planned upgrades to the 737 by Boeing, and, last but not least, the euro-dollar exchange rate has moved powerfully against Airbus over the past year. Producing in euros but selling in dollars at the present rate of exchange adds up to only one thing - a thumping great loss.

It's always possible that, by staying in, BAE will eventually get a better price, but it may be an awfully long wait, and in any case the stronger likelihood is that it will end up with even less. PwC has been auditing the Airbus position on BAE's behalf. There's not much there which allows BAE seriously to challenge the Rothschild valuation.

Time to bale out? You bet it is.

Sarin gets his man at Vodafone

Poor Arun Sarin, beleaguered chief executive of Vodafone. News that he's bringing Vittorio Colao back as deputy chief executive and head of Vodafone's European operations has only further fanned the flames of speculation that Mr Sarin is about to get the chop. Is this appointment not a sign that Sir John Bond, the chairman, is already flexing his muscles by lining up a successor?

There is still a vociferous minority of shareholders gunning for Mr Sarin, and, as long as they are, he'll never entirely quash rumours of his imminent demise. But in fact Mr Colao is Mr Sarin's appointment, not Sir John's, and a very good one he looks too. He was already a Vodafone high flyer when he left to take the job of running RCS Mediagroup back in his native Italy three or four years back. That didn't work out for him, so now Mr Sarin has lured him back to the key job in Vodafone after his own - that of sorting out the company's fast-maturing European operations.

It's going to be quite a challenge. Revenues are still growing, but only just. With prices deflating at the rate of 15 to 20 per cent a year, Europe's mobile phone operators are having to sprint just to stand still. It's proving hard verging on the impossible to return to past rates of robust growth.

Mr Colao's job is to find new ways of stimulating revenues - broadband, mobile advertising or simply driving more usage and volume. At the same time, he's been instructed to take the axe to cost. Surprisingly, people are only a small part of total costs. The greater inroads will be through outsourcing, reducing the complexity of networks and procurement. It has never been entirely clear what the ginger group shareholders really want, other than Mr Sarin's head on a platter. Some call for the disposal of the US mobile interests, others are less bothered with this and merely ask for sharper management. Whatever it is, their hostility would be greatly reduced by an improvement in operational performance. If Mr Sarin isn't delivering soon, it really will be Sir John Bond who is making the next appointment.

Fence-sitting by CBI on immigration

In his first major public appearance as director general of the CBI, Richard Lambert has only confirmed the business organisation's propensity to fence-sit. As you would expect from a former editor of the Financial Times, it was highly articulate, intellectually pleasing fence-sitting, but on one of the crucial economic and social issues of our time - whether to open Britain's borders to more immigration - he none the less failed to take a proper position.

Quite a few of his members have already put their names to an open letter urging the Government to persist with the present, open-doors policy on immigration when Bulgaria and Romania join the EU next year.

Yet Mr Lambert aligns himself with what appears to be the Government's new policy on these matters in urging a "pause for breath" with the latest accession nations. No one would deny the possible downside of a further wave of unconstrained immigration, in terms of social and economic disruption. There may also be particular problems with open access to the likes of Bulgaria and Romania, where organised crime is still rife. What's more, the ease with which employers can hire skilled labour from abroad may be discouraging the development of skills in the existing workforce, thereby creating a new underclass of the unskilled.

Yet in the end, you either believe in the free movement of labour or you don't, and I challenge you to find a business leader who seriously argues against it. In most respects, it is an economic boon, and it is certainly one of the primary reasons why the US is as economically successful as it is.

The only decent counter argument is that to have unrestricted access when much of the rest of Europe doesn't puts an unfair burden on our resources. Yet to join our European neighbours in erecting barriers only further damages the cause and undeniable benefits of further liberalisation.

j.warner@independent.co.uk

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