Jeremy Warner's Outlook: EasyJet comes of age, but as rivals give chase nobody is as low cost as O'Leary's Ryanair

Taxing oil until the pips squeak; More mumbo jumbo on bird flu risks
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The Independent Online

Yet as Stelios prepares for his party, there's the irrepressible Michael O'Leary, chief executive of Ryanair, again predicting his rival's demise. In fact, says Mr O'Leary, easyJet isn't a proper low-cost operator at all, only a poor imitation of one which, like the plethora of other copycat versions, will be unable to survive the coming shakeout. Eventually, he predicts, there will be only four airlines of any significance in Europe - British Airways, Lufthansa, Air France and himself.

This I find as unlikely as most of Mr O'Leary's other predictions. Yet on one thing he's right: Ryanair is the lowest-cost operator in Europe by a country mile, with costs per passenger mile of little more than half those of easyJet. This more than compensates for his propensity to abuse his customers and fly to out of the way places.

The easyJet business model is a slightly different one, in that it tends to fly to established airports with slower turnaround times and higher landing and handling charges. This significantly adds to costs. Yet though easyJet might now be a powerful enough brand to survive, it needs to watch its back.

Even Emirates manages to achieve around the same costs as easyJet, proving that for newer airlines without the legacy cost base of the flag carriers, it is possible to achieve the lower cost model even for full-service, long-haul flight. The competition in this industry just gets tougher and tougher.

Taxing oil until the pips squeak

Oil prices are off their hurricane-fuelled highs, yet by historic standards they remain quite high enough. Despite assurances from Lord Browne of Madingley, the BP chief executive, and other industry leaders, that increased supply will eventually cause prices to settle at more tolerable levels, oil producers are continuing to coin it as never before.

Top executives from five oil companies including BP and Shell are due to appear before a Senate committee hearing on soaring industry profits tomorrow amid growing calls both in the US and Europe for the imposition of windfall profit taxes. In Britain, oil profits are bound to be seen as a possible target by the Chancellor as he plots next month's pre-Budget report against the background of a slowing economy and a growing tax shortfall.

Politically, this would be a much easier tax increase to sell to the country than most - both painless and apparently justified. Only another pummelling for the banks would receive a more enthusiastic round of applause. Yet as we have seen with the abolition of tax credits on dividends, the long-term consequences of these seemingly innocuous tax raids can be profound and deeply negative.

I don't want to act as an apologist for the oil industry. Quite enough people find gainful employment doing that already. Yet there is no such thing as a benign tax increase, even when imposed on an apparently profiteering industry. One way or another, they always find their way back into the wider economy, and when they do, it's you and I who end up paying.

Over the past three years, the Chancellor has already taken two bites out of the oil industry cherry, increasing North Sea taxes overtly on the first occasion, and then on the second "harmonising" the payment of corporation taxes in a way that produced a big, one-off boost to the tax he receives from oil companies. One way or another, oil is already the most heavily taxed product in the land, with about 70 per cent of the cost of a gallon of petrol going straight to the exchequer in the form of excise duties and VAT.

Thanks to higher prices, oil companies will also pay about £10bn to £11bn in North Sea and corporation taxes this year, or about double the year before. Billions more flow back into the economy and into our pension funds through dividends and buy-backs. So in a sense, the country is already sharing in the windfall. To tax North Sea production more heavily will only cause oil companies to shift investment from already declining acreage into more promising regions of the world with more benign tax regimes.

And yet I fear that none of these arguments will deter the Chancellor, who must find new sources of tax from somewhere and is already on record as blaming the oil industry for the economic slowdown. If the deflationary effect of higher oil prices causes tax revenues to fall short of expectations, there could scarcely be a more satisfactory way of making up the difference and punishing the industry at the same time for the damage caused than by raising the tax burden.

Yet on one front, the oil industry's detractors may have a point. In an attempt to avoid the boom and bust of past cycles, the industry has quite deliberately been underinvesting in its future, so much so that none of the oil majors is replacing proven reserves at the rate it is expending them. The same may be true of oil -producing nations, not withstanding pledges by Saudi Arabia greatly to expand its production potential.

According to a recent International Energy Agency report, energy investment will need to equal $17trillion - $6trillion of it in oil and gas - between now and 2030 to keep pace with demand. There's little sign of appetite for such a scale of investment. Unfortunately, taxing the oil industry more heavily isn't going to make it any more willing to invest; rather the reverse.

More mumbo jumbo on bird flu risks

The World Bank yesterday added itself to the growing list of those warning in alarmist language of dire economic consequences if there is a bird flu pandemic. It has even put a number on it - $550bn across the developed world, a figure apparently derived from evaluating the economic costs of the likely number of deaths, hospital admissions, outpatient visits and days off in illness.

Take no notice. The real economic costs are likely to be far less severe, and looked at cynically, the whole thing might prove mildly beneficial. Not that I'm advising complacency.

The 1918 Spanish flu pandemic caused 50 million deaths worldwide, a quarter of a million of them in the UK alone. Some 30,000 UK residents died from Hong Kong flu in 1968/69. Yet though all deaths are a tragedy for those affected, it doesn't generally result in a wider economic cost, particularly when, as with flu, it is the old and infirm that are most at risk. To misquote Scrooge, bah, humbug, it is better that the old and unproductive should be left to die so as to decrease the surplus population.

As for the medical costs, it is hard to see why these should be economically harmful either. In fact, the increase in activity in the healthcare sector would provide a useful counterweight to the downturn in consumption.

The truth is that we have no idea what the economic consequences of a serious flu pandemic might be or even what the risks of one are. All such assessments are hypothetical nonsense, but I suspect the sanguine appraisals are the more reliable. The alarmist ones are reminiscent of that famous newspaper headline which read "Two million women and children could die if ...". The "if" never happened.

Hundreds of billions were spent in the developed West needlessly preparing for the Millennium Bug in a process which fuelled the latter stages of the technology bubble. It was all that spending which brought on the nasty dose of economic flu, not the bug at all, which in the end proved to be largely non existent. At least this time around, there's nothing for the salesmen to sell other than Tamiflu and scaremongering economic research.