Jeremy Warner's Outlook: Eddington leaves a better ship than he found at BA but the headwinds remain daunting

Lessons from the US for Britain's PPF; Morrisons still struggling with Safeway; Johnson gets off on right foot at DTI
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The Independent Online

Willie Walsh, the chief executive elect at British Airways, is apparently already aboard, his luggage safely stowed in the overhead locker, but he was nowhere to be seen on the flight deck yesterday as Rod Eddington presented his last set of annual results as chief executive.

Willie Walsh, the chief executive elect at British Airways, is apparently already aboard, his luggage safely stowed in the overhead locker, but he was nowhere to be seen on the flight deck yesterday as Rod Eddington presented his last set of annual results as chief executive.

Perhaps the former Aer Lingus boss was wandering around BA's Waterside headquarters, complete with its own babbling brook, cobbled high street and Waitrose supermarket, trying to figure out how many of the 3,000 souls who work there he really needs to keep the airline aloft.

Put another way, that's about half the total workforce Mr Walsh left behind at Aer Lingus after saving the Irish airline with some brutal but necessary economy measures. Mr Walsh may well have little option but to deliver something similar at BA, for no sooner has it conquered one set of challenges than it seems to be flying into fresh headwinds.

The latest buffeting comes from sky-high fuel prices and an equally sky high pension deficit. In other respects, however, the legacy which Mr Eddington leaves behind is a lot better than it could have been. Net debt is down to its lowest level in 12 years, which is just as well given the junk rating conferred on it by the credit agencies. Even BA's perennially loss-making short-haul European network is on the brink of washing its face.

It has been a bumpy flight for BA's shareholders through the shocks of 9/11, Sars and the Iraqi invasion. The shares have done no more than maintain a holding pattern under the Eddington watch and the return of BA to the dividend list looks as distant as ever. It will become more remote still if the new pensions regulator has his way and forces companies to erase their deficits before they can think about rewarding investors.

Last year BA achieved a 6.9 per cent operating margin. The target Mr Walsh inherits from his predecessor is to lift that to 10 per cent. Compared with the 20 per cent post-tax margin Ryanair still manages, that still looks pedestrian. Even so, it will be a mighty achievement for Mr Walsh to get there, particularly if BA's most important market, the United States, takes a serious turn for the worse. Mr Eddington could well be baling out at the right moment. Those left behind may need to fasten their seatbelts for an even bumpier ride.

Lessons from the US for Britain's PPF

As a timely reminder of just how fraught this pensions malarkey can get, take a peek across the Atlantic to where the Pension Benefit Guaranty Corporation, the US agency on which our own spanking new Pensions Protection Fund is modelled, is fast sinking under the weight of $62.3bn in long-term pension obligations.

The latest company to offload its pension woes onto this now virtually bankrupt US protection scheme is United Airlines, which was this week given permission to transfer £6.6bn of liabilities to the fund. This is bad news for the fund but great news for United, which saves an estimated $645m a year in pension costs, or about a third of the total savings it needs to emerge from Chapter 11 bankruptcy protection.

Indeed it seems such a good wheeze that other airlines are virtually certain to follow suit. The United action threatens a domino effect in which other airlines are forced to seek bankruptcy protection to bring their pension costs down to United's level. If they don't, then United gains a correspondingly large competitive advantage.

Nor is this the only warning for our new system of pensions regulation from the ghost of Christmas future. In an attempt to prevent these liabilities bouncing back on the taxpayer, US lawmakers are urgently drafting legislation that would dramatically increase the premiums companies with solvent defined benefit pension funds are required to pay to support the protection scheme.

A proposed new formula for measuring the health of pension plans would cause nearly all plans to be considered less than 100 per cent funded. Even relatively healthy pension funds will end up paying both a higher flat rate and an additional higher variable premium to reflect the fact that they are underfunded. It scarcely needs saying that the incentive to provide such pension benefits and to ensure adequate funding is correspondingly reduced.

What happens in the US tends to be repeated on these shores a few years later. Already David Norgrove, the new pensions regulator has aired the idea, much practiced in the US, that the British protection fund might take pension liabilities off the hands of companies in financial distress in return for a share stake or assets, especially if it helps maintain jobs. It doesn't seem to have helped the US pensions guarantee scheme much, which is still bust as bust can be. .

Morrisons still struggling with Safeway

Any statement that causes the share price to rise can hardly be called a profits warning, and in any case Wm Morrison Supermarkets had so thoroughly prepared investors for more bad news that when it was actually released yesterday it came as something of a relief. There was no warning on sales, or even directly on profits. Rather, the bad news was confined to profit margins, which Morrisons had said would show a modest improvement this year but it now transpires will be significantly lower.

Bob Stott, the chief executive, thought the announcement so unimportant that he wasn't even around yesterday to explain it; he was on holiday. Investors were instead left to figure out for themselves quite how it was that the company had failed to anticipate the duplicated costs which have caused the decline in profit margins.

The execution of Morrison's merger with Safeway has been a textbook study on how not to do it. Yesterday's warning that the the dual costs of distribution, IT and administration involved in running two supermarket chains were taking longer to unwind than anticipated is just the latest example of the befuddlement that has characterised the integration. This ought to have been a marriage made in heaven, but the City is beginning to wonder whether Morrisons can ever get it right. Sir Ken Morrison, the chairman, says that once all Safeway units are converted to the Morrison format, which should be complete by November, the framework will then exist for a significant improvement in performance.

Let's hope he's right. While Morrisons has been struggling with the merger, its rivals have been making hay. There's some evidence to suggest that the recent revival at J Sainsbury has been achieved largely as Safeway's expense, while the botched nature of the integration gives every reason to think that Morrison, previously a regional retailer, is not up to the job of managing a national chain.

Johnson gets off on right foot at DTI

Alan Johnson has got off to a cracking start as Secretary of State for Trade and Industry. Less than a week into the job he's axed the Prime Minister's ridiculous decision to rechristen this graveyard of government the Department for Productivity, Energy and Industry, a rebranding exercise which as well as costing a six-figure sum to execute has understandably attracted universal derision. This is an extraordinarily encouraging sign. How is Mr Johnson to build on this triumph of decision-making?

He might do worse than to recommend the department be abolished altogether, a plan seriously considered by one of his predecessors, Nicholas Ridley, who stunned senior officials in his first day in the job by asking what the department was for. But then Mr Johnson does have at least one serious task to perform, which is to decide on whether Britain should build a new generation of nuclear power stations. After such a splendid display of common sense, there's just the remotest possibility we might end up with some decent decision-making.

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