Jeremy Warner's Outlook: Expect fireworks as City returns to work

Ryanair: watch out for the hidden extras; Sainsbury: time to put up or shut up
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The Independent Online

It's back to work for the City next Tuesday after the long bank holiday weekend, so prepare for fireworks. The panjandrums of high finance flying in from their Tuscan villas and Mediterranean beach houses are returning to a very different world to the one they left.

An eerie calm has returned to markets over the past week, but conditions remain fragile and there is much work to be done. As European financiers return to their desks, we can perhaps expect to see some of the same things repeated here that the US has already experienced: a co-ordinated admission by larger banks of the need to borrow from the standing facilities provided by central banks, and perhaps a number of rescues of connected hedge funds or higher-risk lenders. Impossible to gauge is whether the return of the A-team is going to make things better or worse in the short term. Certainly there will be a concerted attempt to clear up the mess, assess the damage and where necessary take the hit. This may either revive the panic, or, alternatively, draw a line under it. It could go either way.

What we do know is that the City is going to have to come to terms with significantly changed circumstances. Credit risk has been widely repriced and reassessed, and whatever the big-wigs do to get a grip, it is most unlikely we will return to where we were before the crisis began any time soon. The outlook for profits in the banking sector will have been correspondingly damaged.

Bob Diamond, head of Barclays Capital, has already opined that the era of big takeovers financed by cheap debt is largely over. Bankers have made a great deal of money out of financing these takeovers, so even if they haven't been left holding unwanted debt, that's one lucrative source of income which for the time being has been removed.

It is also hard to see what the future might be for the "conduits" and "special investment vehicles" at the centre of the storm. Hardly anyone had heard of these things before the crisis hit. One thing the City can be sure of is that regulators will be all over them like a rash now that their activities have been so cruelly exposed.

Post-Enron, off-balance sheet finance was meant to be a no-no. For bankers in particular, there are severe restrictions on use of off-balance sheet vehicles, yet they don't seem to have stopped the proliferation of the conduits and SIVs, many of which seem to have served no purpose in the payments system other than that of making money for their sponsors. Again, it is unclear what they may have been contributing to profits. Yet their curtailment may make wholesale funding more expensive, further eating into bank profit margins.

The best banks attempt to organise their affairs so that if one source of revenue dries up, another takes up the running. Even so, it is hard to see what might compensate in the short to medium term. We are not talking here about a collapse in profits, but analysts will certainly be adjusting their forecasts down quite significantly when they return.

Ryanair: watch out for the hidden extras

A euro here, a euro there and pretty soon you are talking serious money. Apologies for misquoting this famous remark, but this just about sums up the Ryanair approach to pricing.

The basic fare generally looks cheap enough, but once you've tacked on all the extras - taxes and airport charges, baggage charges, the money you have to fork out for exceeding the weight limit, priority boarding charges, and, most annoying of all, the unwanted travel insurance which the system craftily opted you back into when you marginally changed the detail of the online booking - you begin to wonder whether you wouldn't have been better off flying British Airways.

In the latest example of these add-ons, Ryanair yesterday announced that those who check in at the airport - believe it or not, something of a necessity for the bulk of passengers - will have to pay an extra £2 a pop for the privilege. With almost laughable disingenuity, Ryanair billed this move as a way of trying to persuade people to check in online, something which is only possible if you are a hand luggage-only passenger. The more airport handling costs are reduced, Ryanair insisted, the lower the airline's prices can be. This is of course utter tosh. The surcharge is in fact a not even thinly disguised way of increasing fares.

I'm an admirer of Michael O'Leary, Ryanair's chief executive, and the service he provides. You get what it says on the tin, and if you don't like it, you don't have to use him. There seem to be plenty of others willing to take your place. Yet businesses which are disingenuous tend to be publicly despised. If nobody likes or trusts Ryanair, it is hard to believe this won't have adverse consequences for its growth.

The check-in surcharge is only the latest in a long line of "initiatives" which Ryanair has attempted to portray as something they are not. Earlier this week, the Advertising Standards Authority took Ryanair to task for claiming it was both cheaper and quicker to fly Ryanair between London and Brussels than take the train. This is self-evidently not the case once the cost and hassle of getting to and from the airport at each end is taken into account.

In my view there is also a wider problem at the heart of the low-cost model championed by Ryanair which some bright entrepreneur will eventually find a way of turning against the airline's present success.

Pricing on low-cost airlines is determined by demand management systems that match demand to available capacity. As the aircraft fills up, making capacity on the flight scarcer, the price of a seat rises. Late booking on busy flights tends to carry a particularly high fare.

This is the very reverse of the way airlines used to operate. The early birds would pay a pre-set, full, price in return for the certainty of a firm booking. Those willing to risk not being able to fly might obtain a bargain by booking late, when the airline would typically slash prices to fill unsold seats.

The other main element in the low-cost model is to ensure that the fullest use of aircraft and associated fixed costs is made by keeping them flying as much as possible. Thus the airline will continue to fly even when there is very limited demand, the flight is only partially full, and prices are consequentially very low. Better to get limited revenue from the aircraft than no revenue at all, is the way Mr O'Leary sees it.

There are two flaws in this approach. First, it seems highly vulnerable to carbon taxes, such as those proposed by the Lib Dems, which would attempt to penalise airlines that fly unfilled aircraft. There is every possibility of such a system eventually being introduced.

But perhaps more important, it irritates passengers forced to pay the fuller prices that busier times command to know they are cross-subsidising business and time-rich passengers flying in the middle of the week. One of the basic rules of business is that it doesn't pay to alienate your most lucrative customers. The checking-in surcharge announced yesterday promises to do just that.

Just how much will passengers take before they go elsewhere? Mr O'Leary certainly knows how to test the boundaries.

Sainsbury: time to put up or shut up

For understandable reasons, Sir Philip Hampton, chairman of J Sainsbury, doesn't want to be seen to be frustrating a bid that, if made at the price suggested, many shareholders would want to accept. He's therefore been more than patient with the Qatari-backed Delta Two. Yet he must be close to the point where he demands a put-up or shut-up deadline from the Takeover Panel.

As things stand, Paul Taylor, head of Delta Two, seems to be making very little progress in answering the concerns raised by his bid, and it is in any case impossible to believe he can fund its debt element on acceptable terms given the present turmoil in credit markets. One way or another, it's time for closure. Either Mr Taylor must come up with a proposal acceptable to the board, or he should be made to pack his tent.

j.warner@independent.co.uk

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