Jeremy Warner's Outlook: Now even Southwest Airlines hits turbulence

Virgin Mobile; Regus comeback; Martha Stewart; M & S postscript
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The Independent Online

Southwest Airlines is the doyen of no-frills carriers. It is the operator which spawned a whole new era in air travel and the airline on which a host of other low-cost carriers have modelled themselves - not least Ryanair and easyJet. So when Southwest stumbles, the rest of the sector ought to worry. And when its chief executive quits unexpectedly, the likes of Michael O'Leary and Ray Webster should look to their laurels.

Southwest Airlines is the doyen of no-frills carriers. It is the operator which spawned a whole new era in air travel and the airline on which a host of other low-cost carriers have modelled themselves - not least Ryanair and easyJet. So when Southwest stumbles, the rest of the sector ought to worry. And when its chief executive quits unexpectedly, the likes of Michael O'Leary and Ray Webster should look to their laurels.

To keep things in perspective, the Dallas-based airline is still a miraculous success story. It sailed through 11 September with barely a blip in its passenger numbers, and while the rest of the US airline industry only survived with the aid of massive government financial support, Southwest continued to record healthy profits throughout what became the deepest crisis in modern aviation history.

But even Southwest is now showing distinct signs of mortality. It has been forced to lay off staff for the first time in three decades and, although it remains very profitable, earnings for the last quarter did not match market expectations. Southwest's wings were clipped by a familiar combination of factors. Fuel costs soared and the wages bill rose because of a retroactive pay deal with its flight attendants. Close your eyes and it could be Ryanair, which is being buffeted by exactly the same crosswinds.

It is still too early to say whether Southwest's setback is a temporary hiccup or the start of a something more worrying. The airline says it expects profits in the current quarter to be higher than last year. But the sudden departure of Jim Parker, who replaced Southwest's legendary founder Herb Kelleher in the pilot's seat only three years ago, does not augur well.

His farewell comment - "I did my tour of duty and it was just time to let someone else have a turn" - makes it sound like he was glad to hand the mantle on. Whether he has pressed the ejector button just in time, no one can yet tell. But what is certain is that the low-cost model of air travel is being tested as never before. Costs are going up and fares are coming down, thanks to the rash of me-too operators entering the market, which guarantees a hard landing for all but the most robust of carriers. Right now, it is much better to be a customer than a shareholder of a budget airline. As Ryanair's ever-ebullient boss says, passengers should make the most of it while they can.

Virgin Mobile

Sir Richard Branson is demanding a big price for Virgin Mobile and the City is proving reluctant to pay it. The £960m flotation, Sir Richard's first dalliance with the stock market since taking Virgin Records private 18 years ago, would put the stock on a similar valuation to Vodafone and other quoted incumbents, which for a virtual network which doesn't own any assets seems to be demanding too much. Virgin is still confident of getting the float away without having to cut the pricing range, but it is hard to see investors going for anything more than the minimum. It never pays to be too greedy.

Regus comeback

Just a few years ago, Mark Dixon's Regus Group was virtually bust. Its US business had to be put into Chapter 11 insolvency protection, while a big chunk of the UK company was sold to Alchemy to keep the creditors at bay. Today the company is sufficiently recovered to be able to take over its main US rival in serviced office space, HQ Global Holdings, and to undertake a placing of shares to part-finance its $302.5m cost.

Mr Dixon was on the ropes, but somehow or other he has managed to bounce back. For staying power, energy and sheet determination this is a man that's hard to beat. Yet his rehabilitation also shows the City in uncharacteristically forgiving mood.

Mr Dixon was spurned when he first tried to float his company, but a year later he was back and this time he was successful. This always struck me as odd, as the dot.com bubble had already begun to burst by the time Mr Dixon got his IPO away. Having greatly expanded on the West Coast of the United States, Mr Dixon was highly dependent on the boom that all the dot.com excitement had given rise to. Indeed, his business seemed almost tailor-made to service the legion of wing-and-a-prayer business start-ups that were the genre of the day. This was the "hotel" concept of office space - turn up and rent as little or as much standardised office space with all mod cons provided for as long as you liked.

To Mr Dixon's mind, this made him almost wholly recession-proof, as in a prolonged business downturn, no one would want to commit to the sort of long-term leases that typically characterise the way office property is let. Instead, a downsizing business community would want the short-term deals that Mr Dixon specialised in.

Perhaps predictably, the very reverse turned out to the case. Regus was much worse hit by the downturn than almost any other property company. This was because in order to provide the short-term space its customers demanded, Regus had signed up to a large number of excessively expensive long-term leases. By leasing long to rent short, as it were, the company found itself caught in a classic bear trap. Short-term rents collapsed with the dot.com bubble, or like the dot.coms themselves, simply disappeared altogether, but Regus was contractually bound to keep paying for the long-term leases.

Today, Regus has largely traded its way out of the difficulties it was then in, though the share price remains a small fraction of its former self. By hook and by crook, the company has managed to wriggle out of the old leases and get the rents on to a basis more in line with today's less giddy environment. Eternal optimist that he is, Mr Dixon insists that this time it will all be different. He's learnt from his mistakes and reformed the business model accordingly. Likely incomings and outgoings are much better matched. Let's hope he's right.

Martha Stewart

AS SHE was sentenced to five months imprisonment yesterday, Martha Stewart, the American lifestyle guru, dismissed her crime as "a small personal matter that has been blown out of all proportion". Her comments are reminiscent of Sir Martin Jacomb's famous description of insider dealing as "a victimless crime". What Ms Stewart did was neither a small matter nor was it victimless. She abused a privileged position to profit at other people's expense, and is rightly being punished for it.

No doubt it's true that had she been a complete nobody she could have expected less harsh treatment. She might not even have been prosecuted at all. Her celebrity status ensured that the case got maximum coverage, commanding by the end enough newsprint to use up an entire rainforest. It also made it inevitable that the judge would impose a custodial sentence, lest he be accused of one rule for the rich and another for the poor.

But it is a powerful lesson none the less in the penalties of reckless behaviour. Why is it that someone as rich and famous as Ms Stewart would put her reputation at risk for such a small amount of money? Presumably because she never stopped to think about it. Either that, or like a petty thief, she thought she wouldn't get caught.

M & S postscript

I'm told by a messenger that I have so upset Philip Green with my coverage of his failed bid for Marks & Spencer that he's vowed never to speak to me again. Some might count this a blessing, but actually I don't. I'm not a believer in irreconcilable stand-offs, and as a genuine admirer of Mr Green's achievements and dynamism, I'm not at all happy to be confined to Coventry in this way. I don't expect my calls to be returned, but I shall continue to make them.

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