Jeremy Warner's Outlook: Sir Rod heads for the departure lounge with BA in a lot better shape

BAE looks ready to step off the Airbus; ReNeuron re-born
Click to follow
The Independent Online

Given the headwinds the airline industry has found itself flying into, that is some considerable achievement. Wars, disease, international terrorism and economic downturn have finished off a few rival carriers entirely and left a string of others in the airline equivalent of the intensive care unit otherwise known as Chapter 11 bankruptcy protection.

But BA today is a far stronger airline than the one the affable Aussie inherited five years ago. The operating margin, at 8.5 per cent, is the best in nine years, the planes are flying fuller than ever and net debt is down 40 per cent.

OK, the business is still not paying a dividend - due mainly to the size of its pension deficit which, for accounting purposes, must now sit on the balance sheet. But for the first time in five years, it can start to think seriously about spending money on new aircraft.

Michael O'Leary will scoff at BA's operating margins by pointing out that Ryanair's net margin is over 20 per cent - proof that when it comes to short-haul European air travel, it is hard to beat the one-price-fits-all model pioneered by the no-frills Irish airline.

But BA has begun to fight back. In July, the increase in the number of passengers willing to pay premium fares was greater on BA's short-haul services than its long-haul ones.

It will be harder for BA's new pilot, Willie Walsh, to get to 10 per cent operating margins than it has been for Sir Rod to lift them to 8.5 per cent. Much of the fat has been trimmed from the organisation and the headwinds are still there. Aviation fuel is not getting any cheaper and it is too early to gauge what the long-term effects of the latest terror attacks in London might be. But he could not have inherited a better platform from which to try.

BAE looks ready to step off the Airbus

Some time soon, perhaps within the next six months, the sale of BAE Systems's 20 per cent stake in Airbus could be announced. That, at least, is the rumour in Paris and Munich, where the Franco-German aerospace giant EADS is champing at the bit to add the BAE shareholding to the 80 per cent of Airbus it already owns.

EADS is throwing off cash at such a prodigious rate that it could almost certainly swallow BAE's stake without having to go back to its own shareholders. There is €4.7bn of net cash in the EADS balance sheet (although a chunk of this is made up of customer advances). BAE's stake in Airbus is valued at about €3.5bn, not including the premium EADS would have to pay to gain full control.

Under the original shareholder agreement a series of put and call options were granted, entitling BAE to force EADS to buy it out only if the actions of the majority shareholder were damaging its interests. EADS has an option to force BAE to sell only if it merges with Airbus's direct competitor Boeing. Neither the put nor the calls look likely to be exercised

It is an open secret, nevertheless, that EADS wants to buy. But does BAE want to sell? A year ago, the answer was probably not. Today, the mood music has changed. Airbus has gone from being a core part of BAE to a business it would only sell if it could find a better use for the funds. In other words, it is being held for value and, profitable though Airbus has become, BAE could arguably earn better returns from investing its money in the US defence market. BAE's acquisition last month of United Defence Industries, the US manufacturer of the Bradley fighting vehicle, is as clear a statement of intent as it could make.

The suggestion, denied by BAE, is that it was only dissuaded from opening talks with EADS before the election because ministers did not want the boat rocked by another Rover-style industrial storm. There is a perception that if BAE sells out of Airbus, then Airbus will quit Britain, taking with it the 16,000 jobs it provides directly or indirectly.

That is almost certainly not the case. BAE ceased to be an industrial partner in Airbus three years ago when the company was re-invented as a free-standing business and there has been no decline in investment at Airbus manufacturing locations in the UK, in fact quite the reverse. The new chief executive of EADS's UK operation, Robin Southwell, himself a former BAE executive, has ambitious plans for increasing its presence here. Had he been in position at the time, then there is a possibility that EADS would have bid for Westland when GKN decided to sell the helicopter manufacturer to Italy's Finmeccanica. So buying full control of Airbus only to begin exporting jobs to France and Germany would send all the wrong signals.

Should BAE decide to sell, then before it could buy EADS would still need the approval of its two controlling shareholders, Germany's DaimlerChrysler and Sogeade of France, both of which own 31 per cent stakes. The incoming chief executive of Daimler, Dieter Zetsche, is said to be less interested in planemaking than his predecessor Jürgen Schrempp but this has led to speculation that the Germans will offload their stake in EADS entirely, rather than block a deal to buy Airbus outright.

If a deal is to happen, then a lot of moving parts need to work at the same time. If you believe the whispers from France and Germany, then the wheels will start turning before next year's Farnborough airshow. We shall see.

ReNeuron re-born

You have got to admire the chutzpah of Sir Christopher Evans, Britain's very own biotech baron. Five years ago, he floated a stem cell research company called ReNeuron for £69m. Two years and a string of disappointments later, he bought it back for £3.6m. Yesterday he successfully floated it once more, this time for £23.4m, raising £9.5m of money from external investors in the process.

As a rule of thumb, a biotech company needs fourth things to have any chance of floating: a drug which is in trials; a range of products; a licensing deal, preferably with a large and financially robust partner; and a tried and tested management.

Arguably, ReNeuron has none of these. There is no product or licensing deal and although the management is tested, it is largely the same one which tried and failed to make a go of ReNeuron back in 2000.

Apart from being one of the most ethically challenged areas of the biotech jungle, stem cell research is also one of the riskiest and least proven.

There has been a lot of promising animal research but none of this has produced anything which is anywhere near to market.

Despite this, Sir Chris has not only got the float away, but he has managed a whole new generation of investors to part with their money. They can't say they weren't warned.