Michael Harrison's Outlook: Cost-cutting comes back to bite BA as catering row runs out of control

Putting a price on the nuclear option; Sometimes it's tough being an insurer
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The Independent Online

It must be August because for the third summer in a row a crisis has come along out of a clear blue sky to send British Airways into a tailspin. In 2003, it was the famous swipe-card strike, caused by BA's over-zealous attempt to introduce new clocking-on arrangements for ground staff. Last year, it was the cancellation of hundreds of flights at the height of the holiday rush after BA discovered that its generous redundancy programme had left it with too few staff.

This year, it is secondary action in support of striking catering staff employed by an outside company which has forced BA passengers to go hungry and check-in facilities to be shut down. Three different problems but the same result in each case: pictures beamed around the world of thousands of stranded passengers milling around Heathrow and a planeload of bad publicity for BA.

And it was all going so well. Only a week ago, BA's chief executive Sir Rod Eddington was happily preparing to fly off into the sunset after reporting the airline's best results in nine years. Now his retirement party threatens to be gatecrashed by a new bout of industrial unrest.

Since the September 11 attacks on New York and Washington, BA has slashed its workforce by more than 13,000 and shaved more than £700m from its costs. By and large, it has achieved these draconian cuts with hardly a murmur of protest: staff have understood that the airline is battling for its survival, not making redundancies for the sake of it or to boost shareholder dividends (they haven't had one in four years).

But occasionally, the resentment boils to the surface and, in each case, the root cause can be traced back to the efficiency drive on which the airline has embarked.

Although the Gate Gourmet staff involved in the present dispute work for an entirely separate company, they were employed by BA until 1997, when the airline decided to outsource its catering to a third party in order to save money. The business was taken over by the US private equity fund Texas Pacific which has decided it can no longer sustain the losses it is suffering and needs to introduce new pay and conditions. Hence the strike.

BA has done much the same with other "non-core" activities as the airline has concentrated on just the actual flying and maintenance of its aircraft. Would the Heathrow catering dispute have flared up in the way it has if the staff involved were part of BA and it had full control over the operation? Impossible to say. But it is a timely reminder that outsourcing operations, especially to gimlet-eyed private equity firms, can be a double-edged sword.

Putting a price on the nuclear option

It is the elephant in the corner of the room and, weighing in at £56bn, it is a pretty big one too. The enormous cost of nuclear decommissioning has been almost totally ignored in the debate about whether Britain should be building a new generation of reactors to replace those due to close down. Until now.

The Government's Nuclear Decommissioning Authority calculates that the cost of cleaning up Britain's 20 oldest civil nuclear sites (not including the eight still in operation with British Energy) has risen by a further £8bn since the last time the sums were done. A few more billions will have to be added to that total if the plutonium stored at Sellafield turns out not to be the asset it is currently classed as in the Government's book and turns instead into a liability.

The green lobby, needless to say, can barely contain its glee on the grounds that you couldn't invent a better advertisement for wind power as the best way for Britain to meet its ambitious environmental targets.

In light of the escalating bill, the NDA might have been forgiven for wanting to defer payment for as long as possible. But not a bit of it. With the exception of Sellafield, the plan now is to decommission the sites in the next 25 years rather than delaying until the next century as originally intended.

Fixing a cost and a timescale for cleaning up the sites is one thing. Finding somewhere to store the waste that must be removed from them is quite another. Two decades after Nirex first began the public debate about what to do with the stuff, its successor CoRWM (the nuclear industry does love its acronyms) has narrowed the options down to four, ranging from long-term interim storage just above or below ground to deep burial. Don't ask CoRWM where the waste will actually be buried but, as Sellafield has been "hosting" the bulk of it since it began reprocessing, it is not hard to guess which site is likely to emerge as the favourite.

Without a government guarantee that anyone building a new generation of reactors would be able to charge enough for their output to cover these so-called "back-end" costs and still turn a profit, a nuclear renaissance looks out of the question.

The NDA's arithmetic could change radically if a decision was taken to go ahead with a new generation of nukes and, as seems obvious, build them on the site of existing ones. Why go to the expense of turning Sellafield into a wildlife sanctuary and building theme parks on the site of the old Magnox stations if they are going to be contaminated all over again? It would, of course, mean storing up the problem for a future generation to sort out but that has been the story of this industry since the world's very first nuclear electricity began being pumped out of Calder Hall on the Cumbrian coast half a century ago.

Sometimes it's tough being an insurer

Nice figures, shame about the shares. Insurance has been a rough old business to be involved in over the past few years and despite forecast-beating results yesterday from Aviva and Royal & SunAlliance, both companies watched as their stock prices went in the wrong direction.

For Aviva, the owner of the Norwich Union brand, the damage was done by some not very optimistic comments about the outlook for the life insurance sector. Equity markets might be rising strongly once again but Aviva still reckons that consumer confidence has been so undermined that a recovery in the long-term savings market will still have to wait until next year, meaning that margins will remain under pressure.

Just as well that Aviva is doing better in its general insurance business where a disciplined approach to underwriting business rather than chasing market share has resulted in improved earnings, despite the increasingly fierce competition in motor and home insurance.

It used to be the case that insurers paid out more in claims than they took in premiums and made a turn instead on investing their customers money. But RSA made a profit in the first half of the year before investment income, continuing its recovery under Andy Haste. The new chief executive is making rapid progress in airbrushing out the Bob Mendolsohn years. He has chipped away some more of RSA's historic exposure to US asbestos claims and taken a big chunk off the company's pension fund deficit at the same time. Not bad going.