Outlook: It is time to allow failing American airlines to go under

Victimless crimes; HSBC gets serious

"American Airlines' fate in the balance", read the headlines in yesterday's newspapers, after one of the airline's biggest unions called the management's bluff by voting against cost-cutting proposals designed to stave off Chapter 11 bankruptcy proceedings. Whatever the outcome of this game of brinkmanship, there is one thing we can be certain of. American Airlines' fate is not in the balance. On the contrary, American will survive come what may, not because it is a good, well managed and strong company at heart, but because the system will ensure it does.

Even if it does go into Chapter 11 American will eventually rise phoenix-like from the ashes again. Not in a month of Sundays will President George Bush allow America's biggest airline, and a fellow Texan at that, to go to the wall. A little bit of state aid, a little bit of Chapter 11, a little bit of cost cutting and American will be off its death bed again in months.

Chapter 11 used to be regarded as a much more sensible form of insolvency procedure than our own here in the UK, where companies are put into receivership or administration and their assets sold to the highest bidder so creditors can be paid back so many pennies in the pound. The downside is that airlines are hardly ever allowed to die in the US and as a result the market never properly corrects.

For an economy which is meant to thrive on the moral hazard of failure being punished by death, Chapter 11 remains curiously at odds with the American free market system. Rehabilitation nearly always follows a brief period of Chapter 11 imprisonment, ensuring that the weak, feeble and downright uncompetitive continue to live on way past the point where natural selection should have extinguished them.

The oddity of the present crisis in the airline industry is that unlike 11 September, which came quite literally out of a clear blue sky, ithas been building for at least a year and should have been fully anticipated.

OK, so Sars is a new ingredient, but the Iraqi crisis and its effect on airline travel was entirely predictable. To describe it as a crisis is in any case something of a misnomer. It's only a crisis for the high cost, established airlines. The low-cost ones have continued to grow and prosper right through it.

With each passing crisis, the effect on the older, full-service airlines is that much more severe, at least in the US, because of rising competition from low-cost operators. More than 25 per cent of US air travel is already accounted for by the discounters. Over the next five years, that proportion might rise to more than a half, so the long-term prognosis for American and others is not good unless they can change. Yet still the system won't allow them to go bust.

Chapter 11 is one thing. The other distortion in the market is caused by the high number of slots at key hubs allocated to American and other established airlines. Traditionally these have been used to feed short-haul traffic into the longer-haul routes, but the viability of maintaining them for American and others is being severely challenged by intense price competition from JetBlue and other upstart low-cost operators. American won't give up the slots, because if it did they would be snapped up by the low-cost competition, so it is forced to support increasingly unprofitable routes in an attempt to keep the discounters at bay.

The situation is mirrored here in Europe, only in less severe form because outside Britain and Ireland low-cost competition isn't yet as intense as it is in the US. Even so, low-cost operators such as easyJet and Ryanair are already forcing the full-service airlines to discount heavily on short-haul routes across the board, cannibalising their own premium business traffic in the process. A much higher degree of specialisation among airlines is the obvious answer, but the transition is proving long, costly and painful. Chapter 11, state aid and other forms of interventionist behaviour only delay the necessary adjustment.

Victimless crimes

Not since the mid-1980s, when one of Morgan Grenfell's top executives, Geoffrey Collier, was led away in handcuffs, have the British authorities succeeded in bagging a big name for insider dealing. There have been plenty of insider dealing prosecutions since, some of them successful, but they've all been of nobodies, and generally for pathetically small sums of money too. The last successful prosecution was of a minor PR man, Tim Blackstone, who escaped with a slapped wrist and a fine for doing it in the shares of one of his clients.

To his eternal regret, Sir Martin Jacomb, former chairman of BZW, famously described insider dealing as a "victimless crime", but on the evidence of the prosecution record so far he would appear to be absolutely right. Hardly ever has the crime been thought serious enough to require a custodial sentence. But as our story on page 23 shows, plenty of insider dealing still goes on, not withstanding the much higher standards of behaviour and compliance now in force across much of the City.

The Department of Trade and Industry, once the responsible authority for insider dealing, used to complain that the burden of proof was too high and the law too tightly defined to be able to catch the serial professional offenders, but the Financial Services Authority, with new powers to treat insider dealing as a civil offence, doesn't seem to to have fared any better. The FSA gained its market abuse powers more than two years ago, but it has yet to fine anyone for the offence, or strike them off.

Insider dealing is an old fashioned financial crime belonging more to the world as it existed prior to Big Bang than today's more rule dominated and sophisticated environment. With the growth in markets and the Americanisation of the City, there are in any case any number of more lucrative ways of making money in securities trading that don't involve breaking the law. None the less, it plainly continues to occur, and probably on a quite substantial scale too. It's a thin line that separates good intelligence from outright inside information, and all traders are constantly on the lookout for it.

The FSA presumably has a large number of cases pending. I say presumably because if it has it's not saying, but I suspect the FSA will find it as hard to catch and bring to book the real offenders as the DTI. It's still extraordinarily easy to cover your tracks by dealing offshore and what's there to feel guilty about if there aren't any victims?

HSBC gets serious

It wasn't quite doubles all round at HSBC investment bank yesterday, but there was a genuine sense of relief among staff, as well as anticipation of better times ahead, that the plodding commercial bankers of head office had finally got round to appointing a real investment banker to co-head their bit of the HSBC monolith.

This hasn't happened since HSBC originally acquired James Capel, with head office choosing instead to impose one of its own on the turbo charged activities of the investment banking division. The effect has been to keep costs low but also to starve the division of the resources it needs to realise its full potential.

The recruitment of John Studzinski, or Studs as he is known in the City, from Morgan Stanley International, is quite a catch for what's become known as one of the also rans of the investment banking world. With HSBC's worldwide network of contacts and clients, together with a capital base second only to Citigroup, it shouldn't be.

The co-appointment is Stuart Gulliver, who has carved out an excellent reputation as head of Treasury in Hong Kong. To already be billing him as Sir John Bond's likely success as executive chairman of HSBC is premature. The chairmanship is likely in any case to become non executive when Sir John finally decides to hang up his boots. But together, the two appointments show that HSBC is about to become serious about investment banking, and given the clout its got worldwide that should make rivals worry.

jeremy.warner@independent.co.uk