Outlook: Standing room only on board the gravy train

BA-AA maybe; Swiss rule
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The Independent Online

A gallows humour has descended on the condemned men in Railtrack House where the successor company planned by Stephen Byers is now referred to as the Royal Mint. Another name for it might be the Gravy Train.

It is a fine job running the railway these days provided you are a banker, an accountant, a lawyer or even a City spin doctor (of which there are already two on board)

One glance at the figures explains why. Steve Marshall, the chief executive of Railtrack Group, may not be in a job beyond next March. But Alan Bloom of Ernst & Young certainly will be. He and his fellow administrators are running up fees at the rate of £2m a month and, at this rate, are likely to be there for the next year at least.

Then there are its lawyers, investment bankers (Deutsche Bank) technical specialists (AEA Technology) who do not come cheap and, of course, rail advisers. Bechtel, the latest company attempting to board the train, is reputedly in line for £34m just for telling Mr Bloom what is wrong with the railways and then another £150m for fixing it over the next three years.

If and when the administrators task is completed they will hand over to Mr Byers' "company limited by guarantee" or "company limited by ambition" as the wags at Railtrack House describe it. The CLG may not be a reality for another 12 months, but the meter is already running. Ian McAllister of Ford has been appointed part-time chairman – the only known instant of anyone giving up the car for the train – and is not charging for his time. But everyone else is, starting with the bankers (UBS Warburg) and the lawyers (Linklaters and Alliance). When Mr McAllister gets around to appointing a chief executive, he will hardly be working for free.

None of the above takes into account the £50m the Government has already admitted to forking out on advisers, retainers and sundry hangers on connected in some way with Mr Byers' Great Railway Adventure. Even if Railtrack's compensation claim fails, the taxpayer will be lucky to see much change out of £500m once the dust has finally settled and Railtrack is laid to rest.

Set against the £2bn of public subsidies that go into the rail network each year, an extra £500m looks small beer. Put another way, that would be enough for Railtrack to pay a dividend for the next three years. Like a broken record, Mr Byers insisted yet again yesterday that he has put the interests of taxpayers and passengers before those of shareholders. But it is increasingly hard to see how.

BA-AA maybe

When Tony Blair was not waging war with the Taliban, he was fighting the good fight for British Airways and its alliance with American Airlines, or so we were told. Somebody obviously forgot to tell the US Justice Department about the PM's friendly fireside chats in Washington with President Bush about open skies. The trust-busters at the DoJ have decided, to coin a phrase, that it really should be BA/AA – No Way unless the two airlines give up a whole stack of landing slots at Heathrow.

At first blush, the DoJ's opinion looks like a killer blow to BA's transatlantic ambitions. Not only is the price higher than BA and AA would like to pay, the whole tenor of the 78-page report is critical of the dominance the two airlines would exert over rival carriers. On closer inspection, however, there are grounds for guarded optimism at BA. Of all the regulators poring over the deal, the Justice Department is by far the most hawkish. And yet it has softened its opposition considerably since BA and AA first tried for anti-trust approval five years ago. Then, the price of DoJ approval was the surrender of 330 slots. Now they are asking the two airlines to give up just 126. Second, and perhaps more important, the final say in the US rests not with the Justice Department but with the Department of Transportation which was more sympathetic to BA and AA last time around.

Third, Brussels is taking a back seat and allowing scrutiny of the deal on this side of the Atlantic to be led by the UK's Office of Fair Trading. Five years ago BA-AA was doomed from the start after Europe's then Competition Commissioner, Karel van Miert, raised the bar impossibly high from the start. This time, his successor Mario Monti has agreed to endorse whatever decision the OFT reaches.

None of this means BA-AA will get the go-ahead, accompanied by a long-awaited open skies deal. But there is still a fair wind blowing in BA's direction.

Swiss rule

It was asking a lot to expect the Gnomes of Zurich to put up with a Brit telling them in Anglo-Saxon how to run their premier bank. In fact, it was asking too much, as Luqman Arnold's abrupt departure yesterday from UBS demonstrates. He had been there less than a year after taking over from Marcel Ospel but even that was too long, judging by the caustic statement that accompanied his departure to be replaced by a Swiss time-server Peter Wuffli.

When an executive of Mr Arnold's standing unexpectedly quits a large financial institution, the assumption is that there is a nasty black hole lurking somewhere. The circumstances are usually papered over with an anodyne press release. but yesterday's one from UBS departed from the usual script describing "differences of opinion" on what sounds like a real smorgasboard of issues.

Details weren't forthcoming, but it's not hard to see where Mr Arnold may have gone wrong. Helpfully, UBS has said the issues were not financial, operational or control, which doesn't really leave much apart from personality. UBS rejected any suggestion that Mr Arnold's lack of Swiss blood had anything to do with his departure, pointing to the promotion yesterday of a US citizen, John Costas, who becomes the head of the investment bank UBS Warburg. But the failure of Mr Ospel, its chairman, and Mr Arnold to work together has left the impression that a stint in the Swiss army is worth more on the CV than a couple of years at the First National Bank of Dallas, where Mr Arnold cut his teeth.

There are other explanations of course. The hot topic of debate among investment bankers (that is, aside from the latest bargains to be had in the Kensington property market) concerns the virtue of a sizeable balance sheet when it comes to winning mandates for deals. Some companies warm to investment banks that can provide giant loans to finance acquisitions, as opposed to just providing expensive advice. UBS learnt this the hard way recently, when Echostar Communications ditched it for refusing to stump up $3bn (£2.1bn) for the purchase of Hughes Electronics. Perhaps Mr Arnold's preference was to leave the balance sheet out of investment banking, a taste that would have antagonised some of UBS's investment banking recruits from the US.

Either way, there remains a black hole in UBS's explanation of yesterday's events. And that is not the best way to reassure shareholders that Mr Arnold's drive to open up one of Switzerland's most secretive financial institutions will continue in his absence.

m.harrison@independent.co.uk

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