Outlook: US airlines bank on casualty-free war as turbulence mounts

Hedge fund gloom; Lastminute.com
Click to follow
The Independent Online

If Bob Ayling hadn't spent two years flaffing around trying to merge with American Airlines, he might have saved his job as chief executive of British Airways. While he was off arguing his case with governments and regulators, the business went to wrack and ruin, and Mr Ayling duly paid the price, if a £2m plus redundancy package can be described as such. As it is, Mr Ayling's successor, Rod Eddington, will be thanking his lucky stars that Wing Commander Bob never managed to pull it off.

If Bob Ayling hadn't spent two years flaffing around trying to merge with American Airlines, he might have saved his job as chief executive of British Airways. While he was off arguing his case with governments and regulators, the business went to wrack and ruin, and Mr Ayling duly paid the price, if a £2m plus redundancy package can be described as such. As it is, Mr Ayling's successor, Rod Eddington, will be thanking his lucky stars that Wing Commander Bob never managed to pull it off.

Things look bad at British Airways right now, what with capacity cuts, the mothballing of Concorde, an accelerated redundancy programme and the shares still deep in the doldrums, but they are a whole lot worse at American. With losses running at $5m a day and rising, American is teetering on the brink of bankruptcy. For once, shareholders have got something to thank obstructive regulators for. They saved British Airways from the misjudgment of its board, and thereby from oblivion.

It is sometimes said that in 100 years of powered flight, the airline industry has lost more money than it has made. There have been exceptions, as there are in all industries, but collectively this is a business that eats capital and gives nothing back in return. The present crisis, brought about by war in Iraq, has made the point more powerfully than ever before. The big question is whether it will make a difference.

Perhaps strangely, the crisis finds the European industry in generally better shape than its US counterpart. While it is true that the European air travel market was less severely hit than the US one in the aftermath of 11 September, it is also the case that Lufthansa, Air France and other Continental operators have proved more aggressive and foresighted in cutting costs for tough times ahead than US rivals. The same goes for British Airways, which has learned the hard way how to keep airborne during the sort of severe turbulence now being experienced.

The US industry's failure to get its act together is not just because it is still largely beholden to powerful labour unions, although that is certainly a large part of the story. It is also because substantial amounts of aid have been doled out by the US Government – up to $15bn of it was sanctioned after 11 September – and because the system that allows US companies to seek Chapter 11 protection from their creditors makes it extremely hard to kill off an American airline. Somehow or other, they always emerge Phoenix like from the ashes of insolvency.

The industry is back cap in hand to Congress right now for yet another dollop of emergency funding. Will they get it, or will the US authorities have the courage this time around to let United, already in Chapter 11, and perhaps others too, finally go to the wall? It's certainly what needs to happen if the industry is ever to put itself on a viable commercial footing. But as long as Boeing and Airbus, both heavily state subsidised in their different ways, continue to produce more aircraft than the world actually needs, there will always be more capacity than demand and the airline industry will continue to lurch from one crisis to the next.

Hedge fund gloom

According to a composite index of hedge fund performance compiled Morgan Stanley Capital International, hedge funds produced a return of 0.81 per cent last month, bringing their yearly rate of return to 6.99 per cent and their three-year rolling annual rate of return to 6.59 per cent.

While this is obviously an impressive performance set against equity markets, which over the past year have lost a further 22 per cent of their value, it's poor against government bonds, up 25 per cent over the last year, and rather disproves the view that this is an industry capable of turning base metal into gold at the click of a mouse. You could have done almost as well on the money markets.

Most hedge fund managers are said to have had a terrible time during the stock market rally of the past couple of weeks, and it is more than possible that when the figures come to be published for this month, they will show a negative rate of return. So much for industry's powers of financial alchemy. The point about hedge funds, however, is that like shares, some are a good deal better than others.

The bulk of aspiring hedge fund managers don't last very long, if only because most hedge funds never raise enough money to cover their costs. Many of those that do are struggling now that the stock market seems finally to have bottomed out. But a select few continue to make spectacular rates of return. Attempting to find them is spawning a whole new industry in fund of funds management. You still need to be a high net worth individual successfully to tap into this new investment asset class. Tax and regulatory issues have dogged most attempts to create retail funds accessible to the ordinary punter.

Just as well, perhaps, if the hedge fund bubble has already gone as far as it is going to.

Lastminute.com

The mutual love-in which accompanied lastminute.com's latest deal cannot disguise the fact that Brent Hoberman and Martha Lane Fox are taking a risk in buying Holiday Autos. True, the two businesses are complimentary in many ways and true too, it will give lastminute a broader base of products, ranging from car hire and hotels to its staples of cheap flights and holidays. It is also a testament to the strength of the lastminute brand that it has managed to pull off a deal which, despite the torrid state of the equity markets, is largely financed with shares.

That said, businesses depend for their success on how the people who run them rub along, and this deal brings another strong, not to say bruising, personality on to the lastminute board in the shape of its founder and chairman Clive Jacobs.

Ms Lane Fox professes not to have seen the fly-on-the-wall TV documentary which showed Mr Jacobs and Holiday Autos in a less than flattering light. But there will be plenty opportunity to get up close now since he will become vice-chairman and executive director. His stake will also be bigger than that of Martha's and not much less than Brent's.

Lastminute's two founders say they love Clive and have already christened themselves the Three Musketeers. Clive says he admires them, and their chairman Allan Leighton, who adds parental guidance to Lastminute's youthful team. But is the boardroom big enough for four egos of this size?

Mr Jacobs is locked in for a year if he wants to max out but after that it is anyone's guess how long he will stick around. Providing the three musketeers can keep themselves from fighting before then, this none the less looks like an excellent deal for lastminute. Online car hire fits hand in glove with the lastminute concept, and what's more, Holiday Autos actually makes money.

jeremy.warner@independent.co.uk

Comments