Open skies cloud the issue for BA deal

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The Independent Online
This week Ian Lang, the Trade and Industry Secretary, has his first opportunity to scrutinise the Office of Fair Trading's recommendations on the proposed alliance between British Airways and American Airlines.

The broad conclusion is thought to be that the deal should, in principle, be referred to the Monopolies and Mergers Commission, but that the door should be left clearly open so that conditions can be imposed in lieu of a reference.

Despite all the bluster from BA and American about walking away from the deal, this is little more than posturing. The two airlines will make concessions. They will give up take-off and landing slots at Heathrow and they will also give up some of their transatlantic routes. The question is how many.

The upshot then will be another round of protracted negotiations between BA, American and the OFT and another barrage of lobbying from rival airlines.

There is something mildly disagreeable about this bartering approach to such an important issue. It sometimes seems that the objective here is to cobble together a compromise that keeps the deal going yet keeps the opposition quiet.

Part of the problem with the BA/American deal is that it cannot be examined in isolation. Courtesy of the US government it has been tied very firmly in with completion of a new open skies aviation agreement with Britain. The US has made it clear that without open skies there will be no BA/American deal.

There is therefore a degree of pressure, sometimes overt, sometimes unstated, on the British competition authorities to reach their conclusions on the alliance.

There is an understated and understandable reluctance to call upon the services of the MMC since this would delay further a process that must be concluded before the open skies talks can recommence with any seriousness.

There is also a timing imperative, since next year the European Commission is hoping to widen its powers to allow it negotiate air treaties on a Europe-wide basis. Given the prize that is Heathrow, and the only real bargaining chip we have, it would be unhelpful to have such a valuable asset played by those whose interests spread beyond west London. There is, therefore a degree of urgency.

That pressure must not be allowed, however, to cloud the judgement of those charged with the responsibility of safeguarding the public interest. If the BA/American alliance is anti-competitive, then stringent conditions must be imposed to bring it into line with the consumer's best interests. If it is not anti-competitive, then there must be no token slot and route redistribution merely to appease opponents of the deal.

Superficially, there is a weight of evidence to suggest that the deal is anti-competitive. However, in mitigation, BA can produce evidence to suggest that the deal is futuristic rather than monopolistic. It is a deal driven by the rapidly changing dynamics of the airline industry, it argues.

The most important ingredients of the final verdict delivered on the BA/American deal must be certainty, clarity and confidence. The temptation to hatch a shabby compromise must be resisted. If Britain can deliver a judgement on the competition aspects that is robust, it will then increase the pressure on the US to do likewise. Its absurd insistence on linking approval of the deal with open skies threatens to jeopardise both. If Britain can take a view on the competition implications of the deal, then so can the US.

If competition issues can be separated from open skies, then there will be a chance of real liberalisation.

Power to the people

WHEN Norwich Union confirms this week that it is to press ahead with demutualisation and proceed to a stock market flotation it will give its senior management an opportunity for the first time to explain the rationale behind a move that is easy to misunderstand.

Part of Norwich's problem is that it is blazing the trail. It is a unique business with a unique set of complexities and a unique motivation.

There is a temptation to try to lump Norwich along with the building societies and some of the other demutualisations. To do that is to run the risk of misunderstanding by association.

The Norwich board has given the question lengthy consideration. Indeed it is credit to the vision of the board that it has even considered the question at all. In a business where accountability is little more than theoretical, it would be easy to drift pleasantly along with the status quo as your guide. But any progressive business will always ask the question "why?", it will always challenge convention and it will be constantly inquisitive.

Having had the courage to ask the question, the board has also had the courage to answer it. That answer suggested that no change was not an option if the business was to move forward and add value to its owners, the life policyholders. Once a programme of change had been agreed, it drew Norwich towards the demutualisation/float approach.

It offers many benefits. The most intriguing is also the most intangible. The current owners are the life policyholders. They will continue to have a stake in the business through the bonus shares they will be given as part of the demutualisation process. That presents Norwich with a great opportunity to develop a unique relationship between shareholder and policyholder, since they will at the outset be one and the same.

The management is not afraid to be innovative and creative. It accepts that the creation of a genuine shareholder democracy has a high degree of appeal. As a unique business, pursuing a unique path, it sees no reason why it should not have a unique relationship with its shareholders who are also its policyholders.

The danger is that the complexity of the process will force the management simply to focus on getting the deal away. The timetable for flotation is tight, and more detached advisers may argue against anything too interesting. However, if that is all Norwich can muster it would be a wasted opportunity. The merits of the demutualisation are powerful enough, and the prospects of the floated business will be sufficiently attractive to ensure widespread support. If Norwich could in parallel develop a more constructive and lasting relationship with its shareholders, it would strike a great blow for the concept of shareholder democracy, which has become a little tarnished of late.