Taking the long haul to open skies

Outlook

BOB AYLING must wonder whether he will be drawing his pension by the time British Airways' alliance with American Airlines is approved. On present timing the two partners will not get regulatory clearance to take to the air until this time next year - three and a half years after the link-up was first announced.

If it is any consolation, talks on the transatlantic "open skies" agreement that must accompany any BA-AA alliance have been going on even longer. They not only predate Tony Blair, they predate John Major. This week the talks have resumed in London for the first time since Mr Blair came to power in May last year.

Perhaps it will be worth the wait since the prize is large. In return for allowing BA and American to exert a monopoly on a number of key transatlantic routes, the market between Heathrow and the US will be opened up to any carrier. This largely means other US airlines.

This will require BA to give up some of its slots at Heathrow to its rivals - 267 is the figure the regulators have in mind. BA and AA appear to be coming around to the idea that these should be given away for free, rather than sold, which is an act of some magnanimity as they are valued at around pounds 500m.

That, however, will not automatically pave the way for the signing of an open skies deal. The Americans are old hands at these bilateral agreements. They have signed 31 such deals with other countries and expect the open skies agreement with Britain to follow the same formula.

The British negotiators, on the other hand, realise that access to Heathrow is worth more than a space on the apron at any other airport in the world. Certainly, it is much more valuable than access to Frankfurt, Paris or Amsterdam.

For that reason they want to cut a special deal with the US. This means that all sorts of bolt-on goodies are on the table. The UK wants to raise the issue of cabotage - the right of UK carriers to operate domestic US services - and get a commitment from the US to ease their restrictions on airline ownership. They also want to exclude the "fly America" clause from a new bilateral which requires US government personnel to fly on US airlines.

These are contentious issues which means that none of the participants expect a breakthrough when the talks conclude in London tomorrow. In fact it will probably take at least two more rounds to make progress, meaning that it could take until next spring or even longer to reach agreement on open skies.

Given what is at stake, and the bargaining chip the UK has in its grasp, it is worth playing the long game. Even if Bob Ayling has qualified for a bus pass by the time the talks reach a successful conclusion.

Microsoft

SOMETIMES THE biggest stories are those sitting there on your own front door step, but for some reason everyone chooses to ignore them. The accounting implications of Microsoft's employee stock option scheme might not immediately seem like one of these, but that's because most people do not realise the extent to which the software goliath has been paying its workers in shares.

As an example of the speculative froth that has built up on Wall Street over the past five years, the Microsoft employee share option scheme, taken together with the company's hedging activities in its own stock, takes some beating. Indeed what Microsoft has built for itself could reasonably be viewed as a financial pyramid.

A potentially vast, unrecognised liability has been accumulated. And its relevance to us here in the UK? Microsoft's share price has so far proved remarkably resilient to the correction in markets. Even a worldwide slump is not going to stop Bill Gates, is the general view. But can this really be true? Is not the rise and rise of the Microsoft share price the Wall Street bubble in microcosm?

Like most US technology companies, Microsoft has had to promise big stock options in order to attract the calibre of employee it needs to stay competitive. Its own chief financial officer has admitted that but for payment in stock yet to be exercised, the company's wage bill - its main cost - would be two to three times higher than it is. The effect has been to establish a potential liability running to some $34bn, or eight times annual net income.

Some of this liability has been hedged, either by buying Microsoft stock directly, or by selling put options in the market - that is selling investors the right to put their shares in Microsoft on the company at a predetermined price. But a large and undefined part of it appears not to have been.

According to Parish & Company Portfolio Managers, an Oregon-based consultancy, if this liability was adequately accounted for, then Microsoft and some other leading Wall Street technology companies wouldn't make any money. Already, the valuations put on these companies might seem stretched enough at upwards of 50 times earnings, but if it were generally accepted that the emperor had no clothes at all, then they would seem like pure fantasy.

What Microsoft should perhaps be doing given the importance of these options as a way of remunerating staff is accounting for them against profit as if they were an ordinary cost. Present accounting rules in the US do not require that Microsoft do this, for it would destroy the illusion of profit if they did.

And yet the only reason people want to go and work for these companies is that they are offered stock in an enterprise whose share price only seems to go up. It can readily be seen that Microsoft and others have created for themselves not only a very large potential liability, but also a serious operational problem should the stock head south, as it is now beginning to, and employees' expectations are disappointed. But that, as they say, is only the half it.

Microsoft has also been selling put options in its own stock on a grand scale. You may well ask what a serious commercial company is doing speculating in its own stock, but actually they do it all the time these days - a process we have come to know as share buybacks.

In theory, selling a put option is no different. But in practice it may very well be, since Microsoft actually books the money it earns from selling options in its own shares. Last year it earned hundreds of millions of dollars in this manner. If the stock plunges through the value of the option, as it is almost bound to in a crash, then Microsoft has to fund the difference. Again this would seem a highly dangerous and speculative activity for a company whose business is not that of investment banking but one of designing and selling computer software.

It may seem odd that a company made up of such self evidently clever people could allow itself to become as exposed as this. You could argue that if the stock collapses, then it's nobody's problem but that of the employees, since it is the value of their share options that disappears down the plug hole and Microsoft's liability with it.

But just as the illusion of profit would be shattered by proper accounting for this form of remuneration, so too would be the illusion of wealth once the fragility of the structure it is built upon is realised. Isn't that rather what's happening to financial markets as a whole right now?

News
More than 90 years of car history are coming to an end with the abolition of the paper car-tax disc
newsThis and other facts you never knew about the paper circle - completely obsolete today
News
people'I’d rather have Fred and Rose West quote my characters on childcare'
Life and Style
The new Windows 10 Start Menu
tech
Arts and Entertainment
There has been a boom in ticket sales for female comics, according to an industry survey
comedyFirst national survey reveals Britain’s comedic tastes
PROMOTED VIDEO
Travel
Bruce Chatwin's novel 'On the Black Hill' was set at The Vision Farm
travelOne of the finest one-day walks you could hope for - in Britain
Sport
footballManchester City 1 Roma 1: Result leaves Premier League champions in danger of not progressing
Arts and Entertainment
Gay and OK: a scene from 'Pride'
filmsUS film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
News
i100
Life and Style
Magic roundabouts: the gyratory system that has excited enthusiasts in Swindon
motoringJust who are the Roundabout Appreciation Society?
Arts and Entertainment
Hilary North's 'How My Life Has Changed', 2001
booksWell it was good enough for Ancient Egyptians and Picasso...
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

Day In a Page

Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

The children orphaned by Ebola...

... then rejected by surviving relatives over fear of infection
Pride: Are censors pandering to homophobia?

Are censors pandering to homophobia?

US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
The magic of roundabouts

Lords of the rings

Just who are the Roundabout Appreciation Society?
Why do we like making lists?

Notes to self: Why do we like making lists?

Well it was good enough for Ancient Egyptians and Picasso...
Hong Kong protests: A good time to open a new restaurant?

A good time to open a new restaurant in Hong Kong?

As pro-democracy demonstrators hold firm, chef Rowley Leigh, who's in the city to open a new restaurant, says you couldn't hope to meet a nicer bunch
Paris Fashion Week: Karl Lagerfeld leads a feminist riot on 'Boulevard Chanel'

Paris Fashion Week

Lagerfeld leads a feminist riot on 'Boulevard Chanel'
Bruce Chatwin's Wales: One of the finest one-day walks in Britain

Simon Calder discovers Bruce Chatwin's Wales

One of the finest one-day walks you could hope for - in Britain
10 best children's nightwear

10 best children's nightwear

Make sure the kids stay cosy on cooler autumn nights in this selection of pjs, onesies and nighties
Manchester City vs Roma: Five things we learnt from City’s draw at the Etihad

Manchester City vs Roma

Five things we learnt from City’s Champions League draw at the Etihad
Martin Hardy: Mike Ashley must act now and end the Alan Pardew reign

Trouble on the Tyne

Ashley must act now and end Pardew's reign at Newcastle, says Martin Hardy
Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?