Jeremy Warner's Outlook: Airbus finally bags BA for superjumbo

Wrong-headed thinking on Rock; Tripartite reform by all means, but how?

Willie Walsh, the chief executive of British Airways, is doing his level best to quash suggestions of political interference in the decision to fly Airbus rather than Boeing for some of his long-haul needs, but are his protestations really credible? The order was a coup for Airbus, and a bit of a blow for Boeing, despite the consolation prize of 24 Dreamliners.

BA has bought from Airbus in the past, but never before for its long-haul needs. Maybe it is the special relationship or something, but to date Airbus has found it hard to prise Britain's flag carrier away from Seattle. This time around, BA is buying 12 Airbus superjumbos with options on a further seven.

So was there pressure from ministers desperate to underwrite the work that British factories provide for the superjumbo? You bet there would have been. Ministers have no say over Airbus now that BAE Systems has sold its 20 per cent stake, but they can at least attempt to arm twist British airlines into supporting British jobs by buying the "right" aircraft. Whether they influenced the decision is anyone's guess. Mr Walsh insists not. Coming from an Irishman, this assertion is a good deal more credible than it would have been from Bob Ayling, Sir Colin Marshall, or any of the other establishment old guard of British Airways. BA may also reasonably feel that it owes the Government nothing after Britain's failure to fight BA's corner more aggressively over the open skies deal with the US.

Yet whatever the truth there are actually a number of very good commercial reasons for BA to opt for the Airbus superjumbo over the Boeing alternatives. Both in terms of fuel efficiency and noise emission, it beats the opposition hands down. Its massive size also allows for more innovation in the full service proposition that BA hopes to offer its premium customers.

By splitting the order between Airbus and Boeing, Mr Walsh achieves what he sees as a perfect fit. The Dreamliner is too small for the perceived needs of quite a number of BA's long-haul routes. By the same token, the superjumbo is too big for others.

For BA, yesterday's order is a milestone in other respects too. Up until quite recently, BA was in no position financially to modernise on such a scale. A massive pension fund deficit in combination with sub-investment grade debt made it difficult to borrow. Over the past year or two, these obstacles have been removed. Yesterday's order allows BA to replace its ageing long-haul fleet and add capacity at the rate of an average 4 per cent a year until 2014. This is a little above the expected growth in the market as a whole. None of this necessarily means BA has secured its future. With the fast-growing airlines of the developing world snapping at his heels – all with hugely ambitious expansion plans too and none of the legacy costs that BA has to maintain – Mr Walsh will still have to fight for that.

Wrong-headed thinking on Rock

The prevailing wisdom is that Northern Rock shareholders deserve to lose everything over the debacle which has overcome their company. This is a view apparently shared by the Government, the Financial Services Authority and the Bank of England. Management cocked up, and now as an example to others, equity holders should be forced to take their punishment. It is a point of view that appeals to the puritan in all of us, but it is also wrong headed.

The near collapse of Northern Rock has already meant huge losses for some, but it has created opportunity for massive profits by others. Lansdowne Partners alone is said to have made more than £1bn from the debacle. Collectively, other short-selling hedge funds may have made a similar amount. Dealers struggle to recall a stock which has been as heavily shorted as this one, with perhaps as much as 50 per cent of the equity out on loan to cover short positions.

Such is the orgy of short selling that some shorters are already unable to deliver. In such circumstances, the FSA and the London Stock Exchange are meant to step in and force the offending parties to buy back their positions, but so far they have stood on the sidelines.

The selling of Northern Rock shares is no longer about moral hazard. Actually, it's about snouts in the trough and it is making the authorities look very silly indeed. The reason why other banks won't lend to Northern Rock and thereby help ease its crisis is not primarily because they think the Newcastle-based mortgage bank is a bad risk, but because they want to see it go to the wall. That will be one less competitor in the market for deposits and mortgages to worry about.

This unholy alliance of hedge funds and rival banks can scarcely believe its luck. Here is a government whose high-minded adherence to the principles of moral hazard delivers their every money-making wish. Were it not for the risks to the wider banking system, Mervyn King, the Governor of the Bank of England, would be positively cheering Northern Rock's demise on from the sidelines. Ministers should beware.

There are 6,000 jobs at risk here. Should they too be sacrificed to the misplaced belief that, pour encourager les autres, Northern Rock should be given over to greedy hedge funds and rival bankers? Selling to JC Flowers, Cerberus or some such other vulture fund might get Northern Rock off the Government's books, but how is it going to look when a couple of years down the line it emerges that the buyers have made yet another fortune by breaking it up and selling it on?

The best advice that Goldman Sachs can give to the Treasury is that it should out-stare the shorters and keep the Rock on life support. Given time, the bank ought to be able to stand on its own two feet again. That's surely a better outcome than the present feeding frenzy.

Tripartite reform by all means, but how?

Everyone agrees that Britain's system of financial oversight has been found wanting by what Richard Lambert, the director general of the Confederation of British Industry, has likened to the failings of a "banana republic". Less clear is how it should be reformed.

Should responsibility for crisis management be stripped from the Bank of England and more overtly placed with the Government and the FSA? If that were done, what would it say about the Bank's continued role as an independent monetary authority?

In order to be in charge of crisis management, it is also necessary to have responsibility for the payments system. If the Bank's ability to implement the interest rates it sets through money market operations is removed, it would become no more than a monetary institute, an adviser on interest rate strategy rather than a practitioner of it. In essence, monetary policy would again become a function of Government. There is no chance of the Government going this route. An independent monetary policy is a cornerstone of the Government's macroeconomic framework. Hell will freeze over before Gordon Brown allows this reform to be reversed.

Alternatively, ministers could go the other way and hand responsibility for banking supervision back to the Bank of England. This might allow for greater unity of purpose in crisis management. But because regulatory failure is always eventually inevitable, it might also end up damaging the Bank's credibility as a monetary authority. Responsibility for regulation cannot in any case be vested in an authority independent of government. As can readily be seen, the issue can be argued round in circles without producing obvious answers.

The case even for a beefed-up system of deposit insurance is by no means unarguable. Northern Rock is a quite unusual bank in that it deliberately targeted the "silver saver" and therefore had a high proportion of depositors with large amounts of money. This made it highly prone to a run if ever it got into trouble. It is unlikely other banks are quite so vulnerable. Oh what joy the policy makers are going to have trying to decide how to secure the barn door now that the horse has bolted.

j.warner@independent.co.uk