Outlook: 'Open skies' as far away as ever after European 'victory'

ScottishPower; Logica/CMG

The "victory" claimed yesterday by the EU transport commissioner Loyola de Palacio after the European Court of Justice ruling on "open skies" agreements promises to be a pyrrhic one. Just consider. The US and the UK have been negotiating fruitlessly for the past ten years a deal for liberalising transatlantic air services. In this instance, there are just two countries and a handful of airlines around the table, and yet still progress has been impossible to achieve.

So why Brussels seriously thinks it will be able to stitch together an open skies agreement which encompasses the US and 15 EU member states (due to be increased to 25) and all their respective airlines this side of hell freezing over is a mystery known only to the eurocrats.

Flag carrying airlines are national virility symbols. In ruling that it is Brussels and not London, Paris or Bonn which should negotiate on their behalf and, just as important, determine who may own them, the Court of Justice has merely set the stage for a spectacular power battle between the EU and member states.

Even supposing that Brussels emerges victorious at the end of the day, why should countries beyond the EU wish to play ball? It is one thing for a non-EU nation to allow reciprocal landing rights for carriers from another country. It is quite another for it to sign a deal with Brussels and then find that any airline from any EU country can fly in anywhere, anytime, any place. No. Yesterday's ruling may have been an important one, but it is little more than a staging post on a journey that looks destined to last an awfully long time.

Where does the ruling leave British Airways and Virgin Atlantic, the two UK carriers which benefit from the UK's current and (according to the court) illegal air services agreement with the US? Predictably, both of them paid lip service to the brave new world of liberalisation that the judgement promises to usher in. They speak with forked tongue

In truth, they can only be delighted that the cosy monopoly they enjoy at Heathrow along with United and American Airlines is safe again for as far as anyone can see into the future. It is hard to see how there can be any open skies policy, negotiated unilaterally with the US, now.

Ms de Palacio promises a new era of liberalisation and low fares for air travellers. Frankly, they have more chance of getting a result from the other court battle which began yesterday – the attempt to prove that BA and 27 other airlines are liable for economy class syndrome - than enjoying the fruits of yesterday's court ruling.

ScottishPower

On the face of it, Ian Russell's admission that there "may be merit" in putting together ScottishPower with Scottish and Southern to create a Scottish electricity powerhouse is a statement of the obvious. But actually, it marks a significant change of stance by the Scottish-Power chief executive. Up until recently he's steadfastly insisted that the regulatory obstacles are so big that it's not even worth thinking about. Now he seems at least to be thinking, and possibly even talking to his opposite number at Scottish & Southern as well.

Nobody's pretending that the regulatory problems have suddenly gone away. At a time when the regulator is trying to liberalise the Scottish market, the idea that an existing duopoly of vertically integrated power and supply business would be allowed to become an absolute monopoly would seem far fetched. On the other hand there would be big cost cuts to hand on to customers by way of recompense, and it could reasonably be argued that a monopoly isn't in reality any worse than the present duopoly. There's not much competition in the Scottish market anyway.

There would also undoubtedly be political backing north of the border for the Scottish national champion thereby created. A merger of the two would put ScottishPower on an equal footing with Powergen, now owned by E.on of Germany, in terms of generating capacity and customers. The Scots would point to the fact that the UK electricity market has already been allowed to consolidate into just four big players, three of them foreign owned. A merger of ScottishPower and Scottish and Southern would add a fifth such grouping.

If Callum McCarthy, chief executive of the Office of Gas and Electricity, hasn't already been asked to examine the merits, he soon will be. More work for the corporate financiers from an industry that sometimes seems to exist only for the purpose of keeping them in work.

Since the industry was privatised 12 years ago in a manner that even then made hardly any sense, it has been through an extraordinary confusion of different owners and structures. Eastern Electricity alone has had five owners. Each time one of these transactions takes place, the investment bankers and corporate lawyers pocket another giant slug of fees. If £2bn sounds like an exaggerated estimate of the grand total, it won't be much of one. No doubt there's purpose in the fee earning madness, but it is sometimes hard to see it.

Logica/CMG

Logica's merger with CMG is one of those huddling together for warmth deals while the gale blows outside; it's much more about survival than expansion. Both companies have been pole axed by the downturn in IT spending that followed the bursting of the tech bubble, and although neither seems to be in any immediate financial danger, there is no obvious way of keeping earnings rising in markets that remain deep in the doldrums other than through cost cutting consolidation.

Fast back just two years, and the two were fierce competitors in all they did. The idea of a merger wouldn't have been thought remotely feasible. Once asked about the possibility, Cor Stutterheim, chairman of CMG, said he thought it most unlikely since CMG was a consensus driven organisation while Logica was a one man band otherwise known as Martin Read. Suspicion was mutual. At Logica, CMG's policy of encouraging employees to wear the company tie is still regarded with absolute derision.

There is nothing like necessity, it would appear, to make friends of sworn enemies. Mssrs Read and Stutterheim have been talking for several months now and they have discovered to their surprise not only that they like each other, but that the cultural and operational similarities between their two businesses are greater than the differences. Better still, the product ranges, geographical strengths and customer bases are diverse enough to allow for a higher degree of cross fertilisation.

The biggest savings will be in wireless messaging and billing software, once a big growth business for both companies. The network operators and handset manufacturers have opted to do much of the for next generation messaging services in house, shutting out Logica and CMG. Mr Read for one remains convinced that the market will eventually come back for the independent software house, but he is having to step back to move forward. Just a fifth of group revenues, mobile telephony software will account for a third of the cost cuts.

Mergers are never easy. Too often the result is only one of plunging morale, unfocused leadership and general infighting. If the cost benefits are delivered at all, they can be far outweighed by the damage to momentum, drive and customer relations. Mr Read is confident his merger won't turn out that way, but then a year ago he was equally confident of maintaining stella levels of revenue and earnings growth. Consolidation isn't always the answer, even in shrinking markets.

jeremy.warner@independent.co.uk