Outlook: Stelios decides to gamble on the twin-engined approach

TXU's MAD world; Somerfield blues; BAE's bomb

What's got two wings, 150 seats, and sells at a 60 per cent discount? Answer: An Airbus A319 on order to easyJet. Airbus is so desperate to break into the no-frills airline market that it has made Stelios Haji-Ioannou an offer he cannot refuse. The headline figure for yesterday's blockbuster jet order is £4bn but easyJet looks as if it will have change out of £2bn.

The A319 has a notional sticker price of $50m but, by buying in bulk, Stelios is reckoned to have picked up 120 of them for $20m a piece. That's $5m less than Boeing was asking for its 737-800.

Ordinarily a steal like that would send an airline's share price into the stratosphere. But easyJet's went into a nasty tail spin yesterday and it is easy to see why.

The low-cost airline model is built on a handful of simple principles. One of them is that no-frills carriers only operate one type of aircraft: it saves on crew costs and training, not to mention spares. The doyen of the industry, South West Airlines no less, swears by its single Boeing fleet.

By opting for a mixed fleet of Airbus and Boeing jets, Stelios has broken that cardinal rule. In typical Stelios fashion, he argued that it would have been an "offence" to not to buy Airbus at the price on offer and that for too long easyJet had believed in its own public relations about what makes low-cost airlines fly.

Since Stelios and his family own 48 per cent of the business, shareholder approval for the Airbus deal is a foregone conclusion. He may longer believe in his own PR but how are other shareholders to reconcile the deal with the prospectus which accompanied easyJet's flotation less than two years ago? There they will find a comprehensive explanation of why it is so important for low-cost airlines to fly just one aircraft type.

Stelios and easyJet have broken the mould before so it would be unwise to bet against them now, particularly when Airbus is stuffing the overhead lockers with crisp £20 notes (and trashing the residual values of every other A319 fleet in the process) and funding the up-front costs of introducing the A319.

But there is no disguising the gamble Stelios is taking and the fact that while he is no longer chairman, he still controls the joystick. Easyjet has only just begun to consume Go and is already on to the next course, Deutsche BA. It has less than a year to digest them before it begins the task of integrating a brand new aircraft into the fleet. Ray Webster, easyJet's chief executive, is highly rated and for good reason but this will stretch even his managerial capacity.

TXU's MAD world

Aw shucks, honey, we just got burnt. Erle Nye, the Texan in the ten-gallon hat who paid John Devaney £3bn for Eastern Electricity back in 1998, yesterday cut the company adrift and hoisted the "for sale" sign. If he is lucky, he will get £1.5bn for the business, which is now called TXU Europe and has become the latest victim of Callum McCarthy's brave new world of wholesale electricity trading.

To be fair to the energy regulator, the trigger for the sale of TXU Europe is the parlous financial state of the parent company back in Dallas where Mr Nye can barely afford to pay a dividend, let alone advance $700m of credit to keep his operations in Europe afloat.

But TXU Europe would not have been a problem were it not for the fact that wholesale electricity prices have fallen 40 per cent since Mr McCarthy began to re-jig the market. The pain is made worse for TXU by the fact that it is also tied into long-term contracts to buy electricity for its five million UK customers at prices which are virtually double that depressed spot rate.

British Energy and Powergen are also in deep trouble on the generating side. But British Energy cannot be allowed to go bust because it represents the nuclear option and Powergen has the backing of a German parent with deep pockets. TXU Europe has neither. It does not qualify for a £650m handout from the Government, nor does the parent company have a dime to spare.

It does, however, have one card in its hand, which is the certainty of mutually assured destruction for any counterparty which pulls the plug on it. Perhaps that is why the likes of Powergen and Scottish & Southern, which generate the high-priced juice which TXU buys, are so keen to see it survive that they are lining up bids for the company.

With the benefit of hindsight, TXU Europe made plenty of mistakes of its own. The biggest was getting the balance wrong between generation and supply and then being forced to buy power at seriously deranged prices.

Mr McCarthy takes the view that every time a player fails it demonstrates how just brilliantly the market is functioning. But at this rate the market will be working so well that there will be no one left in it.

Somerfield blues

First Iceland, now Somerfield. The casualties of the supermarket price battle are mounting up. Somerfield's profits warning was a stonker by any standards, all the more so because it had been denying for several days that one was on the way.

But yesterday there it was in all its glory leaving the shares looking as limp as some left-over chicken on the Kwik Save meat counter. It was the same last week with Big Food Group, owner of the Iceland frozen food stores which got the big chill after reporting a slump in sales.

The problem is plain: such is the price squeeze being exerted by the big boys in the supermarket sector that the smaller operators cannot keep up. The Wal-Mart owned Asda is leading the charge with relentless downward pressure on prices and it is forcing the market leader, Tesco, to follow suit. That is causing enough problems at the likes of J Sainsbury and Safeway let alone second division players such as Iceland and Somerfield. These laggards can either maintain prices and haemorrhage market share, or try and match rival price promotions and watch their profit margins wither away. It's not much of a choice but Iceland has decided on the former strategy, Somerfield the latter.

Whether it will works or not is doubtful. Both are working with weak brand names and poor store portfolios. In a sector where growth is already slowing, the future does not look good. Neither is going bust as Somerfield has low debts and Big Food Group had its refinancing earlier this year. But with the market likely to get tougher still they are going to struggle to trade their way out of the current mess. Somerfield has jettisoned its chief executive in an attempt to clear up a complicated management structure which saw it stagger along with an executive chairman and a chief executive. As the sole man in charge John von Spreckelsen now has no one else to blame. He has been in tight spots before as the head of Budgens which eventually attracted a buyer. So maybe he is hoping for a bit of industry consolidation down at the dismal end of the market. But who with? Big Food Group might be a merger candidate but the thought of Iceland, Somerfield and Kwik Save getting together sounds a bit too much like three drunks propping each other up at the bar.

BAE's bomb

BAE's aerial bombardment of the Ministry of Defence has been a partial hit. Geoff Hoon now promises us a defence procurement policy based on the contradictory principles of maximising competition while safeguarding the UK's industrial base. It will be interesting to see how he squares the circle when the first big test comes early next year and he has to choose between a French or British aircraft carrier.

michael.harrison@independent.co.uk