WILLIE WALSH has a back-seat pilot with him in the cockpit at British Airways. The pensions regulator will be watching how Mr Walsh steers the airline and, if he disagrees with a particular turn, he can block it. Some investors were disappointed that the new chief executive did not announce an interim dividend yesterday. But had he been so inclined, he might have found it difficult to persuade the regulator that the money should go to investors rather than into plugging the gaping hole in BA ’s pension fund.
The numbers that Mr Walsh revealed yesterday showed increasing revenue and an underlying improvement in profits, the previous year’s figures having been bolstered by proceeds from the sale of Qantas. But the high cost of fuel means that, even though hedging lessens the impact to some extent, BA must seek savings elsewhere. Technology will play an ever greater role, particularly, Mr Walsh says, where it “eliminates activity”. He means human activity, so that BA can cut back on the number of employees, who account for 30 per cent of costs.
But he cannot cut back on the money that he is shovelling into the BA pension fund. At the moment, the company contributes five times what the employees do, a ratio which he thinks completely unreasonable. Any change, however, will have to be achieved within a restructuring of the entire pension scheme.
“We have to ensure that anything we do addresses this issue once and for all,” Mr Walsh says. That will not be easy. The deficit is currently put at £2 billion on an FRS 17 basis but, according to John Ralfe, the independent pensions consultant, the buyout deficit is likely to be about £4 billion. In a paper for Royal Bank of Canada, Mr Ralfe suggests that BA will be paying the largest levy of any company into the new Pension Protection Fund next year. He estimates that it could be between £10 million and £30 million, depending on the total amount that the PPF sets out to raise.
The PPF contribution will not hobble BA, as it surely will some smaller companies with hefty deficits. Nevertheless, it represents a continuing headache which Mr Walsh would rather eradicate. Although he does not have at the top of his agenda the need to secure the merger that his predecessor, Sir Rod Eddington, sought, he does concede that BA must have its eyes open for the “transformational deal”, which would probably be a transatlantic one. With the pension fund in its current state, the pension fund regulator would probably be unenthusiastic about such a deal.
More immediately, Mr Walsh is concentrating on his drive for efficiencies and persuading passengers to upgrade to his more expensive seats. The internet is becoming increasingly important in both marketing the airline and in operating it. Already around 22 per cent of passengers book online and within a couple of years, the proportion could reach half.
By the time the airline transfers to Terminal Five at Heathrow, around 80 per cent of passengers will check in either online or through the self-service terminals at the airport. This trend eliminates activity, as Mr Walsh would put it, and brings down costs. Better still, terminals do not need pensions.
Bankruptcy pain for borrowers
PEOPLE are now paying the price for borrowing too much. An increase of 46 per cent in the numbers of personal bankruptcies in the third quarter against the same period last year is an alarming leap. Part of the steeply rising trend that has been in evidence this year is undoubtedly due to the change in the bankruptcy laws that has made it easier for a bankrupt to wipe the slate clean. For some, going bankrupt is undoubtedly being seen as a relatively painless and stigma-free way to shed debts. To many more, however, it will involve misery: the loss of homes and jobs.
()As house prices soared and banks ladled money to buyers, the seeds for many of these bankruptcies were sown. The Council of Mortgage Lenders estimated in August that a first-time buyer’s average new loan was 88 per cent of the value of the property and that people were borrowing 3.21 times their income. But to reach that average, there were plenty of people borrowing much higher multiples of their earnings to fund close to 100 per cent of the purchase price. They left no margin to meet the increases in interest rates that have ensued.
The heavy indebtedness of consumers has taken its toll of the high street, keeping shoppers’ purses shut. Hence the latest figures show the retail sector as the hardest hit by liquidations. In the second quarter, total business liquidations were up 14 per cent on a year ago and retail collapses were up 17.5 per cent.
The third-quarter rise in liquidations was slightly higher but the likelihood is that the proportion of those that were retailers was even higher. The landlords will be next to suffer.
Sky bites back
THE independent directors of BSkyB were distinctly unamused by the behaviour of the institutional investors in the company. So unamused that they have taken the unusual step of penning a letter to tell them so.
The directors, including Lord Rothschild and Allan Leighton, clearly resented the fact that they had spent a deal of effort trying to reassure investors that they would protect BSkyB from over-encroachment by Rupert Murdoch’s News Corporation (parent company of The Times) and had agreed a limit on the increase in voting rights that News Corp would gain from the proposed share buyback. Yet a hefty number of investors voted against the buyback anyhow.
“Misguided” was how the independent directors described the action of the investors. Imagine what the tone of the missive would have been had the motion actually been lost!
Boot goes in
SILCHESTER does not have a pivotal holding in Boots but the lack of enthusiasm it expresses for the Boots merger with Alliance UniChem echoes the sentiments of several other investors in the company. This wariness does not appear to have been dispelled by the concerted efforts in recent days of chief executive Richard Baker and chairman Sir Nigel Rudd. Sir Nigel has rebuffed an overseas bid for Pilkington, where he is chairman, and investors seem to think that he should have been equally unwelcoming at Boots.
