No time to shoot the messengers

Anthony Hilton12 April 2012

GIVEN that the airline industry is facing its worst crisis since the Gulf War 12 years ago, the surprise would be if there were not arguments at the top of companies such as British Airways about what is the best direction in which to fly.

So reports of a rift between BA chairman Lord Marshall and chief executive Rod Eddington might merely reflect the crisis in the industry. Tension between chairmen and chief executives is part of the governing process and it is vital that it comes into play when times are hard because then it is doubly important for management not to be panicked or bounced into actions that have not been thought through.

But BA is coming to the point where it has to make some strategic choices on its future size and shape. At extremes the issue is this: should it shed as little as possible of its global network so that it will be poised to spring back when air travel recovers and remain a world class airline (this might be characterised as the Marshall plan)? Or should it undertake a major shedding of routes and capacity to enable it to survive even if this crisis is prolonged, though as much less of a force in global aviation (arguably the Eddington view)?

In practice, I doubt that either Marshall or Eddington is that polarised. The trouble is that there is no right choice. What is right depends on how quickly the airline industry recovers, and no one knows that. The Marshall plan will be no good if BA goes bust waiting for the upturn. The Eddington plan will be no good if it leaves the airline so emaciated it can no longer provide effective competition for the American carriers or Air France and Lufthansa when the good times return. But it is clearly gratuitous for the debate and the issues to be personalised so that Marshall becomes a target who needs to be ousted because he is blocking Eddington.

Given the flak Marshall has endured in recent years at British Telecom, Invensys and Inchcape, he is unlikely to buckle at the first sign of rumbling from shareholders who lack the nerve to put their names to the rumours they feed to the newspapers. It is nevertheless a deeply unpleasant trait that some institutions seem to think firing the management is justified as revenge for a falling share price, regardless of whether it is in a company's best interests.

Pole positions

THE polarisation of the retail financial industry between those allowed to advise on products (who cannot produce them) and those allowed to produce products who can sell these but nothing else has never worked quite as intended.

It was supposed to stop customers being duped into thinking they were getting objective advice from someone who was in fact a company salesman, or from an independent adviser who was a salesman for three or four competing companies. But instead of happy customers it was a regime that delivered the home-income plan scandal, and the pension mis-selling problems, to say nothing of Equitable Life.

Today the chairman of the Financial Services Authority, Sir Howard Davies, said he would like to get rid of it - to break the shackles polarisation places on competition and innovation, while at the same time ensuring consumers get clear information about the different type of advisers available to them. It recognises the flaws of the current system and wants to correct them.

So two cheers for a bold move from the FSA, with one cheer withheld lest we forget why we had polarisation in the first place. It was imposed in spite of huge protest by the FSA's predecessor body in one of the first bursts of regulation in the mid-1980s.

Rosy view

WITH about a third of American companies due to report fourth-quarter profits for 2001 this week, investors will get a glimpse of the horizon from company boardrooms. At present, the overall earnings forecast for this year is for corporate haemorrhaging to slow markedly in the current quarter and reverse in the second, ending one of the deep-est profit recessions for decades.

However, this rosy scenario depends on the overall economy beginning to grow again, either in the current quarter or by early spring and then to post solid 3% to 5% growth for the rest of the year.

As Federal Reserve chairman Alan Greenspan suggested in his first speech of the new year last week, this sort of strong bounce back is not assured. He noted significant risks to the economy, including sluggish growth overseas, tepid capital spending, rising long-term consumer interest rates and still-fragile consumer confidence, all of which complicate recovery prospects.

There is a subtle warning here. Except for some consumer-related spending, most of the negative factors he cited have not shown much response to the aggressive interest rate easing this past year. With the Fed Funds rate at a 40-year low of 1.75%, there is not a lot of ammunition left in the Fed's arsenal.

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