Join up to stave off the recession

Anthony Hilton
3 Dec 2008

It seems an age ago that Tony Blair promised us joined-up government, and while it was obviously a rash thing to promise it is nevertheless disappointing to see that every year seems to take us further away from, not nearer, the goal.

Take the banks, the poor beaten-up banks, under pressure every day from government to free up their lending so that we will not shortly be awash in closures of businesses suddenly starved of credit. But just as they are pummelled from one side by ministers, so are they arm-locked from the other side by the Financial Services Authority laying out what it thinks is the required amount of capital for a healthy banking system. It leaves the banks no where to go - damned if they do, damned if they don't.

As far away from banking as you are ever likely to get sit the water companies. They get calls every day from Whitehall asking them to invest now to help stave off the recession. Mandarins suggest, for example, they might widen a few drains or build a new reservoir to help to combat climate change.

But it is OfWat, the water regulator, that decides what investment water companies will be allowed, by including, or not, in the regulated asset base. Any investment falling outside this permitted category is, literally as well as metaphorically, money down the drain. Government may urge firms to do it. The regulator won't allow it. Spending on climate change is for the Government, not water companies, it says.

Government wants firms to invest for the future. The regulator wants lower water bills for customers. You can't make both the priority. Like the banks, the water companies are damned if they do, damned in they don't.

Agreement in the low-cost air

Michael O'Leary of Ryanair and easyJet founder Stelios Haji-Ioannou rarely agreed on anything in public when they were going head-to-head as pioneers in cut-price air travel 10 years ago. Now, though, it is interesting how close their views are - even if they still do not admit it.

Stelios has expressed public alarm at easyJet's expansion plans going into what might well be a prolonged recession, and he is surely right to do so.

Freddie Laker was sunk in exactly this way in the 1980s recession when he committed to buy a raft of new aircraft just as the world economy was turning down. His competitors on the North Atlantic recognised that they then had deeper pockets than he did, and launched a price war in which he was the inevitable loser.

There are still enough state-owned or state-sponsored competitors around for easyJet to become a similar target if times get really tough, whatever EU competition rules may say. The firm is so big now it cannot buck the market, and it stands to reason there will be less air travel as the recession bites.

The collapse in sterling has already made weekend breaks to the Continent significantly more expensive. Taking fewer short holidays abroad is an obvious way to economise. If people decide to go only twice, not three weekends a year that is a 50% drop in numbers in a business which needs high load factors to break even.

The only surprise in this is that institutional shareholders like Standard Life have backed the board in seeking to silence Stelios rather than encourage a full debate about his concerns.

O'Leary's bid for Aer Lingus is surely also not the buccaneering, confident expansion he would have us believe.

The shares have fallen so far he is locked into a big loss on his 29.9% holding unless he buys the whole business, but the main attraction must be the £650 million cash pile tucked inside Aer Lingus. He may also see an opportunity to save a lot of money by eliminating competition and consolidating the very large number of overlapping routes.

It is hard, however, to believe he actually wants to add three different types of Airbus to his fleet of Boeings. So the explanation whi ch makes more sense is that O'Leary sees tough times ahead and sees this deal as protecting revenues and delivering cash - which is what Stelios wants the easyJet board to focus on, too.

Feeling positive about negatives

In these difficult times there ought to be a prize for people determined to look on the bright side. Thus today's "Life Of Brian" award is for comment attributed in the Financial Times to Derek Stewart, a director of Mellon Global Alternative Investments.

One-third of the hedge funds in which his group had invested are now restricting withdrawals so he cannot get his money back. But he took comfort from the fact that "managers were doing this for positive reasons".

What reasons? "They don't want to be forced sellers of securities already trading at historically low prices."