Terry Murden: Airlines can emerge from turbulent times in a more robust position

Published on Saturday 13 September 2008 13:59

THE misery being suffered by thousands of stranded holidaymakers this weekend has brought a few brutal truths to the fore.

Almost 2,000 jobs are also on the line following the collapse of XL, the tour operator, and together with the disappointed passengers, they are victims of a sector that has gorged itself on the rampant desire for easy, low-cost travel of the past decade. This latest crisis may be unfortunate, but as boom is usually followed by bust it also had an air of inevitability about it.

That said, the demise of XL appears largely one of its own making. The subsequent failures to keep travellers informed of impending trouble was unforgivable, while the root causes of its difficulties should have sounded a few alarm bells. It seems airlines are good at reminding us to fasten our seatbelts and blow whistles to attract attention, but how much of that advice was heeded by the board?

It joined the rush to cash in on the boom in budget holidays, but was highly geared following its management buy-out from the Avion Group in 2006, benefiting at the time from the low interest rates and cheap debt available.

XL was not short of willing customers, but found itself short of cash as fuel prices and the cost of debt began to rise. For this, questions have to be asked about its hedging policy, its management of cash flows and its business model which left it more exposed to fuel costs than rival operators.

Almost 30 airlines have gone out of business this year, and British Airways boss Willie Walsh warns that a similar number may follow. But not all airlines have been caught out by the fuel price hike and not all mismanage their financial planning in the crazy race to fill aircraft with passengers paying barely enough to cover the costs of getting them to their destination.

In characteristic fashion, Ryanair criticised XL's abandoned passengers for choosing the wrong airline, an unsubtle and uncompromising attempt to secure some publicity on the back of another's misfortune. But underlying that message is that only the fittest will survive and that may be no bad thing if the sector is to restore some sense of proportion to how it operates.

Green has a point and banks should act on it

STEPHEN Green's assertion that bankers have been paying themselves too much is a breath of fresh air for those of us who have been urging reform of the remuneration procedures at our top companies.

The chairman of HSBC told the BBC that the banking industry was too focused on short-term profits and that current pay schemes did not reflect long-term performance. He indicated remuneration was one of the causes of the credit crunch as some staff were paid too much for deals that ended up costing their banks a fortune.

According to Green, compensation levels should be set by the market but should be consistent with the long-term interests of the market as a whole and the shareholders of a given institution.

It's not clear exactly what "set by the market" means, apart from being the "going rate" which rather brings us back to where we started. Banks, and other companies, will pay what they think is required to get the right person for the job. If Green is suggesting changes to the way the market sets those rates, then bring it on, but let's see some details.

Shareholders would welcome the chance to temper some of the crazier rewards, including the bonuses, pensions, stock options, golden hellos and goodbyes that are loaded into salaries.

While it is appropriate for companies to pay whatever it takes to get the right candidate, the rewards should not be disproportionate. More importantly, the corporate governance code needs amending so that remuneration is based on success rather than failure. That should start with a detailed inquiry into the cosy remuneration committees that are too remote from shareholder control. Some independent input and caveats on when rewards kick in would be a welcome change to the way they operate.

Don't bet your shirt just yet

HAVE we reached the bottom of the market? There is a growing view among wealth managers that the next two months will see the nadir and that investors will be encouraged to get back into the stock market from October. But they also expect some further volatility, so it's not yet time to bet your shirt.