Many of the recent articles about the British Airways - whether about the Iberia merger, the proposed strike or the ensuing court case or - mention the BA pension funds deficit of £3.7 billion.
Relatively few articles mention the pension fund assets, which appear to be about £12 billion. Most of this is invested in shares in other plc's, and some will be invested in UK government bonds - which is a neat trick of the UK government to create a captive market for its bonds: "If you want the pension fund tax breaks, you have to invest x% in UK government bonds" - but I digress.
In round figures (they are to some extent plucked out of the air by actuaries and stock markets), the pension funds have assets of £12 billion and liabilities of £16 billion, net deficit £4 billion, which BA 'owes' them.
If we add BA's pension fund deficit of £4 billion to its current market capitalisation of £2 billion that gives BA an enterprise value of £6 billion. (To digress yet again, a large part of that enterprise value consists of the landing slots it was given for free and for which it should be paying a fair market price to avoid there being barriers to entry).
If we consider BA and its pension funds to be one economic unit, we end up with total assets of £18 billion and total liabilities to pension scheme members, i.e. employees, of £16 billion. If we didn't have these silly rules brought in after the Robert Maxwell shenanigans, BA could simply issue two new shares to its pension funds for every share in issue to settle the pension fund deficit.
That would probably focus the minds of the trade unions and employees on the fact that the BA economic unit is in fact a worker-owned investment fund with a majority stake in an airline - call it a co-operative if you will. They'd accept, in the short term, that people have to be laid off - but their redundancy pay is, to a large extent, being paid by the continuing employees, not some mythical group of shareholders, who are always seen as fair game for being plundered.
Thursday, 17 December 2009
Worker-owned co-operatives
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11 comments:
Far be it for me to mention the fact but surely - it is other plc's shares or shares of other plcs?
WFW, that's a tricky one. The plural of "plc" is in fact "plc's" with an apostrophe, so you'd have to write "other plc's' shares" which looks messy.
Sorry, you can't do that. Market valuation is not the same thing as assets. You can't add the pension fund assets to its market valuation of £6 billion.
I don't know what BA's company (as opposed to pension scheme) assets are, but there's nothing to say that they are the same as its market cap. They might be less or more.
Also, the pension fund does not have a stake in the airline just because the airline owes the pension fund some money. The amount owed is not dependant on the performance of the airline business, whereas a stake would be.
The points you're making are good ones though. Try applying the same logic to Her Majesty's Government by the way!
AC "Sorry, you can't do that."
Yes I can and I just did. I never said BA had "assets" of £6 bn, I said it had "enterprise value" of £6 bn. The value of the pension fund assets aren't necessarily reflected by 'assets' on the balance sheets of all the other companies in which they hold shares either, are they?
"the pension fund does not have a stake in the airline just because the airline owes the pension fund some money."
Oh yes it does. If the strike action causes BA to go belly up, and it ceases paying in that £3.7 billion shortfall, will the members of the pension fund be richer or poorer? The answer must be 'poorer' ergo they have a 'stake', hence the new-fangled term 'stakeholder'.
Kind of makes sense I guess. On this basis could they transfer the ownership/management of social housing to local government pension funds in return for that deficit, then see if council officers still want to hand them out for free to who ever has the most babies?
S_L, that is a radical plan, worthy of further consideration.
OK, I'm puzzled.
I also have an interest, in both senses of the term, as my retirement planning depends on about a quarter of my income coming fom a BA final salary pension.
First question:
Market cap £2bn
Pension assets £12bn
Pension liabilities £16bn
How does that come out at £6bn? From my non-financial perspective it looks like assets of £12bn in the pension fund investments plus £2bn in the airline, making £14bn. Set against £16bn liabilities that leaves the combined "economic unit" with a worth of -£2bn, not +£6bn.
Second question: how do you get the £18bn assets in the next paragraph? Surely the only assets are the £12+2bn for the investments and the airline?
Third and final question: how would issuing new shares to the pension funds settle the deficit?
Let's approximate and say there are 1bn shares in this £2bn company (as per your link).
If we wake up tomorrow and there are 3bn shares, they'll surely only be worth about 67p each (two-thirds of current value).
If 2bn of them are given to the pension fund, then that only addresses £1.33bn of the deficit. And, I imagine, it might annoy the existing shareholders somewhat.
I'm not a financier, so I assume it's me that's in error. Where am I going wrong?
CJN, my maths was as follows:
BA itself: enterprise value £6 billion minus pension liabilities £4 billion = market capitalisation £2 billion.
The pension funds: pension liabilities of £16, other assets of £12 billion and a receivable from BA of £4 billion.
The two £4 billions net off to nothing, of course, and you just add up what's left.
As to your third and final question, you're missing the other half of the equation - the shares would be issued to the pension fund as payment of the £4 billion.
So BA's enterprise value of £6 billion is unchanged but the pension fund liability goes away, so the market cap is now also £6 billion. The existing shareholders now own one-third (worth £2 billion) and the pension fund owns two-thirds (worth £4 billion) instead of having a receivable of £4 billion.
So really BA is investment trust with an expensive hobby of running an airline?
L, yes exactly. And it owns shares in all the other big British companies, so when Unite says it will 'support the workers' elsewhere, that is directly in opposition to the interests of BA's employees (who are also Unite members).
OK. I'll try again.
Why is your idea better than BA doing a £4 billion rights issue to meet its pension deficit?
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