They probably aren't even aware they are doing it.

This month's edition of British Airway's Business Life magazine ("Total reading time 57 minutes", it says on the cover) includes half a dozen main articles (one page or longer) all of which are about rents and rent-seeking:

1. Interview with the CEO of Canada Goose, the premium cold weather clothes manufacturer:

When [my grandfather] first arrived, he worked in a clothing factory as a cutter and then decided at some point that he wanted to open up his own place, which he did. It was very small and in downtown Toronto, which was the home of the garment industry back then. Now it's the night-club district…

Most brands these days are not real brands, they're some product mass-produced in some factory somewhere else that has a fancy store woven in front of it by marketing departments…

I went to Europe, where I learned how valuable the term 'Made In Canada' is for us. I realised that for a lot of people a Canada Goose jacket is like a Swiss watch. The place where it is made is really important. We're a quintessentially Canadian product. All of our jackets are made in Canada. It's impossible to imagine us not making them in Canada.

2. Article about football players' salaries:

Manchester City, the 2011-12 Premier League champions, spend more than £200 m each year on player wages along, a figure that equates to 87 per cent of the club's total turnover… it's not as if it's the players or even their agents who are ultimately deriving up wages, it's the broadcasters - and one in particular.

In the summer of 2012, BSkyB signed a new three-year deal to cover 166 games a season, worth a record £2.3 bn to the Premier League… It's interesting to contrast that with Sky's first deal to cover Premier League in 1991. Back then it paid just £340 m.

3. Article about a private business which wants to build reusable rockets for space travel:

"I think there's nothing positive or constructive I could say about Kenneth Clark" [Managing Director Alan Bon] told an interviewer earlier this year.

It was Clark, in his role as Minister for Trade and Industry during Margaret Thatcher's final term, who 25 years ago pulled the plug on government funding of HOTOL - Horizontal Take-Off and Landing - the admittedly flawed spaceplane being developed by Bond and his colleagues…

Earlier this year, however, the government did a volte-face and over next two years it is to plough £60 m into the development of Sabre, a revolutionary engine tipped to transform the economics of putting satellites - and indeed people - into space…

… The technology behind Reaction's pre-cooler is so commercially valuable that rather than take out a patent - which would perforce lead to publication of its workings - the company is avoiding the risk of feeding copycat competitors by treeing it as a trade secret, like the recipe for Coca Cola.

… a new backer emerged in the shape of Nigel McNair Scott, a Conservatie Party donor and chairman of property investment company Helical Bar.

4. Article about commercial property syndicates:

Commercial proeprty is bounding back. Figures from industry monitor IPD who that UK commercial real estate returned1.9 per cent in the three months to June, the highest return in two years…

Many hope that this heralds a definitive upturn in the property cycle, and a signal to invest in shops, offices and factories on the back of a recovering economy.

5. Article about local loyalty card schemes:

My Sant'Ambrogio card, issued by the eponymous market of central Florence, is about two tubs of fresh pest away from marking me as a most loyal customer indeed.

Supported by the local council, this card is designed to encourage me to shop not in the international chain supermarkets and stores on the edge of town, but instead with the market stall holders and local businesses who risk being left behind if everyone moves to the suburbs.

6. Article about hotel renovation:

You could argue that a quality new build might be cheaper but that misses the point. The Prince de Galles has an established location on Venue George V and a proven trading history, and offers considerably less market risk.

Finding suitable land in an established European city is all but impossible, and what's more, a speedy renovation can improve a hotel's fortunes in months, while building from scratch takes years.

The battle for air supremacy (Part 94)

From The Guardian:

Heathrow airport has been told to introduce a real-terms cut in the fees it charges airlines in order to curb its "substantial market power" (1) – a move that could put the brakes on spiralling air fare increases...(2)

But the airport, which is controlled by Spanish infrastructure group Ferrovial, warned that the proposals put at risk a long-term capital improvement programme designed to improve facilities for passengers.(3)

Heathrow's profits rose by 12% to £1.3bn in 2012, driven largely by an increase in the fees it charges airlines – by far its largest source of revenue.(4) Although the charges are paid by airlines they are passed on to passengers through higher air fares...(5)...

Publishing its proposals the CAA said: "At Heathrow, the CAA found clear evidence of substantial market power and is proposing a traditional price control mechanism.(6) After a decade when prices have risen – largely to enable major capital investments including new terminals to enhance passenger experience – the CAA is looking to encourage further investment whilst improving value for passengers in other ways."(7)

But Willie Walsh, the chief executive of British Airways parent IAG, warned that the proposals did not go far enough. The head of the largest airline operating from Heathrow said: "Heathrow airport is over-priced, over-rewarded and inefficient, and these proposals, which will result in an increase in prices, fail to address this situation."(8)

1) Airports clearly they do have enormous monopoly power and a large proportion of their landing/take-off charges are location rent, pure and simple. And that monopoly power arises because - for whatever reasons - the number of airports is strictly limited so airports near London are all running at 99.9% of capacity, thus the price which airports can charge is far above their actual costs. Actual spending on running costs is a small fraction of that, and this is the last thing they will cut or else their whole income stream dries up. And even if there were no limit on the number of runways and aircraft movements, I suppose their is a natural upper limit to the number of aircraft movements, the sky is only so big.

2) Similarly, the prices which airlines can charge for tickets is far above their actual running costs. Between them the airports and airlines are running a cartel-monopoly and the passenger pays. If demand increases and supply stays the same, what happens to prices?

3) They would say that, wouldn't they? What facilities, pray tell? Above and beyond the basics like baggage handling and passport control, passengers (and people who come to pick them up) are paying through the nose for parking and refreshments. They pay for themselves.

4) Hardly surprising is it, that an airport's charges, a large part of which is rent, see (1), are its largest source of revenue? And all their other revenues are just rents as well, like the money they get from parking charges or the rent they collect from all the shops and restaurants.

5) No they aren't. The availability of passenger places is just as limited as the landing slots, it's the same thing. Airlines base their tickets on "what the market will bear" and as long as that is above their actual costs, they will put on flights. We know that for most commonly flown routes there is a huge monopoly profit element, as evidenced by the fact that the landing/take-off slots themselves can sell for millions of dollars, all depending on where they are to and from and what time of the day. The slot for the eleven am flight to New York is worth ten times as much as the eleven pm flight to Siberia etc.

6) Control of which prices? Ticket prices or airport charges? If you restrict ticket prices to below market clearing level then admittedly that would put a downward pressure on airport charges as well, but that is just an opportunity for ticket touts, who would end up collecting the rent instead of the airports. And if you restrict airport charges, then the monopoly profits just get collected by the airlines instead, ticket prices wouldn't drop by one penny.

7) Like how? There's no reason to expect airlines and airports to run their operations at nothing less than absolute revenue-maximising prices? If you "enhance passenger experience" then those revenues will increase.

8) He would say that. wouldn't he? See (5).

Irrelevant Fact Of The Day

From Investments & Pensions Europe:

UK banks are reporting pension liabilities that in some cases exceed the institutions' total market capitalisation, with three of Britain's largest banks significantly worse off than mainland European rivals, a study by Citibank has found.

Examining FTSE 100 companies at the end of last December, the study noted that former public companies reported the highest pension liabilities when viewed as a percentage of the market cap, with British Airways and telecommunications provider BT cited as examples.

So what?

These businesses have a large positive value. From this value we deduct the amount of their liabilities to arrive at their market capitalisation (plus/minus the usual fluctuations in share prices). There is no need to compare this net value of the shares in a business with any specific category of liabilities, such as pension fund liablities, because those liabilities are already taken into account when working out the value of the shares.

To use a crude analogy: husband has take-home pay of £1,000 and his wife makes him hand over £600 of it for housekeeping. It would be misleading to say that her income exceeds his and hence that it is impossible for him to pay her £600 out of his £400 take home pay - they have a joint income of £1,000 and how they split it is up to them.

So instead of saying that BT has a market cap of £1 and net pension liabilities of £2, it is more accurate to say that BT has an 'enterprise value' of £3; £1 of which belongs to shareholders and £2 of which belongs to its pension funds.

Worker owned co-operatives

In the context of nothing in particular, Motley Fool ran a fine summary of the nine FTSE companies with the biggest pension fund deficits. The figures provided are: market capitalisation (£ bn); pension fund deficit (£ bn); and pension gross liabilities as a % of market capitalisation.

The distinction between the assets of the pension fund and the assets of the company itself is a purely legal one, seeing as the pension liabilities are liabilities of both combined, so it is useful to compare gross pension liabilities with gross consolidated assets, which gives us the following figures:

British Telecom - 86%
British Airways - 85%
BAE Systems - 72%
Invensys - 65%
Royal Bank of Scotland - 58%
Aviva - 57%
Royal Sun Alliance - 56%
Rexam - 55%
National Grid - 52%
Smiths Group - 43%

In other words, in economic terms, employees of BT or BA who are still in one or other of the final salary pension schemes actually own 86% or 85% of the whole thing. So if they go on strike often enough, what little residual value belongs to the shareholders will be wiped out first and they would be worker-owned co-operatives along the lines of the John Lewis Partnership. Would the employees at that stage stop threatening to strike, or would the businesses just implode because they'll keep on threatening strike action by force of habit?

What is also striking is that three of those are privatised utilities, two are insurance companies and one is largely nationalised bank. BAE Systems' largest customer has always been the government or governments.

I don't wish to be seen as unpatriotic, but...

Has anybody else noticed that organisations whose name starts with the word 'British' are all 'a bit shit'?

British Aerospace (cue smartarse who claims that they are called 'BAE' nowadays)
British Airways
British Broadcasting Corporation
British Council
British Energy
British Gas
British Institute of Human Rights
British National Party
British Petroleum
British Telecom

"A Question About Unions"

Answers on a postcard over at Joseph Takagi's.

Half a free market is better than none.

In case you were ever thinking about starting up an airline in the UK, presumably the first thing you'd do is get hold of the accounts for other UK airlines and look at the profit and loss account. Then you divide the profits you could make by the amount of money you'd have to invest in aeroplanes, and that gives you your return on capital. If that's more than, say, ten per cent, then you are on to a winner, yes?

Nope. There are two kinds of airlines in the UK - those who were granted take-off and landing slots for free when they were privatised in the 1980s (i.e. British Airways); and those who had to buy landing slots for their market value 'second hand' (most of the others). The accounts for the former will neither show the value of the landing slots (which is enormous, they are worth more than the aeroplanes) nor the associated amortisation*; the accounts for the latter will show the cost of the landing slots; the associated liability (or share capital) and the amortisation.

So before you can go into business, you need to buy some slots (and now might be a very good time to buy, the air travel industry being at rock bottom). How do you work out the value of the slots? Well, you work out your cash profit per flight and then deduct from that the required return on the money invested in aeroplanes; what is left over is a balancing figure - you then take a random figure as an "earnings multiple" and that's what you offer. Another airline with slots to spare does the same calculation, and provided your estimate is higher than theirs, they'll sell you it.

If you overestimate the value, then you are doomed, of course - you are committed to the corresponding loan and interest repayments for ever more, but the value of the slots can plummet (let's imagine that Eyeful o'yokel never stops erupting, for example). Or their value might rocket if the NIMBYs get their way and airports are never allowed to expand.

Anyways, getting back to the point in hand, Nick Drew looked at the Lib-Con Energy policy, and under "Good", he listed replacing Air Passenger Duty with per-flight duty. I commented thusly:

Per flight taxes are better than per passenger, but the best way of doing it is auctioning off the landing/take-off slots. The value of these is merely a balancing figure between revenues and costs; so however much the airlines voluntarily pay for the balancing figure does not change anything - it's a non-distortionary tax, because you cannot pass on a balancing figure.

In other words, instead of having to hand over a vast amount to another airline, every year or two, you would do your own calculations and turn up at the next auction and bid for the number of slots you think you need; and if yours is the winning bid, you buy an aeroplane or two to match (airlines who lose enough bids will no doubt have one or two spare), paint it in your colours and away you go. If you overbid for a slot for a year or two, you will go out of business, but at least the amount of money you have lost is much less than if you had overbid for buying up slots in perpetuity from another airline.

Nick D didn't seem to get the point, and replied:

I'd be cautious about price-setting distortions (market power) under your auction system, MW - auctions have been tried in many areas of the energy industry and have thrown up all manner of problems.

I specifically was not talking about auctions in the energy industry, which is all much trickier (because raw material costs fluctuate so wildly). Ah well. Here endeth today's.

* Applying normal accounting standards, BA only accounts for landing slots which is has acquired from third parties, which are stated as having cost £212 million in its 2009 accounts, the cost is amortised at £8m a year. Back in late 2008, BMI which owns 11% of Heathrow landing slots, valued them at £770 million (the value has fallen since), BA owns 41% of Heathrow landing slots (plus heck knows how many at Gatwick etc) so their total value a year or two ago must have been about £5 billion, about as much as all its aeroplanes put together.

Fun Online Polls: British Airways & Wealth Creation

This week's Fun Online Poll had a high turnout and a conclusive response, so I'm calling the result now:

"Would you be bothered if British Airways goes bankrupt and is split up between smaller competitors?
Yes - 19%
No - 79%
Other, please specify - 3%

That seems pretty clear cut to me, so no further discussion required. Thanks to the 154 people who took part, as ever.
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As it's a quiet news day, this week's second Fun Online Poll is a general question:

How do people create wealth?

Vote here or use the widget in the sidebar.

Fun Online Polls: Commute times & British Airways

Thanks to everybody who took part in last week's Fun Online Poll. The responses to the question "How long does your journey to work take in the morning?" were as follows:

less than 15 minutes - 32%
15 to 30 minutes - 22%
30 to 60 minutes - 29%
60 to 120 minutes - 15%
more than 120 minutes - 3%

I foolishly forgot to include the option "I work from home", which (judging by the comments) would be about a third of the 32% who reported a journey time of less than 15 minutes.

There is no particular back story to this poll - I was just genuinely interested whether my assumption that the majority of people are prepared to tolerate a commute of 'about half an hour' was correct and what the spread about the mean (37 minutes) is.
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Staying with the travel theme, the British Airways versus Unite (the trade union) industrial dispute seems to me like one of those cases where you want both sides to lose.

As a privatised former public entity, BA was given enormously valuable landing slots at UK airports for free but inherited a hefty final salary pension scheme which it never bothered to fund properly. Even though it was privatised a quarter of a century ago, it never really shook off the public sector mentality - even now, salaries for BA staff are nearly twice what they are at other airlines (if they had taken lower salaries then the difference would have gone into the pension fund and all would be sweet and dandy).

The trade union is being completely daft - in economic terms (if you consolidate the airline and its pension fund into one entity), the employees already own about ninety per cent of their employer (or at least older members of the final salary pension scheme do). I am surprised that the union doesn't have an economist to quietly point this out.

Luckily, there is a way in which both sides can lose. All it needs is for passengers to stop booking with BA for a few weeks and the whole thing will simply collapse. All their slots can be auctioned off properly by the government (preferably on a leasehold rather than a freehold basis) and smaller competitors and new entrants can snap up the aircraft, infrastructure and most of the employees.

So that's this week's Fun Online Poll: "Would you be bothered if British Airways goes bankrupt and is split up between smaller competitors?"

Vote here or use the widget in the sidebar.

Charlie Whelan

@ Adam Collyer

Adam Collyer left a comment here as follows:

OK. I'll try again. Why is your idea [that BA issues new shares to its pension funds to settle the pension fund deficit] better than BA doing a £4 billion rights issue to meet its pension deficit?

That is another option that is well worth considering, of course, if BA's shareholders are up for it, a variant of which I have recommended myself on more than one occasion. However that wasn't the point of the original post, the point was to highlight that BA and its pension funds, taken together, are in fact a worker-owned "investment trust with an expensive hobby of running an airline" (as Lola put it).

I always find it helpful to look at the 'big picture' before worrying about solutions (sometimes there simply aren't any, and it's best to let the trade and assets go into new ownership and start again).

Worker-owned co-operatives

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.