Independent, The (London) ,
May 31, 2008 by
DAVID PROSSEROUTLOOK
This is not a happy time to be an airline. If anything at all was surprising about the collapse of Silverjet yesterday, it was that the business class-only carrier has survived this long. Its two rivals in the sector, Eos and Maxjet, were forced to mothball their flat beds many months ago.
Lawrence Hunt, the founder and chief executive of Silverjet, says he is still in discussions with an investor that might yet come to the airline's rescue. But don't hold your breath - it is difficult to imagine why anyone would want to commit their cash.
The killer fact for Silverjet is the cost of fuel for a round trip to New York - broker Daniel Stewart's estimate is that it amounts to around 44,000 today, compared to 28,600 when the airline began flying. For a new airline competing on price, with no economies of scale and little capital to ride out tough times, the figures just cannot be made to add up.
What will really frustrate Mr Hunt is that there is nothing inherently wrong with his belief that a business class-only model is potentially lucrative. Silverjet is just a victim of bad timing rather than poor management - it simply had the misfortune to take off at the same moment as the oil price.
In fact, while there may have been fewer Silverjet customers than Mr Hunt might have liked, many of those who have flown with the airline have raved about the experience and it has boasted high levels of repeat bookings.
No wonder. Silverjet's exclusive terminal at Luton - no harder to get to than any other London airport - enables customers to skip the worst bit of air travel, battling through overcrowded airport facilities to the departure gate. And once in the air, top-notch facilities mean Silverjet passengers are likely to enjoy their flight, particularly having paid considerably less than customers of rival airlines.
The really annoying thing about Silverjet's unfortunate timing is that the past year should actually have been a massive opportunity for the airline. With the global economy slowing, businesses are naturally keen to cut costs. What better way to save money than to send staff overseas on business class-only airlines offering seats at a third of the cost of established rivals?
Silverjet should also have benefited from improving demographics in the UK, US and other Western markets, where populations are older and wealthier. This has increased the size of the non-business market for business class seats, particularly those priced more affordably.
It will be no consolation to Mr Hunt, but all these arguments mean Silverjet will almost certainly not be the last you see of the business class-only model. Even when the oil price comes back down, it is difficult to imagine another start-up targeting the sector, but why shouldn't more established budget airlines move into this territory?
Indeed, low-cost carriers around the world are already targeting business customers, in many cases with enhanced services such as more exclusive lounges, greater flexibility on flight booking or even premium economy-class seats. It's not a huge leap to imagine a carrier such as easyJet launching business class-only services at competitive prices. Or what about Michael O'Leary, the visionary boss of Ryanair, who has already talked of his ambition to run transatlantic services?
The Open Skies agreement that was implemented earlier this year has made the airline sector - the soaring oil price excepted - more conducive to competition. Mr Hunt and his colleagues at Silverjet will now, in all likelihood, miss out on the chance to exploit that opportunity. Expect someone else to step into the breach.
No prizes forpension prudence
No wonder companies keep closing their final salary pension schemes. The premiums employers must pay into the Pension Protection Fund, set up to protect members of schemes run by companies that go bust, will be more than twice as high as the compensation scheme itself had suggested last November. And what will particularly aggrieve many finance directors is that they appear to have been victims of their own prudence.
The PPF raises money in a rather peculiar fashion. Some 20 per cent of its annual levy comes from fees charged to schemes on the basis of their size. The other 80 per cent is a risk-based levy, with premiums based on how well-funded a scheme is and the likelihood of its employer falling into insolvency. There is thus an incentive for employers to keep their schemes well funded - the carrot is a lower PPF levy.
Trouble is, the PPF works out how much money it needs each year before taking a detailed look at the assets and liabilities of individual schemes and their employers. Last November, it decided 675m was the magic figure for 2008-09, only to discover that employers had improved their schemes' funding positions so markedly that the risk-based levy formula would produce a substantial shortfall.
No matter. The PPF warned in November that it expected to have to scale up schemes' bills once it worked out the detail of the risk- based levy. At the time, it reckoned a factor of 1.6 was realistic, but yesterday announced the number required was 3.77.
To put this another way, employers with final salary pension schemes will now have to pay a risk-based levy - remember, this accounts for 80 per cent of the total PPF annual charge - that will be 2.36 times higher than the fee they were expecting only six months ago. All because they have funded their schemes more generously than the PPF had allowed for.
The PPF's justification for what appears to be an injustice is that while scheme funding has improved in the short term, it must protect against long-term risk. That may be, but many employers will feel cheated by this arrangement. Had they not improved scheme funding, their bills would have been even larger of course, but the huge fee increases they face hardly represent the juiciest of carrots.
A reason to buy, but not to sell
If a company's directors don't have sufficient confidence to hold on to its shares, why should investors? Directors' dealings are widely followed both in the City and amongst private investors for good reason - it seems perfectly logical that directors with the inside track on their companies' performance are likely to make sensible decisions about share sales and purchases.
Yet some new analysis from Deutsche Bank, which has for more than a year been monitoring directors' dealings at more than 500 companies across the European Union, suggests that investing on the basis of this information is likely to produce mixed results.
Deutsche found that purchases of shares in their own companies by directors might well be a useful buy signal for investors. On average, over the past year, companies reporting such purchases tended to outperform in subsequent months, with their shares outstripping both the wider sector and country indices.
Intriguingly, however, the same signal is not apparent from sales. When directors sold their companies' stock, there was no sign of the subsequent underperformance from the share price that one might expect.
The German bank offers no explanation for why this should be the case, though it's fair to point out that there are all sorts of motives underpinning the decisions by directors to buy or sell their own shares. Still, it seems odd that one type of transaction should seemingly give such a strong signal when another does not.
The answer may be that company directors are no more astute than the rest of us when it comes to selling out of positions. You have been warned
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