The plane truth in Ryanair's £6.3bn order

Anthony Hilton12 April 2012

IT IS hard to dislike Michael O'Leary, the boss of Ryanair, or to do anything but admire the success of the airline he has created. The time is clearly right for the growth of low-cost airlines, but he has been - and continues to be - genuinely innovative.

It is, however, seriously unnerving to see him place an order with Boeing today for $9bn (£6.3bn) of new aircraft. By any standards that is a huge order, and for an airline of Ryanair's size and resource it seems almost imprudent - even if, as is suggested, O'Leary has exploited the current collapse in new plane orders to buy them at almost half price.

The trouble is that too many successful airlines have fallen into similar traps. In 1979 Sir Freddie Laker placed a massive order for Airbuses to develop a short-haul network in Europe to complement his transatlantic service. When the recession of 1982 came, it was one of the things that brought him down.

Similarly, in America, while everyone talks about the success of cut-price carrier Southwest Airlines, they conveniently forget the demise of so many others, like People Express. They were the Ryanairs of their time but they got over-ambitious, grew too big, too fast and diluted and then destroyed their low-cost proposition.

The bigger question this raises is how entrepreneurs behave. In the Thatcher era entrepreneurs were hailed as risk-takers with vision and bravery and deserved their rewards. Arguably, though, that was a bit simplistic. While all businessmen have to seize their opportunities, the really successful entrepreneur does not take gambles, does not bet the farm and seeks at all times to expose his business to as little risk as possible-while still going forward. We hope O'Leary has got the balance right, but there is room for doubt.

Credit squeeze

LYNTON Jones, one-time chief executive of the International Petroleum Exchange and more recently in charge at Jiway, has run into some barbed comments following the launch of a new consultancy, Bourse Consult, he has set up with former Easdaq boss Steffen Schubert.

Jiway, an exchange aimed at the private investor seeking to invest across borders, was launched just as the technology boom collapsed and private investors raced to the hills. Perhaps he can expect to have his leg pulled a little for that.

It does seem rather harsh, however, also to take him to task for his time at the International Petroleum Exchange, where his only sin was to be ahead of his time and at odds with a few powerful members in seeking to get the exchange to demutualise and embrace outside investors.

When his proposals fell just short of the 75% support they required, he resigned on principle, only to see the exchange subsequently do most of what he had suggested. All this just goes to show how hard it is to get credit for doing the right thing.

Prudence penalty

THE ROW over the decision by Alliance & Leicester and Natwest to ease back on home loans in certain areas has to be one of the most stupid yet. Even more bizarre is that their rival Halifax should complain about it. No one is making it do the same. Why does it not simply welcome the reduction in competition?

It is self-evident that if banks behave prudently in an upswing, the subsequent downswing will be much less painful. Banks' credit policies are as important as the level of interest rates in determining the amount of activity in the economy. If they are too free with their money the economy is likely to overheat, particularly when rates are as low as they are now. Equally, if they are relentlessly tight, low interest rates will not get things moving.

In the desperate economy of the early 1990s, house prices crashed leaving hundreds of thousands of people with mortgages greater than the value of their homes. Many homebuyers subsequently lost everything - home, savings, job, family.

At that time, people turned on the banks for lending them too much money too easily in the previous boom. Some even sued - successfully - saying that they were not responsible for the financial disaster because the banks should have known better than to lend them so much. No one told them prices could go down as well as up.

There is a lot of evidence that the market today is becoming overheated, with young people buying multiple flats to let, gearing up and buying some more. Their path to riches will end in a re-run of the 1990s disaster if the market and the economy weaken unexpectedly. It is a bizarre world where lenders seeking gently to protect people from such dangers should be a subject of criticism.

Catch-up time

BANKING'S problems are as nothing compared with the difficulties in insurance. At a discussion sponsored by the Centre for the Study of Financial Innovation, Alex Letts of technology company RI3K argued that the events of 11 September have not only cost re-insurers an unprecedented amount of money, they also underlined how inadequate their controls and systems were for the modern world.

It took them an age after the terrorist attacks on the US to come up with a clear idea of their liabilities, but these estimates have since been doubled and there is still no real conviction that they are the right numbers. At the same time, the industry's cash management is amateurish and back-office procedures archaic.

The great mystery is why customers continue to pay far more than they need to because of the industry's incompetence, particularly when all these problems could be solved and the industry made massively more efficient by the intelligent use of technology, he says. Re-insurance is lagging at least 10 years behind the rest of the financial sector. It is time it made bigger efforts to catch up.

China cheer

IF you were a strategic rival of the US but had had to keep most of your foreign currency reserves in dollars, the birth of the euro must have looked like a golden opportunity for a bit of sensible diversification.

Patrice Madoux, chairman of CADES, which manages the debt of the French social security system, tells me China is becoming much more interested in triple-A rated government agency-related paper such as the bonds CADES issues.

His agency has done a couple of well-received roadshows to China and it seems highly likely the Chinese government is no less interested in euro-zone government paper. A sign that confidence in the euro's long-term prospects is rising?

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