Monday, May 24, 2010

Pensioned off

With reference to my earlier post about British Airways, John Band has an excellent post up pointing out that all is not quite as it seems in that company—especially as regards the assets.
BA’s enterprise value – the amount that its assets plus goodwill are worth, before taking into account its financial liabilities – is something like GBP7bn. The reason its market cap is only GBP3bn is because it also has a GBP4bn pension deficit. In other words, money that BA owes to its workers and former workers accounts for more than half of the company’s total value.

This has two policy implications.

One is that Red Tory Philip Blond’s suggestion that the government should mutualise BA isn’t quite as insane as it looks – more than half the company is already owned by the workers, and if things were to get worse then the pension fund has priority over the shareholders as a creditor. A deal like the one the US government brokered for GM, leaving the workers as majority shareholders, isn’t totally implausible.

The other consequence of this ownership pattern is something which should make BA shareholders rather nervous.

If the industrial action were to turn into a major, long-term dispute that drove down passenger numbers and revenues to such a severe extent that BA had to go into administration, then the pension fund would have priority over BA’s assets (including not only its physical assets, but also its brands, goodwill, systems, etc). It’d be hard work to rebuild BA as a global brand after that kind of collapse, but it wouldn’t be impossible – particularly with worker ownership ending the company’s labour crisis overnight. The shareholders, however, would lose everything.

It really is worth reading the whole thing, but the main point is: don't buy shares in BA.

The other point is that—if BA is mutualised—then we are going to see just how good the workers are at running a massive, international, multi-billion pound business. My personal opinion is that it will hurtle down the toilet at a phenomenal speed.

Now, it may be that the workers are thinking along the same lines as John Band—but I'll bet that they aren't. Apart from anything else, workers tend to have a very high opinion of how much better they'd be at running things than they actually are.

Running a company is not an easy thing. I am part of the management of a small web software company employing under twenty people, and trying to ensure that everything runs smoothly is not an easy task—and my main job really only entails running the actual day-to-day software development side of it.

Do we think that BA cabin crew—who are unwilling to lose perks when their company is currently losing nearly £1.5 million per day—are going to be any better when this multi-billion pound company is "theirs"? No.

Because many workers—like those spending government money—have a real problem with understanding that companies (even ones the size of BA) don't just have magic money floating around.

Let me give you an example from a company I worked in once: on hearing the news that said company had won a major contract, one of the designers turned to the sales manager and said, "so? I won't see any of it."

To which the sales manager replied, with remarkable restraint, "what the hell do you think pays your salary?" The designer hadn't even thought about it: he just assumed that his wages appeared in his bank account... Well, actually, I don't know how he thought it got there—by magic presumably.

Anyway, should BA go into administration and be mutualised, the pension obligations wouldn't end—because this isn't just the pensions of current workers, but those who have retired and are busy living off said pensions. All that would happen is that a mutualised BA would have less credit and still have a £4 billion pension fund hole.

And no one in their right mind would want to go and manage a company made up of workers who were willing to bankrupt said company rather than accept that they were going to have to accept some cuts; similarly, no one is going to lend money to that company and, most certainly, no one is going to buy the shares of said company.

Even were BA to be mutualised, it would go bust long before the oil runs out...

5 comments:

Pogo said...

It's a well-known fact that the money to pay salaries is printed in the wages office.

Tim Worstall said...

Re unions of workers getting a cut of the equity. This has happened with a couple of US airlines.

Yes, they then went bust again.

As will GM

paul said...

Managers also tend to have an overinflated view of their own worth in order to attempt to justify "earning" 85x more than the people doing all the actual work.
See also "Peter Principle".

Morlock said...

"[BA] would go bust long before the oil runs out..."

Are you finally coming around to realising the truth about peak oil (and, consequently, why governments are thrusting the AGW scam down our throats) DK?

The Disgruntled CC said...

They should be seen off to the job centre.