UK plc doing better than in past slumps

Allister Heath

THERE are many reasons why the stock market has bounced back, despite the severity of the recession. The fact that corporate earnings didn’t collapse as much as originally feared is one such explanation, as highlighted this weekend by Lombard Street Research.

The operating profits of UK companies have fallen 8.4 per cent from their peak, compared with 10.6 per cent peak-to-trough in the 1990s recession, and 22.8 per cent in the early 1980s. The fact that the drop in profits has been contained to single digits is a considerable achievement; it can be attributed in part to very speedy cost-cutting and drastic reductions in inventories (helped by modern just-in-time stock-control). The other big driver has been labour market flexibility, which has helped avoid redundancy and early retirement schemes where possible by freezing wages and cutting hours.

It is often thought that one of the big lessons from the present collapse is that nothing ever changes in economics. It is certainly true that each time pundits start to claim that we have entered a new order – in the late 1990s, justifying the bubble, or in the mid-noughties, rationalising the property bubble – the economy has a habit of imploding. But something does seem to have changed: some parts of the economy have become more flexible, companies employ more efficient IT systems and employees have started to cooperate with employers better. It is easy to become gloomy, especially when one looks at Britain’s future prospects; but what this shows is that not all the trends are bad.

CADBURY, British Airways and the Royal Mail are three very different companies with two things in common: they are famous British institutions for whom it is now make or break time.

If Cadbury wants to survive as an independent firm, which it deserves to do given its strong performance and potential, it will have to fight much harder than it has so far. Kraft’s deadline, as imposed by the Takeover Panel, is 9 November. We need no more blunders from Todd Stitzer, Cadbury’s CEO, who has repeatedly undermined his case since Kraft’s Irene Rosenfeld launched her intention to bid; and we need a robust, detailed demolition of the offer, which could come at the end of this week. Stitzer needs to stand up, look investors in the eyes and explain to them exactly how they will be better off sticking with him over the next five years.

In the case of BA, there are no options other than to slash costs and continue merger talks with Iberia (see story below). If Willie Walsh, BA’s chief executive, fails to push through a substantial enough plan, his firm’s decline will start to spiral out of control. It is imperative that those considering whether to strike reflect upon the crippling costs this would impose on the airline, especially in terms of reputation. Walsh is a good CEO; for the sake of his investors and all those BA employees who have already sacrificed a lot, he must succeed, not be further undermined by angry dissidents with no real, viable alternative.

Regrettably, I fear there is no realistic possibility of success at the Royal Mail, a declining, cost-ridden business in a market facing catastrophic structural change because of the internet and where competition is intensifying. The Tories want to privatise the business, which makes a huge amount of sense. The question, however, is why anybody would wish to invest in what looks like a doomed enterprise.