26 August 1998

BA's bargain buy sends wary investors on a mystery trip

Bob Ayling just cannot resist a bargain. Like an It girl at the Harvey Nichols sale, the prospect of 30pc off the ticket price for a fleet of Airbuses was just too much to resist.

British Airways has broken the habit of a commercial lifetime and bought some aircraft not made by Boeing. Indeed, it has bought so many that the wags yesterday were suggesting that it would have been cheaper to buy Airbus Industrie, the secretive consortium which builds the planes.

As it is, BA is buying the best part of a year's production, and such is the scale of its spending spree that it has enough left in its purse to bung some decent orders to its old suppliers, too, which should discourage Boeing from trying to make the whole thing political.

There is no denying that the BA order is a breakthrough for Airbus. Nobody really knows whether the manufacturer makes money, since there is nothing as vulgar as a published balance sheet or profit and loss account. Nor does the company produce a retail price list (presumably it would be illegal to do so under the fatuous new laws governing recommended retail prices in Britain) so it is impossible to gauge whether Mr Ayling really has the terrific bargain that he claims.

Suggestions that he was attempting to suck up to Karel Van Miert, the EU competition director, to gain more favourable terms for the stalled alliance with American Airlines were instantly dismissed yesterday. Good heavens, you don't think this was a political decision, do you?

BA promised the assembled plane-load of journalists that the final complex terms produced a bottom-line saving of 10pc over the best that Boeing could offer. The market took Mr Ayling at his word, and marked BA shares up on the news. Mind you, if one of the company's fleet followed the path of the shares, the passengers would all be braced for the worst - the price is close to a three-year low.

The order highlights some of the reasons why investors are wary. They fear that the cost of the alliance will be too high. They are not much impressed with the launch of BA's new cut-price airline, and suspect that the price gouging that characterises so many routes will become more difficult if deregulation ever really arrives in Europe.

Finally, they find it hard to reconcile BA's argument that it wants smaller planes with the projections of passenger growth. Smaller planes and more frequent services should, BA reckons, allow it to improve the proportion of business class passengers.

How much profit Airbus will make from this deal is anybody's guess. It desperately needed to break the Boeing monopoly and has spent four years trying to get Mr Ayling to open his purse. Boeing, racked by production and management problems, has been winged but will be back.

Airbus is at last trying to turn itself into a proper business after sheltering behind French financial fig leaves for so long. The process should be complete by the middle of next year, when in theory it should be easier to see where the profit is being made or subsidy offered. Flotation is pencilled in for 2002. That should be fun.