9 July 2015
Week in Brief: BUSINESS AND THE CITY
EMPTYING WALLETS: George Osborne, the Chancellor, has been indicated that his budget speech will announce proposals for a further extension of permitted retail trading on Sundays. By the time you have this issue that will be confirmed, or not, but certainly there is a lot of pressure from retailers to amend the law on this. Larger stores are only allowed to trade six hours on Sunday, usually from 11am to 5pm. As the war between on – line retailers and those with real shops hots up further, the shop based traders need to offer the maximum possible access, thus the longest trading hours possible, which will also help defray the increasingly onerous costs of operating large property empires. At the same time the on-line traders want to offer greater immediacy of delivery to ensure that they compete with the immediate satisfaction of requirements that shoppers gain by going to a nearby shop. Amazon, as usual, is taking the lead in this and will shortly be offering one hour delivery in selected urban centres. Quite how they will manage this in traffic jammed cities such as London is not clear but bike couriers may be about to see an upsurge in business.
PLANE MONEY: Mr Osborne is also worrying about holiday makers in Greece as the economic crisis, the growing possibility of an exit from the Euro, empty bank vaults and cash machines, and the growing reluctance of Greek businesses to accept credit card payments all threaten payment problems for tourists. The Treasury is considering shipping plane loads of euros to Greece to distribute to vacationers who find themselves short of the readies. Quite how this will work, and how rapidly the air-euros will get to the more remote Greek islands has not been disclosed. Not just cash will be flown out – medicines are likely to be loaded on to the emergency flights – presumably for those who have overdone the sun and retsina while worrying about the cash to get them home.
PLANES, TRAINS, AND AUTOMOBILES: Let’s hope the Treasury flights to Greece (see above) are not intending to use Easyjet. Unions representing staff working on the budget airline have called for series of strikes over the summer, beginning in early August, after the breakdown of long running talks over improved pay for cabin staff. Although the airline has said that this does not involve UK domiciled staff ,Easyjet operates from a business hub in Geneva, it is likely that if the industrial action does go ahead the complex schedules operated by modern short haul airlines will cause disruption to flights across the network as some flight legs will not be able to fly. At the very least, it will require some complicated rearrangements of flight patterns, not easy when paths and landing slots are at maximum utilisation during the summer holiday rush.
Meanwhile…trouble on the trains too. Engineers working on Southern Railways – the people who keep everything in working order and good repair – are to take strike action for five days from 12th July. Their union, the RMT, has been negotiating for higher pay and a reduction in working hours from 39 hours per week to 35. The company is standing firm against this – at the moment.
Trouble on the Great Western Railway system too. The same union is resisting what it says are job cuts that will impact customer service and safety and has called a strike there for 2 days from 8th July. The job losses are connected with new trains which will begin operating on the newly electrified main line to Bristol and Wales from 2017. Though maybe the union is being a little premature – word is that the electrification works are running a year behind schedule.
No relief on the London Underground either. A strike there, if it goes ahead, will disrupt services for 24 hours from Wednesday evening. This is to do with plans by London mayor Boris Johnson to introduce 24 hour running on some tube lines from September this year. The RMT union is again at the forefront of the strike action, but is strongly supported by ASLEF, the train driver’s traditionally moderate union, who have turned down a one off bonus and a 2% pay rise in return for each man working about seven overnight shifts per year.
And automobiles? No strike action should trouble you there, but road works will – the amount of disruption caused by repair works on the UK’s decaying road network reaches record heights this year, say motoring organisations.
TRADING TROUBLES – ONE: Two major British businesses which looked as they were on a strong recovery track have faltered, according to press announcements. Marks and Spencer reported in its quarterly trading statements that general merchandise sales in its store business (this is, non-food, from shops) fell by 0.4%. This is continuation of a long-term trend of falling sales from the retail giant’s huge trading estate and is a disappointment after the previous quarter showed a reversal of the decline with an uplift in sales. On further analysis, the root cause is actually a fall in clothing sales, and Mark Boland, CEO of the group, is relatively relaxed about this quarter’s weakness, attributing it to unseasonable weather in May. (Odd how strong performance is rarely attributed to beneficial weather.) Good news is that on-line sales are up 38% and M&S are very upbeat about the further prospects for that part of their business.
TRADING TROUBLES – TWO: Rolls-Royce, another great British business name, has a new chief executive, Warren East; he had a difficult start to the job, announcing a profit warning on Monday which was his second day there. This is the third profit warning in the last 18 months from the aircraft engine maker (Rolls also makes engines for other applications and also ancillary specialist engineering parts, but aircraft engines are its core and most important business by far). The problem for Rolls is that aircraft manufacturers are becoming much more cost sensitive at a time when competition in the engine business is getting greater, and Rolls’s standard products are ageing. The American engineering conglomerate GE is Rolls’s main rival but Pratt and Whitney also compete with them for business. Both have lower costs than Rolls and hence better margins; Rolls is also investing heavily into next generation engines which should stand it well in the future. Not that the business is unprofitable – the revised forecast is for profits of around £1.4bn as against the previous forecast of £1.5bn. Slightly more worrying to shareholders though is the cash forecast – Rolls was anticipating generating about £250m of cash; now it is looking at a neutral position.
Mr East promised immediate action to restore cash flow and profitability. He started that by cancelling the companies share buyback programme. Rolls intended to buy back around £1bn of shares and was half way through that now abandoned programme. The share price fell 10% in response.
KEY MARKET INDICES: (at 07 July 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.56% (steady); 5 year 1.55% (slight fall).
Europe€: 1 mth -0.9% (rising); 3 mth -0.3% (steady); 5 year 0.37% (falling)
US$: 1 mth 0.18% (falling); 3 mth 0.46% (rising); 5 year 1.69% (easing)
Currency Exchanges:
£/Euro: 1.41, steady
£/$: 1.55, £ steady
Euro/$: 1.1, € slightly weaker
Gold oz: $1166, slight fall
Oil, Brent Crude: $56.54, 10% fall on the week.
London Stock Exchange: FTSE 100: 6,518. FTSE 350: 3,620
Briefly: Though Greek sovereign default has occurred, there has been no dramatic impact yet on exchange rates or interest rates. The Euro remains surprisingly steady, as is sterling. The LSE continues to drift gently down, perhaps reflecting a nervousness about European recovery prospects. What is surprising is the sudden drop in the oil price, as discussed in our article “Surplus Energy” elsewhere in this issue.
