06 July 2017
Week In Brief: BUSINESS AND THE CITY
NO DIVIDENDS FOR GOING INTERCITY: The number of passengers carried may be reaching record levels, and the railway network is probably in its best physical condition for eighty years, but profits are proving elusive. In fact, rail earnings are at their lowest level for a decade, though that is generally shielded from the public (and investor) scrutiny because most rail franchise operators are part of larger groups and do not break out their rail operations in public financial statements. However, Stagecoach, which operates both bus services and trains, came out of the tunnel this week to say that its surprise fall in earnings – down 83% to £17.9m for the year ended April 2017 – was mainly due to writing down around £130m on its Virgin branded East Coast franchise, which operates the east coast main line route from London Kings Cross to Edinburgh, and serves points between, such as York, Newcastle, and Leeds. The east coast route, although one of the most prestigious and busiest in Britain, has a history of financial stress forcing owners into the ballast, beginning with Great Northern, its first franchisee, who had to hand the franchise back after running out of money. When Stagecoach took it on there were mutterings that they had offered too much and it seems that that is indeed so – of the £130m, £84m relates to anticipated losses for the next two years. Stagecoach says the problems come from many sources – rising costs not matched by rising fares, the costs of heavy regulation which imposes penalties and costs on late running, and strong competition – the east coast is one of the few lines which does see significant competition between operators – with First Hull and Grand Central offering passenger choice. In the current year passenger carryings were also down, which the company attributes to terrorism incidents and political uncertainty, especially impacting on high margin business travel.
LOST AT SEA: Another headache for Chancellor Phillip Hammond: last year saw North Sea oil revenues turn negative, meaning that for the first time since the early 1970’s tax on revenues from the undersea oil has not supported government expenditures. Oil has produced total tax revenue close to £200bn since the first rigs began pumping oil, but that has been declining for many years and currently is the lowest since exploration got properly underway in 1969. Worse still than having no tax revenue, under the structure of the Petroleum Revenue Tax oil companies can offset a proportion of decommissioning and scrappage costs (of their rigs and pipes) against tax paid which meant the Treasury paid out about £300m in the last financial year, which may be up to double in the current year. Experts say this situation should reverse again soon as some new fields are opened up to the west of the UK, with also some gas likely to come on stream from new gas reserves in the North Sea, and as scrappage costs tail off. But this all depends on the oil price. If it weakens again, then revenues will of course be lower and that will drive taxable income down.
FLEET ORDER: Good news for Glasgow, for the Royal Navy, and most of all for BAE Systems, the British engineering company. It has just won a contract to build, over the next fifteen years or so, eight new frigates, with state of the art anti-submarine capabilities, to boost the Navy’s firepower in the key area of fighting mobile missile launch sites. The initial commitment is for only three of the eight, which should be ready around 2024; work is due to begin this month. This is all good news for not just BAE, but also for the steel industry and for designers and makers of advanced electronic control equipment, though not so much for tax payers. The total (today’s value) contract price is £3.7bn. The work should create 3,400 jobs over the prolonged period, many on the Clyde. It is also good news for Charles Woodburn who took over from Ian King as chief executive of BAE at the weekend. It was one of his first announcements. The order follows on from the recent Clyde launch of the Navy’s super aircraft carrier, Queen Elizabeth, which will be followed by a similar ship.
DRIVING AWAY: Elon Musk is no doubt the Henry Ford of our age, but, unlike Mr Ford, Mr Musk has developed a bit of a reputation for promising too much, too early. His Tesla all-electric cars are beautifully styled and wonderfully environmentally friendly – but have a habit of turning up long after their promised availability dates. When customers are ordering (and paying large deposits) well in advance, having to wait much longer than promised for delivery damages the brand and even creates concerns about the finance – though Tesla has been pretty open about its financial structures. But Mr Musk has learned quickly – as he has in so many areas. His new mass market model, the Model 3, is due to start deliveries on Friday 28th this month, two weeks ahead of the promised date. The car costs around US$35,000 and is the real game changer for Tesla, following its sports and luxury models, the S and the X, as it will turn the California carmaker into a mass market producer. That is almost assured – 400,000 potential owners paid deposits on the Model 3 soon after it was announced and pre-sales have risen further since. Output is rising fast on the production line from an initial 1,500 a month or so to hit the target of 20,000 a month by the end of the year. The US stock market was pleased to hear that Tesla is getting it together – the share price has risen by two thirds this year and Tesla is now the most valuable car maker in the US; and has the strongest brand loyalty.
NOT ON POINT: More problems at Hinkley Point. EDF who are building – are about to start building – the huge nuclear reactor which will be a key component of the UK’s renewed nuclear energy programme say that their estimates of costs have gone up a further £1.5bn, and that delivery of the project could be delayed by a further year or more (it was supposed to come on-stream about now, but is now looking to be in production in about ten years’ time). EDF is now pretty much locked into the project and increased costs and further delays are for its own account, so will continue to drive down anticipated returns. The company denied rumours from industry watchers that this might be the beginning of attempts to get out of the project altogether.
SCALE ELECTRIC: It was inevitable really. Porsche are developing self-drive technology, as is every major car manufacturer. But the German sports car maker is going one step further – it intends to self-drive cars round a number of major racing circuits using the ultimate performance of the cars. Then car enthusiasts will be able – virtually or in reality – to drive the track to see how close they can get to that supposedly perfect performance. Soon we shall all be racing drivers…
KEY MARKET INDICES: (as at 4th Julye 2017; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.30% (unchanged); 5 year 0.89% (rise).
Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.16% (rise)
US$: 1 mth 1.04% (steady); 3 mth 1.20% (steady); 5 year 1.97% (rise)
Currency Exchanges:
£/Euro: 1.14, £ strengthening
£/$: 1.29, £ strengthening
Euro/$: 1.13, € weakening
Commodities:
Gold, oz: $1,223, fall
Aluminium, tonne: $1,854 rise
Copper, tonne: $5,893, rise
Iron Ore, tonne: $62.50, sharp rise
Oil, Brent Crude barrel: $49.71 rise
Wheat, tonne: £147, rise
London Stock Exchange: FTSE 100: 7,378 (slight fall). FTSE Allshare: 4,029 (slight fall)
Briefly:
The markets generally showed some strengthening this week – iron ore positively bounding back up as China made positive noises about output. Oil continued to move back up – and Mr Carney waggled his eyebrows and the market obeyed, pushing five year interest rates sharply up, with sterling following.
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