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Markets News Wednesday: Aer Lingus to proceed unilaterally with its €97m cost cutting plan; Eurozone industrial prices rose in October
By Finfacts Team
Dec 2, 2009 - 11:22:03 AM
President Barack Obama reads as Marine One lifts off from the South Lawn of the White House enroute to Andrews Air Force Base for the trip to West Point, New York, December 1, 2009, where he announced an additional deployment of 30,000 service personnel to Afghanistan.
Eurozone industrial prices
In the month of October 2009, the industrial producer price index rose by 0.2% in both the Eurozone (EA16) and the EU27. In September, prices fell by 0.4% in both zones, according to the EU statistics office, Eurostat.
In the 12-months October 2009, industrial producer prices dropped by 6.7% in the Eurozone and by 5.8% in the EU27.
The Chinese Embassy in Dublin has announced that a China Trade and Investment Promotion Mission consisting of over 150 entrepreneurs, is visiting Ireland from today, Dec 2nd to Friday.
An Ireland-China Economic & Trade Cooperation forum will be held from 9:00 to 15:00 on Thursday December 3rd, at the Hilton Hotel, Charlemont Place, Dublin 2.
Aer Lingus
Aer Lingus announced today that following an extraordinary meeting of its board, it approved the release of the following statement from Christoph Mueller, chief executive:"Aer Lingus and all of its employees have not reached agreement in respect of all aspects of the proposed Transformation Plan. We have narrowed the gap with most union groups on the achievement of sustainable savings and this has brought us very close to signature with them.
The exception to this promising outcome is the Irish Airline Pilots Association (IALPA) and to a lesser extent, Cabin Crew. Instead of sustainable savings of a structural nature, only temporary savings over a short few years were offered by IALPA. Aer Lingus was asked for very high compensation in return. Our pilot compensation and productivity remains out of line with the compensation and productivity of our competitors.
The Board and Management believe that the majority of our staff understands that Aer Lingus needs to make significant and urgent change if it is to have an independent and successful financial future, and that they are committed to achieving this change. If successful, we can maximise the scale of the Company and keep staff numbers closer to current levels. However in the absence of real cost savings being delivered from all employee groups, we will have to resort to other measures.
The Board and Management will now move to reduce capacity, further eliminating routes which are loss making as a result of our high cost base. This will result in the operation of fewer aircraft, which in turn will lead to additional redundancies beyond those included in the Transformation Plan. It is very likely that these redundancies will commence immediately and will be compulsory.
I remain confident that Aer Lingus can pursue an independent future. I wanted to prove that a unionised airline, Aer Lingus, could be turned around in Ireland. In this regard it has always been and remains our preference to secure the required cost savings through agreement with our employees.
On this occasion it has not been possible to reach agreement with all our employee groups and we must now take whatever actions are necessary to stabilize the business, in the interests of Aer Lingus, its customers, the majority of its employees and its shareholders."
The Aer Lingus board is due to meet again on Friday after deciding to proceed unilaterally with its €97m cost cutting plan.
The board took the decision yesterday evening, despite the fact that unions at the airline have so far failed to sign up to the proposals which envisage immediate cuts of €97m to stem significant ongoing losses.
Last night, Christoph Mueller said the decision was necessary to stabilise the business, but would likely lead to more job losses than the 676 voluntary redundancies originally envisaged.
Irish redundancies November 2009
According to data published on Tuesday by the Department of Enterprise, Trade and Employment, there 5,903 redundancies notified to its claims service in November.
This brings the total redundancies so far this year to just over 73,000, almost double the number recorded in the same period in 2008.
Commenting on the 96% increase in redundancies to end November , the Director of the Small Firms Association, Patricia Callan, said that “there is a clear need for the Government to now prioritise the restoration of cost competitiveness to the small business sector, which is the only way to stop the haemorrhage of jobs.” An additional 5,903 people were made redundant in November, bringing the running total for the year to 73,024.
The SFA is calling on the Tánaiste this week to reopen applications to the €250mn Employment Subsidy Scheme and to broaden the criteria to all sectors of the economy and to those companies currently employing less than 10 people. “All of the supports announced to date are restricted to the same 800 Enterprise Ireland client companies, which while vitally important to these internationally trading companies, will do nothing to stem the job loss tide in the other 249,200 companies, who traditionally have employed half the private sector workforce, some 800,000 people,” said Callan.
The CSO reported this morning that the Irish Live Register total increased from 422,500 in October to 423,400 in November, an increase of 900. The unemployment rate remained unchanged at 12.5% - - see link to story in Box below.
The downturn sparked a flood of money from central banks into their economies. There are now fears that the over-stimulation can lead to new asset bubbles and inflation. Cecilia Hermansson from Swedbank sees asset price bubbles in emerging market real-estate and equities.
Number of Irish insolvencies rise
The total number of insolvencies in Ireland increased for the third consecutive month with 117 companies going bust in November, according to the latest statistics from InsolvencyJournal.ie, Kavanagh Fennell’s online insolvency publication.
Commenting on the research, Ken Fennell, partner, Kavanagh Fennell, said, “The figures are down 23% on the year high of 151 insolvencies recorded in July, but there has been a small increase in insolvencies in the past three months which is not surprising as there is usually a peak in insolvencies in the last quarter. The overall picture for 2009 remains bleak with a total of 1,326 firms declared insolvent so far this year. The average rate of monthly insolvencies stands at 121 companies per month. Should this continue, the total number of insolvencies will exceed our own predicted figure of 1,400 insolvencies this year.”
The construction industry again recorded the highest number of company collapses in November. There was, however, a 20% drop in the number of insolvent firms compared to October suggesting that the rate of insolvencies in the construction industry may finally have bottomed out. There was no such reprieve for the services and hospitality industry, both of which recorded increases in company failures this month.
The services industry continued to suffer with another 25 companies becoming insolvent in November - up from 22 in October. This brings the total number of insolvencies in the service industry to 253 this year, second only to the construction industry where there were 394 insolvencies to date in 2009.
The motor trade’s woes also continued with the number of companies declared insolvent in the industry jumping from one in October to six in November. The figures will no doubt strengthen the Society of the Irish Motor Industry’s argument for the introduction of a scrappage scheme in the December budget.
The total number of examinerships stayed the same with only two companies applying for court protection in November. This suggests that companies may be wary about the examinership process following the Zoe Group’s unsuccessful examinership bid in September.
November also saw a slight decrease in the number of insolvencies through receiverships, with the volume of receiverships down 45% from the year high of 22 in February.
Europe's big banks get bigger
Bloomberg reports today that European banks are emerging from the credit crisis bigger than before, posing more risk to their national economies.
BNP Paribas SA, Barclays Plc and Banco Santander SA are among at least 353 European lenders that have increased in size since the beginning of 2007, according to data compiled by Bloomberg. Fifteen European banks now have assets larger than their home economies, compared with 10 lenders three years ago.
Meanwhile the FT reports that some of the most controversial financing practices of the credit-bubble years – from cov lite loans to Pik toggle notes and dividend recap exercises – have returned to Wall Street, stoking fears that debt markets are growing overheated.
The techniques fell into disrepute during the financial crisis because they were based to varying degrees on the same rosy expectations that encouraged companies and consumers to assume what proved to be crippling levels of debt.
In a cov light – short for covenant light – loan, borrowers are granted credit with few, if any, conditions.
US markets
In New York Tuesday, the Dow closed up 127 points or 1.23% to 10,472.
The S&P 500 gained 1.21% and the Nasdaq rose 1.46%.
China's yuan will go through a revaluation in coming months and there will be a slowdown in government spending in the second half of 2010, according to Chris Rynning, CEO of China-based private equity group Origo Sino-India, Wednesday. The revaluation will not have the big impact on the economy that people expect, he said:
Asia
The MSCI Asia Pacific Index rose 0.4% Wednesday.
The Nikkei 225 rose 0.38%; the Shanghai Composite has gained 1% and India's BSE Sensex 30 is down 0.2%.
Dubai World announced it would be restructuring around $26 billion of debt, calming investors' fears Tuesday. Clem Chambers, CEO of ADVFN, and Brian Kim, CIO of Liquid Capital, have analysis.
Currencies
The euro is trading at $1.5089 and at £0.9055.
For live currency updates, check the right-hand column of the Finfacts home page.
The US dollar fell to $1.6038 per euro on Tuesday, July 15, 2008 - an-all time record.
The BDI slid 41% in the third quarter and rose 40% in October.
The index fell 11.8% last week to 3,974 points as the global benchmark for freight costs extended its correction after hitting a 2009 high in the previous week.
Davy chief economist Rossa White comments: Irish government must hold its nerve on public pay with a week to go to the Budget - - "The Irish Budget is now one week away. We already know that it will contain a €4bn fiscal consolidation plan (flagged to the European Commission back in April and consistently reiterated since, not least in the pre-Budget outlook). But the shape of the Budget matters: a minimum of €2.5bn must come from current spending cuts. That will reduce the structural deficit and boost Irish competiveness, paving the way for economic recovery. As part of the current spending cuts, the government must hold its nerve and avoid fudge on public pay to make it credible.
The government intends to extract half of the current spending savings from public pay. It remains in talks with public sector unions about how to do this. The latest union suggestions to generate €1.3bn in payroll savings are laughable. They propose a couple of weeks of unpaid leave for workers, failing to grasp that what is required is a price, not volume, adjustment in the public sector. In theory, this proposal may achieve a small price adjustment alongside a damaging volume adjustment. In practice, it is unworkable.
On paper, the state may generate savings from not having to pay staff for two weeks a year. But if public servants are not working full-time, presumably services would suffer - - never mind the bureaucratic nightmare in trying to co-ordinate cover in areas like the Health Service Executive (HSE) where systems do not even talk to each other. Of course, if unions suggest that services will not suffer, the implication is that the public service is either overstaffed or unproductive. The simple reality is that a straight pay cut is optimal (by reducing the cost of public services), justified (thanks to the pay premium over the private sector and equivalent public servants in the EU), easy to implement, and would also bring down the pensions bill by cutting final salary."
Goodbody chief economist Dermot O'Leary comments: Economics; T -7 to Budget Day - - "Exchequer returns for the important month of November, when self-assessed taxes are collected, will effectively complete the arithmetic ahead of next week's Budget 2010. Whether the budget turns out to be 12% of GDP or 13% of GDP in 2009, the implications are the same and have been known for some time - Ireland needs to take drastic action to reduce the budget deficit over the coming years. Much of the attention over recent weeks has been focused on the previously announced €4bn in changes in 2010.
Within this, a figure of €1.3bn has been quoted as the planned savings to the public sector pay and pensions bill. It has emerged overnight that a deal has been reached between the government and union officials that means a deferral of tomorrow's planned strikes. The agreements point to the introduction of compulsory unpaid leave for public sector workers instead of any pay cuts. We find it difficult to see how such a plan can be implemented and bring about the required savings in this component of spending which accounts for close to a third of the total. Indeed, press reports indicate that there is scepticism in the Dept. of Finance about the savings that can be brought about in this way.
A saving of only €1bn on public sector pay and pensions seems likely, which a disappointment in our mind, more for the signal that it sends out about the political will to impose the required changes to solve the problems in the public finances in the least damaging way to the economy. Moreover, one must remember that the required savings of €4bn is only the first part of a four-year budget consolidation phase agreed with the European Commission. The total consolidation amounts to €15bn over this period and it would be advisable to do most of the heavy lifting early, as it would remove some of the uncertainty about future changes on the part of consumers and businesses. It still looks like the changes to be announced next week will be split 75%/25% in favour of spending cuts, but discussions are likely to continue to the wire on how this will be implemented."
Goodbody analyst Anna Lalor comments: EC appears willing to consider cash payment on Government prefs - - "Press reports this morning provide comments from the European Commission (EC) on the situation that AIB announced yesterday, where the deferral of coupons one its tier 1 capital securities in line with EC state aid requirements had the knock on impact of meaning it could not pay a cash dividend on the preference shares held by the Government (with the alternative option being payment in ordinary shares). AIB noted in the statement that it and the Department of Finance were in discussions with the EC on this matter, as the Government would rather receive the coupon payment in cash as opposed to equity. The EC commented yesterday that in its "approach to restructuring aid for banks, it is possible for the period of coupon restrictions to be adjusted if this would favour private capital raising that would, in turn, reduce the amount of state aid". It also noted, that in the context of the restructuring plan submitted by AIB, it will support efforts by the company 'to raise private capital, including measures aimed at providing adequate remuneration to the Government's preference shares without necessarily diluting existing shareholders.'
It appears that the uncertainty over whether the preference coupon due to the Government in May (March in BOI's case) could be paid in equity or cash as a result of yesterday's action is leaning largely towards payment in cash, with the EC recognising that a bank that has lower existing state ownership (already as potentially a 25% stake from the warrants, while if the coupon was paid in equity, at current prices it would own a further 17% of AIB) will probably find it easier to raise private capital, therefore reducing the potential requirement for state support in raising equity."
