TheChek News Flow

Transport commissioner says Brussels needs ‘detailed explanation’ after ticket prices rose 30% over summer

Brussels is probing the recent rise in air fares across Europe after airlines pushed up prices by as much as 30 per cent over the summer, leading to bumper profits.

Adina Vălean, the EU’s transport commissioner, told the Financial Times that EU officials were “looking into detail . . . of what is exactly going on in the market and why”.

The European Commission does not have the power to regulate air fares, but Vălean’s intervention adds to pressure on airlines over the recent price rises, triggered by a travel boom and supply chain issues. She said she was seeking explanations from airlines about the rise in fares and the potential barriers to connectivity in the bloc.

Average air fares across Europe were between 20-30 per cent higher over summer 2023 compared with 2019, according to EU data released in October in response to a question in the European parliament.

Vălean said she had no plans to intervene in the “functioning” aviation market but the commission needed more details of the industry dynamics that had led to the higher prices.

“We are still investigating because we don’t have a full, detailed explanation,” she said, particularly on whether the fare rises were a long-term trend.

Brussels is concerned that high air fares could affect the EU’s outer regions, such as islands or isolated territories that rely on aviation for connections with the rest of the bloc.

“We cannot go as a regulator into micromanagement of prices or imposing that, I don’t think this is doable or desirable,” Vălean said. “On the other hand, what I as a regulator worry [about] is that a price [could] become a barrier for connectivity.

“We are in a permanent conversation with the industry . . . to understand what the cause of this development is.”

Vălean’s intervention adds to political pressure on airlines over rising fares.

The Italian government has proposed capping prices on routes to some islands, although it partially backtracked in September and instead gave the country’s competition authority new powers to police ticket prices.

Airlines are free to set their own fares under EU laws, and the liberalised air market has historically driven down prices and opened up new routes.

However a surge in demand for flights has this year, amid a shortage of aircraft, drove up ticket prices. Many airlines retired planes during the coronavirus pandemic, while supply chain problems hit deliveries and inflationary pressures across fuel and labour also pushed up costs.

While ultra low-cost carriers Ryanair and Wizz Air are flying more than in 2019, most European airlines are not.

Airlines including British Airways owner IAG, Air France-KLM and Lufthansa still reported record profits over the summer, helped by rising fares, partly repairing the damage to their balance sheets during the pandemic. The global industry has more than doubled its profit forecast for the year, according to the sector’s trade body, as a result of surging post-pandemic demand for travel.

Vălean said she feared higher prices would continue because of the imbalance between demand for travel and tight supply of new aircraft.

“We do expect that capacity is not going to grow at the same level as the demand.”

Airlines also face paying a higher price to pollute after member states and the European parliament last December agreed rules that will speed up the phaseout of free carbon credits given to airlines under the bloc’s emissions trading system and require the industry to report on non-CO₂ emissions too.

Airline bosses have said they broadly support the EU’s ambitious climate targets, but insisted that they need more support if they are to cut emissions, particularly in the development of sustainable aviation fuels.

IAG, Lufthansa, Air France-KLM, easyJet and Ryanair have been contacted for comment.

Region dominates continued rise in global spending by subscribers but industry faces pricing challenges

North America is set to maintain its grip over music spending in the coming years, as subscription models grow in popularity to account for more than 60 per cent of global consumer revenues by 2027, according to forecasts from consultancy Omdia.

Paid subscriptions to streaming services such as Spotify have revived the music industry over the past several years, restoring revenue that had been lost to online piracy at the turn of the millennium.

Subscriptions are set to make up more than 62 per cent of all global recorded music revenue by 2027, up from 58 per cent in 2022, Omdia analysts predict. Physical formats, such as CDs and vinyl albums, will recede to 13 per cent of revenue in 2027, from nearly 17 per cent in 2022, Omdia says.

Even as streaming services have expanded to many countries around the globe, Omdia expects North America to remain the bedrock of music spending by a wide margin.

The region will account for 43.2 per cent of global recorded music buying in 2027, down only slightly from 43.9 per cent in 2022, Omdia analysts forecast. Europe will maintain its number two spot, with 27 per cent of global music spending, the consultancy adds.

Spotify launched a decade and a half ago, and hundreds of millions of people across the world now pay a monthly fee to stream music. The streaming pioneer reached 226mn paying subscribers at the end of September.

But the early land-grab of new subscribers is slowing in some regions, leaving the music industry to find ways to keep up momentum and fuel future growth. “The days of high double-digit growth are long gone”, Omdia warns. “Developed countries all face the problem of what to do when the subscriber pool dries up”.

In the US, this slowdown has already begun. Last year, US recorded music revenue rose 6 per cent compared with the prior year, to $15.9bn, according to the Recording Industry Association of America, the trade group. This was its slowest growth rate since 2016, when the business had just begun to bounce back from its piracy-driven downturn.

In the next phase of music streaming’s evolution, Omdia analysts suggest that streaming companies will need to strike a balance with pricing.

Investment bank TD Cowen notes that the amount consumers spend on music relative to their other expenses is less than half of the level it reached during the 1990s. “Not only is music still relatively inexpensive; the product has also improved significantly, with streaming services offering access to a library of virtually all music ever created on easily portable devices”, says analyst Doug Creutz. Against this backdrop, he expects further price rises in the coming years.

Goldman Sachs analysts believe that the monetisation of music has “significantly lagged consumption” and also expect price rises “on a regular basis, especially in an environment of higher inflation”.

When Spotify launched in 2008, “the environment for recorded music sales was completely different”, says Simon Dyson, Omdia analyst. “Piracy was still horrendous. There was still lots of free music floating around. The $9.99 [price] was in line with the price of a CD.”

It would take more than a decade for Spotify to raise the price of its standard subscription in the US, the world’s largest recorded music market. The streaming group announced a $1 rise in July of this year, with Americans now paying $11 a month to stream all the world’s music. Spotify said the price rise would help the company “keep innovating in changing market conditions”. Rival Apple Music last year raised the price of its music subscription to $11 a month.

Dyson anticipates that Spotify will continue raising prices by $1 every year going forward. “It’s very underpriced for what it’s offering,” he says. “Even if they do a price rise next year and the year after, I think it will still be underpriced.”

Early financial results suggest Spotify has pricing power. During the quarter when Spotify raised prices, the group still managed to sign up 6mn new subscribers, above the 4mn it had forecast. The group also turned a profit for the first time in more than a year. Chief executive and co-founder Daniel Ek said the results proved that Spotify could become a “great business”.

“Because of our confidence in our product and our ever-expanding content offering, we felt the timing was right to raise prices”, Ek, the 40-year-old billionaire, told investors on an earnings call.

Omdia analysts believe that music companies and streaming services “need to be more proactive” in offering different pricing and subscription options. At the moment, Spotify, Apple, Amazon, YouTube and others all offer a similar catalogue of songs at similar prices. Omdia expects these services will need to differentiate themselves in the same way that Netflix and video platforms do, with exclusive content.

Spotify has made strides towards this, making a push into podcasts and audiobooks with the goal of expanding its scope to all things audio — not just music. Spotify is even offering UK and Australia subscribers 15 hours of audiobook listening per month at no extra cost, an offer that it plans to expand to the US in the coming months.

However, Omdia analysts expect streaming companies will eventually need to split some of these offerings into different subscription tiers or add-ons. “It may seem like a good idea to increase the breadth of content to limit churn, but continuing to keep all audio content in a single silo really is a recipe for disaster,” they warn.

Legislation announced in King’s Speech will allow companies to bid yearly for new licences to drill for fossil fuels

New legislation to mandate annual North Sea oil and gas licensing rounds will be at the heart of the King’s Speech on Tuesday, as Rishi Sunak looks to exploit a key policy divide with Labour ahead of the next UK general election.

The prime minister insisted the bill, which would allow companies to bid yearly for new licences to drill for fossil fuels in the North Sea, would protect jobs and strengthen Britain’s energy security by reducing its exposure to volatile international markets.

The announcement, which comes in the wake of the energy shock sparked by Russia’s invasion of Ukraine that has sent prices soaring, will allow Sunak to highlight how his “pragmatic, proportionate and realistic” approach to achieving net zero by 2050 contrasts with Labour’s policies.

The main opposition party has an average 20-point polling lead over the Conservatives ahead of the election expected next year, and has said it intends to make Britain a “clean energy superpower”.

Britain currently relies for most of its energy needs on oil and gas, which are forecast to remain part of the country’s energy mix beyond 2050.

However, the North Sea Transition Authority, the regulator, has acknowledged that any new licensing will do little to reduce Britain’s dependence on imports or affect prices of oil or gas significantly, given that the basin’s reserves are in decline and the commodities are traded on international markets.

Sir Keir Starmer has said that if his party wins power it will honour existing licences, but he has ruled out granting any new ones. Instead, the party will prioritise significant investment in nuclear and renewable energy sources.

In September, Sunak pushed back a ban on the sale of new petrol and diesel cars from 2030 to 2035 and relaxed the phaseout target for the installation of new gas boilers.

The prime minister’s latest announcement comes as he attempts to regain political momentum following damaging revelations about the UK’s response to the pandemic in the Covid-19 public inquiry, and lurid claims about unnamed Tory MPs in a new book by former culture secretary Nadine Dorries.

The King’s Speech is expected to set out new bills on crime and sentencing, leasehold reform and the creation of an independent football regulator in England.

The plans to step up oil and gas licensing, which apply to the area of the North Sea over which the UK has jurisdiction, come after the NSTA last month offered the first batch of 27 new licences as part of a round launched in October 2022.

Before then, the process had been paused since 2020 as the government reviewed the climate impact of oil and gas exploration. 

The legislation will be caveated with key net zero tests that must be met before a new round is launched each year.

Ed Miliband, Labour’s shadow energy secretary, described the bill as “a stunt which does nothing to lower bills or deliver energy security”.

“We already have regular North Sea oil and gas licensing in Britain, and it is precisely our dependence on fossil fuels that has led to the worst cost of living crisis in generations,” he added.

David Whitehouse, chief executive of Offshore Energies UK, a trade body, welcomed the prospect of a “predictable licensing process with transparent checks” each year. “The UK needs the churn of new licences to manage production decline in line with our maturing basin,” he said.

But Tessa Khan, executive director and founder of campaign group Uplift, said the government was selling a “pipe dream”, adding: “More North Sea licensing will do vanishingly little for the UK’s energy security and nothing for our unaffordable energy bills.”

Palo Alto Networks is close to acquiring Israeli startup Talon Cyber Security in a deal that could value it at $600 million to $700 million, according to two people familiar with the discussions. The deal could be announced as soon as Monday, one of the people said.

The acquisition would extend Palo Alto Networks’ acquisitions of small cybersecurity startups and add another offering to its suite of enterprise security software geared to companies with remote or hybrid workforces. Talon’s core offering is a secure web browser based on Google’s Chromium software whose features aim to prevent employees from clicking malicious links.

• Palo Alto Networks has been buying small security startups

• Deal could value Talon at between $600 million and $700 million

• Talon makes software geared toward remote workers

Palo Alto Networks, which has a $76 billion market capitalization, last week said it would acquire Israeli data security startup Dig. It paid about $400 million, according to TechCrunch.

Talon declined to comment. A spokesperson for Palo Alto Networks did not immediately respond to a request for comment.

Interest in Talon also shows companies are willing to pay a premium for cybersecurity startups. Talon was generating less than $1 million annually in revenue in 2022, The Information reported at the time. Its more recent revenue couldn’t be learned. Palo Alto Networks may be equipped to quickly monetize Talon’s product by selling it alongside its popular firewall and cloud security technology.

It also indicates that deals for Israeli startups are still getting done after the outbreak of the Oct. 7 terrorist attacks by Palestinian group Hamas. The Israeli military has since drafted hundreds of thousands of reserve soldiers, including thousands of tech startup workers, some of whom are now fighting in the Hamas-controlled Gaza Strip. In September, The Israeli outlet Calcalist reported that Palo Alto Networks was negotiating a deal to acquire Talon for $600 million.

Talon has raised $126 million from backers including Lightspeed Venture Partners and Team8. The Tel Aviv-based startup was founded in 2021 by CEO Ofer Ben-Noon and CTO Ohad Bobrov. Its software also tracks what employees are downloading as well as screenshots they have taken.

Palo Alto Networks has in recent years entered newer markets such as cloud security, where it competes with rising startups like Wiz, as well as incumbents like Netskope and Zscaler. To win in that field, Palo Alto Networks has recently relied on offering discounts on its software bundles, The Information previously reported.

Captagon is at the center of a long-debunked myth about militant violence in the Middle East.

The Israel Defense Forces and U.S. government have both recently claimed that Hamas militants were high on captagon, a type of amphetamine popular in the Middle East, during the group’s brutal October 7 attack on Israel. The drug increased Hamas’ willingness to kill and torture civilians, officials said.

According to one of the world’s foremost experts on captagon, whom Motherboard spoke to, it’s an incredibly unlikely claim with little evidence to back it up. While it’s possible that some militants were high on uppers at the time of the attack, recent reports that captagon induces a violent mania are unfounded—while claims that Islamic extremists routinely use captagon to go into battle is a rumor that has been discredited before.

The reports that Hamas fighters were high on captagon during the attacks originated with Israel news agency Channel 12 before they made their way to USA Today and Semafor. According to the reports, unnamed officials from the IDF and U.S. government confirmed that captagon was found on the bodies of dead Hamas soldiers. The anonymous officials told Semafor that the drug was used to “stimulate [Hamas’] willingness to attack, kill, and in some cases, torture, civilians,” but the report did not quote officials directly.

Notably, U.S. officials made a point of telling Semafor that captagon was used by ISIS. Equating Hamas to ISIS has been a key part of Israel’s strategy to justify its ongoing siege of Gaza, which has killed thousands of civilians, to destroy Hamas.

Caroline Rose, director of New Lines Institute’s Strategic Blind Spots Portfolio, was skeptical of officials’ claims around captagon. “There was this claim that captagon was on his body, but there was no video evidence of this,” she told Motherboard. Rose tracks the movement of captagon as part of her work with New Lines and said that the drug is in Gaza—narcotics regularly make their way into the strip, and Hamas previously seized a shipment of captagon while blaming Israeli sources for trafficking the drug—but stressed that the popular amphetamine pill is not a wonder drug that explains the violence of the attacks.

Captagon is a bit of a mystery. It’s the brand name for a fenethylline, a synthetic upper first produced in Germany in the 1960s as an amphetamine alternative. “It’s very similar to Ritalin,” Rose said. “It allows people to stay up late. It allows people to stave off hunger, to focus, and concentrate.”

The drug fell out of favor in the decades after its initial manufacture. In the early 2000s, as official production dwindled, the remaining supplies moved onto the black market. It became popular in the Middle East and is currently manufactured primarily in Syria. Now, captagon is a catch-all name for a wide variety of substances, usually taken in pill form, that produce an amphetamine-like high.

“We don’t have a comprehensive definition for the substance,” Rose said. “But once it came to the Middle East, we started to see the formula change quite drastically. It did not mimic fenethylline whatsoever, instead it incorporated little to no amphetamine or, sometimes, up to 47 percent of amphetamine metabolites inside a pill that was a mixture of caffeine, quinine, procaine, and sometimes toxic levels of zinc and copper from the tableting machine…we would see a very wide spectrum of anything producers could find to put inside these captagon pills.”

Rose said that some captagon pills contain just minimal levels of amphetamine—the active ingredient in many common ADD medications—and cutting agents. She said that reports of captagon causing a violent mania are strictly anecdotal. “When we look at the surveys and the comprehensive studies that are conducted on captagon consumption, and to be fair there aren’t that many, it doesn’t seem to be inciting this kind of crazed behavior,” she said.

She also noted that some of the facts in the USA Today story didn’t make sense. “What’s notable is that they said they were methamphetamine-like stimulants. Captagon is an amphetamine type stimulant, not methamphetamine,” she said. “Israeli security said that small batches were found in the form of a cocaine-like powder. And they also said that small bottles containing a white fluid with traces of captagon were also found. I look at captagon seizures a lot and I’ve seen power in the sense of precursor materials, but not captagon powder. And I’ve never seen captagon in liquid form before. So I find it somewhat difficult to believe that, in one raid, we find two new forms of captagon.”

Politicians have long pointed to captagon as a source of militant violence, especially in the Middle East. Often, this ends up portraying the perpetrators of extreme terroristic violence as bloodthirsty, drug-fueled zombies—a kind of unstoppable evil.

“There is this rush to blame captagon for the violent behavior that’s perpetrated, when it’s very clear that there was extensive planning and preparation for these operations,” Rose said. She pointed to reports in 2015 that captagon fueled Islamic State attacks in Paris. “In fact, that operation required a lot of planning and a lot of preparation.” A tox screen of the Paris attackers later revealed they had no drugs in their system.

“It helps some people try and rationalize some of the violence that’s conducted,” Rose said. “The attack we saw in early October was catastrophic. Additionally, it’s an illicit activity that people can pin on bad actors that are already identified as bad actors.”

Drug use by soldiers, especially the use of stimulants, is common. Throughout the 1950s and 1960s, the Pentagon kept nuclear equipped B-2 bombers in the air above the world 24 hours a day. The pilots chewed dexedrine pills to keep awake during long flights. During the Vietnam war, the DoD pumped soldiers full of speed. World War II was, famously, fought on amphetamine. U.S. pilots reported amphetamine use in the Gulf War and the War on Terror; two service members even tried to blame amphetamines for a friendly fire incident in Afghanistan. “They’re all pretty much used for the same thing, which is to stay up, stave off hunger, stay focused,” Rose said.

She said she’d tracked seizures of captagon in Gaza, but stressed that there’s no pill that unlocks a person’s ability to conduct brutal attacks and there’s no evidence that captagon use was widespread or a key part of Hamas’ plan. “Fighters might have taken cocaine right before, or captagon, or no substances at all. Some might have taken caffeine, some may be sleep deprived,” she said. “There’s so many different stimulants that heighten awareness and attention during an operation, but there's no way that captagon was a factor to blame in the violence and atrocities that we witnessed on October 7.”

“I think when it comes to the mystique of militant use of substances, we’ve seen this story again and again and again. It’s not new,” she said.

What a week Tim Cook had. On Thursday, Apple reported anemic September-quarter results, completing a fiscal year where revenues fell 2.8%. That’s actually not a bad result given that the smartphone market that drives Apple’s business shrank 10.5% in the same 12-month period, according to IDC data. Still, it is yet another reminder (if any were needed) that Apple is no longer a growth company. Cook’s other big event this week was his birthday: He turned 63 on Wednesday, which incidentally is several years older than any of his counterparts atop other big tech firms. In fact, the average age of the CEOs of Microsoft, Alphabet, Meta Platforms, Amazon and X/SpaceX/Tesla is around 50.

For a company of Apple’s size and cultural importance, it’s remarkable that there’s so little public discussion of the fact that its management is aging—and so little sense of who could come next. Jeff Williams, Apple’s chief operating officer, is reportedly just a couple of years younger than Cook, which means he could only be a short-term successor if Cook decided to retire tomorrow. To be clear, there’s no reason to think Cook is planning to retire imminently, but it’s certainly possible he wants to have another chapter in his life. A Bloomberg report in 2021 said Cook wanted to stick around for “one more major new product” release, such as the mixed-reality glasses which are due out early next year. Assuming that’s true, Apple’s board should be looking for a successor now.

In fact, while Cook has unquestionably been an excellent CEO, at least from a shareholder point of view, it wouldn’t be a terrible thing for him to move on sooner rather than later. The company is too reliant on a portfolio of mostly older products to have any hope of improving its long-term growth trajectory. The mixed-reality headset looks unlikely to be the fix some might want. What Apple needs is a leader with fresh ideas and a willingness to take some risks. Cook, who has maintained an exemplary track record over the past dozen years, has reason to take less risk, not more. After all, who wants to blot their reputation at this point in their tenure?

Will that be someone from inside? Most of the people at the top of Apple have been there a long time and have surely absorbed Apple’s way of doing things. That’s probably a good thing, given how successful the company has been. The question is whether one of those people is willing to try a few new things. It’s a question the board and shareholders need answered.

City of London seeks to redefine itself as dining destination

New Wolseley restaurant comes as Square Mile aims to become leisure hotspot after drop in worker footfall

At 7am on Wednesday, the Wolseley, a West End diner frequented by a mix of financiers, dealmakers and celebrities, will throw open the doors to its first outpost in the City of London.

The launch of the Wolseley spin-off, which occupies the site of a grand former department store opposite London Bridge known as the “Gateway to the City”, marks the biggest restaurant opening of the year in the Square Mile, costing an estimated £10mn.

It comes as London’s financial district presses ahead with efforts to redefine itself as a destination for restaurant-goers, day trippers and tourists in a push to offset the drop in office workers’ footfall since the shift to hybrid working following the coronavirus pandemic.

The number of restaurants in the City fell by 28 per cent between September 2019 and September 2023, outpacing the rate of closures across the capital, according to research by industry tracker CGA and consulting group Alix Partners.

But in the past year the district has stemmed the tide — losing just 1.3 per cent of its sites, the lowest rate of decline for any inner London district.

“Things have definitely picked up in the City,” said Baton Berisha, chief executive of the Wolseley Hospitality Group, which was founded by famed restaurateur Jeremy King before he was ousted by majority owner Thai-based Minor Hotels last year.

Berisha predicted that higher demand for corporate lunches from workers in the office between Tuesday and Thursday, as well as increased footfall from tourists on weekends, would ensure the new outpost remained “very busy” beyond opening day. Wolseley Hospitality Group operates nine sites across the UK.

Historically deprived of a vibrant dining scene, the City has added a series of marquee venues over the past decade, and demand for the Wolseley’s upmarket competitors nearby has remained strong despite the cost of living crisis.

One Lombard Street, a brasserie located opposite the Bank of England, had its best trading day in its 25-year history in mid-October, recording just over £60,000 in turnover. A few streets away, almost 2,000 diners visited steak restaurant Hawksmoor’s City outlet in the last week of October, 15 per cent higher than the same week in 2019, when it did not open on weekends.

Gareth Banner, managing director of Soho House-run members’ club The Ned, said the Wolseley was a “welcome addition” to the Square Mile. “I’ve always adopted the view that a rising tide lifts all boats. “I’m conscious that they will be competition . . . but ultimately it makes the City a bit more of a destination,” he added.

Demand patterns resemble a “bell-shaped curve” concentrated between Tuesdays and Thursdays, when workers commute into the office, according to Soren Jessen, a former banker who runs One Lombard Street. In turn, restaurants have cut back on staffing numbers on less busy days: the Ned saves up to 25 per cent on payroll on Mondays and Fridays, Banner said.

Oyster card usage at London Underground stations located in the City was 13 per cent higher on a Wednesday in mid-October than on an average day before the pandemic, according to a Financial Times analysis of data from Transport for London, which runs the network. But usage on the Monday and Friday of the same week last month was more than 20 per cent down on pre-Covid levels.

Jessen said that in the middle of the week, regulars “come for breakfast, go and have meetings, come back for lunch and then a drink in the afternoon. You can spend a lot of money in one restaurant.”

Corporate lunches, the linchpin of demand for City venues, meant the district was better placed to weather any economic slowdown, according to Will Beckett, chief executive of Hawksmoor, which has had a presence there since 2011.

“In a cost of living crisis, you’d probably rather be exposed to corporate cards than purely household income; it’s a bit more robust,” said Beckett, estimating that two-thirds of midweek lunches at his group’s Square Mile restaurant were paid for by corporate credit cards.

But the Square Mile has also benefited from an increase in leisure visitors over the weekends, spurred by a £2.5mn-a-year investment from the authority that manages it. Sunday lunch at the Ned, for instance, is fully booked for the next six weeks.

“On weekends, we never had anyone much in the City . . . that has absolutely changed,” said Chris Hayward, policy chair at the City of London Corporation, which began its annual investment in 2021. “The stuffy image of the City of 20-30 years ago has long gone.”

He said efforts to boost tourism had helped the City compete with local rival Canary Wharf and global competitors, such as New York’s financial district. Both have put more focus on diversifying into leisure attractions since the pandemic.

Coq d’Argent, a rooftop restaurant overlooking the BoE, used to be “a sea of suits but . . . not anymore”, said David Loewi, managing director of its owner D&D London. “You can’t just rely on the corporates anymore.”

Karl Chessell, CGA’s director of hospitality, said upmarket restaurants were likely to be “less susceptible” to an economic downturn because of the spending power of their clientele. But he cautioned against “calling the bottom of the market”.

The possibility of more rail strikes later this year could yet hit the hospitality sector over the vital Christmas period, while a planned rise in business rates next April could add to restaurants’ costs.

But for the time being the City’s dining scene continues to thrive. “The Wolseley has never really been about the food, it’s about the overall experience and the buzz . . . and the City has always been open to that formula,” said Peter Harden, who collates the annual Harden’s London restaurants guide.

Top executives have left group’s green divisions after shift in focus under new CEO

Chief executive Wael Sawan plans to make Shell “leaner” and more selective about how it invests in the energy transition as he defended a shift in focus that has led several senior executives to leave the company’s green divisions in the past six months.

Since he took the top job in January, Sawan has outlined plans to boost returns by maintaining oil output, growing the gas business and trimming less profitable parts of the company’s low-carbon portfolio established under his predecessor Ben van Beurden.

“We need to get leaner, we need to get more focused, we need to get more disciplined,” Sawan told the Financial Times. “That inevitably will include choices around where we are going to operate but also importantly how we operate.”

Last month the UK-listed energy major, which is the largest company on the FTSE 100, confirmed it would cut 200 jobs in its low-carbon solutions division and place another 130 positions under review, representing at least 15 per cent of the workforce in that unit.

The cuts followed a decision to scale back Shell’s work on hydrogen technology for passenger cars to focus on hydrogen for heavy goods vehicles and industry. Shell is building Europe’s largest green hydrogen production plant in the Netherlands.

This year Shell has also agreed to sell its retail energy business in the UK and Germany and is seeking to exit some of its investments in renewable power generation and storage in Europe.

Senior executives, who have left Shell because of the shift, told the FT it had become clear internally that the company’s ambition in some of these areas had changed.

“It’s not what he’s said, it’s what he hasn’t said,” said one recently departed executive, referring to a perceived lack of support from Sawan for parts of Shell’s Renewables and Energy Solutions business. “The silence was deafening.”

Sawan told the FT he remained committed to transforming Shell into a “multi-energy” company, while cutting emissions to net zero by 2050, but that Shell would no longer “pretend to lead” in parts of the energy transition where it did not have the right competencies and capabilities.

“In transport and industry we already have a significant market share there, and we think it is only natural for us to lead as we support the decarbonisation of those sectors,” he said.

In addition to hydrogen production that means Shell will focus its low-carbon spending on activities such as electric vehicle charging, biofuels and carbon capture and storage.

In areas where Shell lacks a unique capability, such as renewable power generation, it would aim to work with partners or not invest at all, Sawan said. “This is really much more of a selective approach to where we are going to lead.”

The moves have been welcomed by many investors, with Shell shares trading near record highs in London. The stock was further underpinned after it reported robust third-quarter earnings on Thursday.

As part of the shift in emphasis under Sawan, the company has also said it will invest more in its world-leading gas business to grow sales volumes of liquefied natural gas by 20 to 30 per cent by 2030.

Selling more gas could mean Shell would have to revise down its emissions reductions targets during a review next year, analysts said.

Sawan said it was too early to comment on the energy transition strategy update planned for March but stressed that LNG had made a significant contribution to global emissions’ reductions in the past five years by allowing coal to gas switching for power generation, particularly in China.

“A sensible, focused approach on low-carbon intensity gas molecules, and LNG in particular, is a key part of [our] strategy,” he added. “That goes hand in hand with our continued focus on looking at profitable decarbonisation with low-carbon molecular solutions.”

Google, Microsoft and Amazon boost investment by a fifth over two years to a combined quarterly total of $42bn

Amazon, Microsoft and Google parent Alphabet look set to ramp up capital spending, as the world’s biggest cloud computing groups build up capacity to serve the growth of generative artificial intelligence.

The Big Tech groups, which together dominate the global cloud market, have boosted investment in computing infrastructure over the past few years.

Capital spending rose to a combined $42bn in the three months to September, almost 20 per cent more than the same period in 2021. That figure, which comprises reported corporate capex from Alphabet and Microsoft and Amazon’s businesswide investment in property and equipment, marked a 10 per cent rise from the quarter to June. Analysts expect the pace of cloud-related spending to accelerate next year.

Executives from the companies said last month that significant chunks of capital spending are going towards the generative AI systems that require huge amounts of computing power and data-crunching. Amazon chief executive Andy Jassy predicted that generative AI will drive “tens of billions in revenues”.

The three tech giants are vying to increase their shares of the cloud market — the business drives Amazon’s overall profits in particular — and must remain competitive in AI to hold on to their customers. Each wants to win new customers with a suite of state of the art AI tools and services, and use the technology to enhance other core products.

The rivals “have to compete on generative AI or they’ll lose relevance and market share”, said Jeff Pearson, managing director at technology consultancy Slalom. “All that is going to require a tremendous amount of capex”, for equipment such as servers and data centres.

Bank of America analysts predict the collective cloud-related capex of Amazon, Alphabet and Microsoft will rise at an accelerated 22 per cent next year to $116bn. This year they raised their 2023 forecast from no growth to 14 per cent. Last year the companies’ combined investment increased 20 per cent from 2021 to $84bn, BofA said.

Microsoft is “ramping up” investment at the fastest pace to support “an uptick in AI workloads” and their broader cloud business, said BofA analyst Justin Post. All three companies, however, were “investing ahead of future revenues”, he added.

Amazon’s quarterly investment figures include assets for its retail business, which it invested heavily in during the pandemic. Analysts said the fall in Amazon’s third-quarter investments, compared with last year, reflected a pullback in ecommerce spending. Amazon said in October its retail capex would fall this year while its cloud-related investment would rise.

The need for huge amounts of costly computing capacity to develop generative AI has pushed AI start-ups to seek partnerships with the Big Tech groups. Microsoft took an early lead and signed an exclusive deal with start-up OpenAI, now seeking a valuation of $86bn. The tie-up gives Microsoft’s customers access to the technology behind ChatGPT.

Microsoft this month became the first in the industry to make the technology behind ChatGPT available as a standard feature in a widely used software product, with the launch of its Copilot generative AI assistant. The upgrade will add as much as 83 per cent to businesses’ monthly software bill.

Microsoft said AI-related demand delivered an unexpected boost to cloud growth in the most recent quarter. Alphabet and Amazon were vaguer in their earnings reports about the impact of their AI investment.

None of the three has “unique advantages on the capex side”, said Charles Fitzgerald, an angel investor and former Microsoft executive. “All have a ton of money on the balance sheet. All are committed to leading in the AI era, so will spend what needs to be spent.”

The focus on growing a capital-intensive business could squeeze margins, analysts warned. High levels of capex were “not going to show up right away” but could be a “headwind” to margins over time and also hit cash flow, said BNP Paribas analyst Stefan Slowinski.

Alphabet said in October that it was committed to “re-engineering our cost base” to “create capacity” for AI-related investments. Microsoft said margins “may decrease” as a result of cloud and AI investments.