TheChek News Flow

Airline struggles to tackle cancellations and delays on peak travel weekend

British Airways passengers around the world were struck by a second day of cancellations and delays on Sunday as the airline struggled to regain control after a computer system failure caused chaos during one of the busiest travel weekends of the year in the UK.

Nearly a third of BA flights departing from Heathrow, Britain’s busiest airport, had been cancelled by Sunday afternoon, while inbound fights from destinations such as New York and Austin, Texas, were also scrapped, leaving passengers stranded. 

Aviation experts predicted the disruption would spill over into the week as BA fought to recover from the major IT crash, which forced it to cancel all flights out of London on Saturday.

It was one of the worst IT failures to strike a global airline. Last year when Delta Air Lines suffered a similar outage. 2,300 flights were cancelled and delays took three days to clear.

“Coming after a spate of other issues, the bad PR and potential reputational aftermath will probably hit future revenues” at BA, which is part of the IAG airlines group, said Damian Brewer, analyst at RBC Capital Markets.

BA had been hoping to resume a “near normal” service out of Gatwick airport on Sunday and operate a “majority” of scheduled flights from Heathrow but passengers at the latter reported lengthy queues and over-crowding. Passengers at Heathrow were forced to wait outside terminal buildings until 90 minutes before their flight was due to depart, as airport and airline staff desperately sought to deal with the congestion.

“There are huge queues everywhere,” said Simon, a passenger waiting for his BA flight to Japan for a holiday. “People are queueing to deal with cancelled flights, there’s another queue for lost bags, and then there’s long queues to get into the departures terminal.”

Alex Cruz, chief executive of BA, blamed the IT meltdown on a “power supply issue” but the carrier would not provide further details on why all of its systems, including back-up systems, had failed. It said simply on Sunday that it was “continuing to work hard to restore all of our IT systems”.

Bill Curtis, senior vice-president at IT analytics firm CAST, questioned why a back-up system had not kicked in. “It [the back-up system] should have been on a different power supply with a replicated database. You would usually lose a few transactions but not the entire operation of the airline,” Mr Curtis told the Financial Times.

The IT meltdown is likely to provoke a further row over cost-cutting at BA, which has come under pressure from unions over its decision last year to outsource several hundred IT jobs to specialists supplied by India’s Tata Consultancy Services. 

It has also been criticised in the past year for money-saving measures such as replacing free food and drink on short-haul flights with M&S sandwiches for which customers are required to pay. 

Mr Cruz, who was chief executive of budget Spanish carrier Vueling before taking the top job at BA in April last year, has been trying to overhaul the UK airline's cost structure so it can better compete with low-cost companies such as Ryanair and easyJet, as well as the Gulf airlines.

Mick Rix, national aviation officer at GMB, the union, claimed the IT problems “could have all been avoided”.

“BA in 2016 made hundreds of dedicated and loyal IT staff redundant and outsourced the work to India,” he said. 

BA denied the claim, responding: “We would never compromise the integrity and security of our IT systems. IT services are now provided globally by a range of suppliers and this is very common practice across all industries.”

BA’s management is also likely to face questions over staffing and communication, particularly on Saturday when passengers complained of a lack of information from airline staff.

Pat Oldham, a supply chain manager who was intending to travel to Seoul on Saturday but found himself stuck at Heathrow’s Terminal 5, complained he had “no contact with anyone from BA”.

Italian infrastructure company Atlantia [BIT:ATL] has signed a EUR 16.3bn financing deal with a pool of banks to fund its public offer on Spanish counterpart Abertis Infraestructuras [BME:ABE], Italian-language daily Il Sole 24 Ore reported. The report cited a joint statement by Atlantia's legal advisor on the matter Gianni Origoni Grippo Cappelli & Partners and Latham & Watkins, which provided legal advice to the 24 banks that make up the financing pool.

Under pressure to cut bills, utility companies diversify to safeguard profits

Enter the home of the future. As well as solar panels on the roof and a heat pump providing hot water, an electric car is in the drive, plugged into a charging point. When the battery is full, an app suggests you discharge some of the electricity to use in the house when you need it most.

The app also detects that your heating is too high and asks if you want it turned down; and points out your boiler is inefficient and offers to arrange an engineer.

This is the vision of Engie, the French utility company that believes energy providers will switch from passively supplying electricity and gas to actively managing customers’ homes.

At a time when UK policymakers are seeking to clamp down on what they describe as “rip off” energy bills and homeowners are interested in generating their own electricity through solar panels, utility groups are having to diversify to safeguard their profits.

Wilfrid Petrie, head of Engie’s business in the UK, likens the transformation to the telecoms industry. “The value is less on the landline itself but how to use it as best as possible,” he said at a recent launch of the company’s household energy service in the UK.

In other words, energy companies are starting to go down the same route as telecoms groups, which bundle together a range of services such as broadband and pay-TV with the basic provision of a landline. Core energy supply is expected to become a low margin activity but value will be added through ancillary services. 

Centrica, the UK-listed owner of British Gas, has long had a sizeable services business that offers products such as boiler repair. In the past few years it has been developing other services around the idea of a “connected home”, where digital devices such as smart thermostats help households better manage their energy usage.

It has developed a “Hive” smart thermostat, which allows users to control their heating and hot water via their mobile phones. For an extra monthly fee, subscribers are offered a range of products, including smart plugs that can be switched on or off via a mobile and motion sensors that alert them if a window or door has been opened.

“The margins on all of these services are much higher [than energy supply],” says Iain Conn, chief executive of Centrica. “Energy supply is not a high margin business in the first place. Last year we made a margin of £52 on an average energy bill, which is £1,044 in our case.

“Will bundled services be part of the future? Absolutely.”

Newer “challenger” energy companies are muscling into the market. Ovo Energy this year bought Corgi HomePlan, a company that offers services such as boiler maintenance. Others, such as First Utility, have branched out into broadband.

Big technology groups are also active. A rival to British Gas’s Hive thermostat is Google’s “Nest”.

However some analysts are yet to be convinced that these ancillary services will be sufficiently profitable to make up for the loss of margin on energy supply, particularly if price restrictions are introduced.

Both the Conservative government and the opposition Labour party have pledged a cap on the most common energy tariff.

“What is unproven at the moment is the monetisation of that,” says Martin Brough, utilities analyst at Deutsche Bank. “British Gas has been at the forefront at least in residential of coming up with Hive thermostats and apps and has had some very good feedback from customers. They like it. What isn’t yet proven is if they are willing to pay ongoing subscription-type revenue.”

Centrica has sold 900,000 connected home products, according to its most recent trading update, but that division made an adjusted operating loss last year of £50m.

It is still in “start-up mode”, says Deepa Venkateswaran, analyst at Bernstein. “That business should be profitable [in future], yes, but is it going to be a £300m, £500m business? I doubt it.”

Mr Conn admits these newer parts of the business are still relatively small but they are “growing rapidly”.

Julian Critchlow, a partner at Bain & Company, stresses that in the immediate future at least, most utility companies will need — and will continue — to make money on basic energy supply. Until more homes move “off grid” by installing their own solar panels and batteries that can store excess electricity, energy supply will remain a core activity.

He points out that companies will probably need to radically cut costs to protect profit margins under any price cap.

Utility companies have warned that a cap could hamper investment, including in areas such as technology.

“Until we get batteries . . . more locally and domestically, I am still going to end up being connected to the grid and I am still going to have — especially if I have an electric vehicle — a relatively noticeable consumption and somebody is going to have to supply that,” says Mr Critchlow.

Utility companies have diversified before — into areas as disparate as financial services — but have since withdrawn, Mr Critchlow points out. “These waves of thinking come through the industry every decade,” he says. “Is the energy supply business dead? I don’t think it is dead but it is going to have to evolve.”

Deal will allow a €5bn state-backed capital increase and wider restructuring

Brussels is expected to approve the takeover by French state-controlled utility EDF of the reactor business of Areva this week, clearing the path for a state-backed rescue deal that will reshape France’s nuclear industry.

Brussels antitrust watchdog is likely to sign off the deal on Monday, according to two people familiar with the situation, a green light that is needed before the French state can carry out the wider restructuring of Areva.

Once Areva’s reactor business is acquired by EDF, what is left of Areva, mostly a uranium mining and nuclear fuel business, will then need only a sign-off of its new reactor in Flamanville in France to unlock a €5bn state-backed capital increase scheduled for June.

EDF has agreed to acquire a majority stake in Areva NP, which designs, manufactures and services nuclear reactors, in a deal valuing the business at about €2.5bn.

The deal will unite two of the companies responsible for building the UK’s Hinkley Point C nuclear plant, the country’s first new atomic power station for a generation, in a move executives say should help to avoid the kind of costly delays that have beset similar projects.

Areva’s EPR reactor — the technology being used in Hinkley Point — has run into problems. The Flamanville III EPR reactor in France is still under construction, six years behind schedule and €7bn over budget. The other in Europe — in Olkiluoto, Finland — is nine years late and €5bn over budget.

Areva, which is 87 per cent owned by the government, was brought to the brink of collapse last year after racking up huge losses over half a decade. The group suffered from a drop in the uranium price since 2011 and weak reactor sales, but also struggled with the costly delays in key projects.

The shake-up at Areva is part of a wider upheaval in the global nuclear industry as European, US and Japanese reactor makers struggle with weak order books, strained finances and rising competition from Russian, Chinese and South Korean companies.

The EU approval will come just weeks after the election of French president Emmanuel Macron, who appointed celebrity documentary film-maker and green activist Nicolas Hulot as energy minister responsible for overseeing the French nuclear sector.

The government has insisted that it remains supportive of the nuclear industry, which provides about 75 per cent of the country’s electricity and employs about 200,000 people. Mr Macron was the economy minister when the EDF/Areva deal was being put together.

But shares in EDF, which is 85 per cent government-owned, fell sharply following the appointment of Mr Hulot amid fears that he could make the government take a harder line on the sector.

The first stage for the Areva restructuring deal was cleared in January, when the European Commission said the proposed package of French government state aid was in line with rules.

This was on the condition that EDF won antitrust approval for the deal, and that one of its showcase nuclear reactors in Flamanville achieved a positive test result from the French Nuclear Safety Agency.

There has been criticism from rivals, however. Nuclear power producer TVO, which owns the Finnish project, is concerned that after the EDF takeover, Areva might neglect Olkiluoto in favour of the EDF-led projects in Flamanville and Hinkley Point.

The Finnish company is also facing the awkward balancing act of co-operating with Areva to finish the project while simultaneously pursuing the French company and its former partner, Siemens, for billions of euros in compensation for the delays.

A TVO spokesperson said: “TVO is conscious of the importance of the restructuring of the French nuclear industry, but is concerned about the effects of vertical integration on competition in the markets for nuclear technology, fuel and services. TVO would have preferred vertical integration in these markets to have been avoided.”

She takes over as Amazon looks to supercharge its apparel business.

Christine Beauchamp is taking the reins at Amazon Fashion, WWD has learned.

An Amazon spokeswoman said: “We’re thrilled to have Christine Beauchamp join as president of Amazon Fashion. She will be leading our fashion business and we look forward to having her on-board next month.”

Beauchamp brings to the e-commerce giant a wealth of fashion knowledge. Most recently she’s been working with The Boston Consulting Group, but before that, she was global brand president of Lauren, Chaps, American Living and Ralph at Ralph Lauren Corp. and ceo of Victoria’s Secret Beauty at L Brands Inc. She has also been a visiting professor in fashion business at New York University.

At Amazon, she takes over from Cathy Beaudoin, who left the company recently having helped build it into a powerhouse.

The e-commerce giant has been keenly focused on fashion, launching a number of private label brands, introducing a live-streaming style show that looks something like HSN and working generally to reinvent the category for the digital age.

Amazon, which research has shown is the starting point for 55 percent of all product searches on the web, is also looking further afield and has the power and desire to change shopping.

The company in April introduced the Echo Look, an artificially intelligent style assistant that takes voice commands and has a hands-free camera. Amazon has also been peering into the future with an eye toward automation and has received a patent for on-demand apparel manufacturing.

Good Dividend Bets Among Automotive Stocks

GM and Ford offer fat yields; Genuine Parts is raising its dividend by 3%.

Ford (ticker: F), which replaced its CEO last week, has been a disappointment for stockholders. Its shares are down 15% in the past year, partly owing to concerns about how the auto maker is positioning itself in coming technologies, such as autonomous and electric vehicles.

Still, the No. 2 U.S. car maker sports a 5.5% yield, the highest among the six automotive companies in the table below. General Motors (GM) yields 4.6%, though its stock has outpaced Ford’s, returning 10.3%.

“Investors have a long memory, and they remember what difficulties auto makers had during leaner times,” says Brian Sponheimer, automotive analyst at Gabelli & Co. “Until we see a down cycle in the North American auto market, where investors can witness what these companies look like when demand and production inevitably get softer, then the stocks are unlikely to move materially higher.”

Ford last hiked its regular dividend in early 2015; GM did so in early 2016. Sponheimer doesn’t expect a significant near-term boost from either, “because it just doesn’t make any sense for companies to do so with yields where they are now.”

However, he says, both are in good financial shape, with solid cash flows and balance sheets. “As an investor, you can look at GM or Ford or other businesses in the auto industry with significantly more confidence from a dividend perspective” than a decade ago, he says. “The number of plants and factories shuttered during the 2008-10 period has changed the cost structure of these businesses.” Labor contracts, he adds, now “provide greater flexibility in the event of an inevitable cyclical change, particularly in North America.”

Genuine Parts (GPC), which has very strong cash flow and whose largest business involves selling auto parts, many in the aftermarket, has announced that its dividend is rising by 3%, to $2.70 a share—its 61st straight annual increase. “That cash flow that Genuine Parts is able to generate not only supports the current dividend, but also future dividend growth and selective M&A,” says Sponheimer.

IN OTHER NEWS, private-label credit-card issuer Synchrony Financial (SYF) plans to hike its quarterly dividend to 15 cents a share from 13 cents. Late last week, the stock was yielding 1.9%… Cracker Barrel Old Country Store (CBRL) declared a quarterly payout of $1.20 a share, a 4% increase. Yield: 2.9%. The company is also issuing a special dividend of $3.50 a share… Chubb (CB) has declared a quarterly dividend of 71 cents a share, up 3% from 69 cents. The insurer’s stock yields 2%… Southwest Airlines (LUV) announced a quarterly dividend of 12.5 cents a share, up from 10 cents. Yield: 0.8%…Chemical and plastics maker LyondellBasell Industries (LYB) is raising its quarterly payout by 6%, to 90 cents a share from 85 cents. Yield: 4.4%.

A Slowing Foot Locker

Cracks are appearing in this former growth stock. As online shopping grows, mall traffic is waning.

Lately, though, cracks are appearing in this former growth stock. As online shopping grows, mall traffic is waning. Perhaps more damaging for Foot Locker—though less recognized by investors—is that the half-decade-long high-end basketball sneaker boom might be over.

Consequently, Foot Locker’s recent woes could get worse before they get better, and that doesn’t bode well for the already weakened share price. The stock, down over 20% this month, to $59.82, is vulnerable to a further double-digit percentage decline.

Wall Street remains bullish: Nearly 70% of sell-side analysts rate the stock a Buy and none a Sell. Independent analyst Jonathan Hanlon, of Research 360°, however, calls Foot Locker a Sell and values its shares at $42, 30% below their current level.

Foot Locker has two strikes against it. First, more than 50% of its stores are in malls, where traffic is declining. Moreover, Hanlon says, “We are seeing basketball shoe sales roll over. That’s Foot Locker’s competitive advantage…especially high-priced and exclusive Nike products. Without it, same-store sales could go negative.”

In mid-April, Foot Locker guided Wall Street to earnings per share of $1.36 to $1.39 in its fiscal first quarter ended on April 30, significantly below the $1.47 consensus. Then, on May 19, the retailer compounded that initial disappointment by reporting EPS of $1.36, below the $1.39 that was both the year-ago EPS and the since-lowered analyst consensus. The company blamed the shortfall on a delay in income-tax refunds to its customers.

A more important reason, opines Hanlon, is that the bubble in basketball sneakers—once characterized by speculation and high prices in resale markets—is over. That segment drove roughly 75% of Foot Locker’s sales growth from fiscal 2012 to fiscal 2016, as well as its 7% same-store sales, he estimates, but that growth has slowed.

First-quarter comparable-store sales rose just 0.5%, while total sales edged up 0.7%, to $2 billion, the worst first-quarter numbers since fiscal 2010. Hanlon notes that in-store comps fell 1.2%, offset by a 12% rise in online sales.

He says that total comps might have been negative in the first quarter if Foot Locker hadn’t increased its promotional activity to drive traffic—at the expense of the gross margin, which fell to 34% from 35% in the year-ago quarter.

With growth slowing, several underlying problems are now more obvious, Hanlon says: poor execution in apparel; increasing online competition, especially from Nike (NKE); and declining mall traffic.

Investors, meanwhile, are missing the fashion risk with sneakers. “If kids decide to buy something else, the need to visit a Foot Locker is lessened,” says Hanlon.

Matt Powell, a sports industry analyst at NPD Group, says the weakest athletic-shoe category—performance basketball shoes—will continue to see growth shrink. Powell expects industrywide sales to grow 3% to 4% in the second half, compared with 4% over the past decade.

Hanlon uses a 10 times price/earnings ratio on his EPS estimate of $3.89 in fiscal 2018, which ends in January, for his $42-per-share target price. That includes $3 per share for Foot Locker’s cash net of debt and liquidity needs. The consensus expectation is $5.18. That’s a wide gap.

The company declined to respond to Barron’s request for comment. In its first-quarter conference call, Foot Locker was “optimistic” about a “second half” acceleration, without giving details. Hanlon calls that “wishful thinking.”

Foot Locker also noted that it’s “aggressively” reviewing and implementing expense cutting. That’s wise, but it should make investors less confident about a putative return to past levels of growth this year.

Barrons weekend summary: Positive cover story on new Ford CEO; positive on EV, IP 

Britain’s departure from EU push fund houses to bolster presence in mainland Europe

Britain’s departure from the EU has pushed many of the UK’s largest investment companies to take action to protect their businesses even before formal negotiations over the terms of Brexit begin.

Jupiter, M&G, Legal & General Investment Management and Intermediate Capital Group are among the fund houses to have bolstered their presence in mainland Europe this year as investment managers attempt to Brexit-proof their businesses. Blackstone and Legg Mason, the US asset managers, have also strengthened their non-UK operations.

Contingency plans include adding staff to European operations, applying for additional licenses from EU-based regulators and establishing new offices on the continent.

The moves have intensified fears that Brexit will damage the UK’s position as Europe’s financial centre, as companies from other sectors, including banks, insurers and wealth managers, also begin to reduce their reliance on the City.

Sean Tuffy, head of strategy for Europe at Brown Brothers Harriman, the US bank, said: “Most asset managers are enacting plans to Brexit-proof parts of their businesses. What will be damaging to the City is death by a thousand cuts.

“You won’t see mass migration, but you will see slippage [of jobs moving away from the UK], as well as unseen losses — jobs that would have gone to London and now go somewhere else.”

Jupiter, the FTSE 250-listed asset manager, has decided to set up a new EU-based entity and to change the legal status of its branches across Europe as part of its contingency plan.

Maarten Slendebroek, chief executive of Jupiter, told FTfm: “There are a few things we need to do and will do. Our overseas subsidiaries are small and hang on to the UK entity. We will rewire that to hang on to the European entity. It will cost us man hours and a couple of hundred thousand pounds.”

M&G, the London-based fund company that oversees £165bn of assets, has cemented its presence in Luxembourg by applying for two licenses from the local regulator and establishing a new management company there. The company, which already employs 10 staff in the grand duchy, will add new employees across legal, compliance and risk roles.

M&G said the licenses should enable the company to continue selling funds across the continent “regardless of the outcome of the political negotiations on financial services after the UK’s exit from the EU”.

LGIM, the UK’s largest investment house, has decided to create a division in Dublin to ensure it can “continue to provide access to European markets”, according to an internal memo sent to staff last week.

The concern across the industry is that licenses granted by the UK regulator — particularly the coveted Mifid license — that enable fund companies to access European clients, will become void if Britain loses access to the single market. This has pushed investment managers to strengthen their presence on the continent to have a firmer chance of not being locked out of European fundraising.

Owen Lysak, a partner at Clifford Chance, the law firm, said: “Asset managers are really ramping up their Brexit contingency planning, with new structures being finalised and locations selected. The reality is that, with two years to go until a potential hard Brexit, companies need to act soon, far ahead of the point where a deal is likely to emerge.”

ICG, the UK-listed asset manager, opened an office in Luxembourg last December and hired five employees. It has also applied for an Alternative Investment Fund Managers license from the local regulator, which should enable the company to continue selling its specialised debt funds across the continent.

Blackstone, the world’s largest alternative investment manager, received its AIFM license from the Luxembourg watchdog in May, according to regulatory filings.

Legg Mason, the US-listed fund house, plans to apply for a so-called Ucits license from the Irish regulator, which should enable it to continue selling mutual funds across the EU.

“Most asset managers have come to the conclusion that Brexit will be a hard Brexit. The question is how hard,” Mr Tuffy said. “Most are looking at what substance they will need to set up in Europe to get ready for that. None of these things can be done overnight. If you accept the premise that you cannot rely on a UK Mifid license, you will need to have substance somewhere else.”

Despite concerns about the impact of Brexit on the UK, a number of international asset managers have strengthened their presence in London in recent months, including Unigestion, the Swiss fund manager, PSP, the Canadian pension scheme, and OppenheimerFunds, the US investment company.

Schroders, the UK’s largest listed asset manager, and Ashmore, the London-based fund house, have also prepared Brexit contingency plans, although they have held back from making operational changes.

Peter Harrison, chief executive of Schroders, said the company would wait to see where banks shifted their operations to in Europe before deciding where and whether to apply for an EU Mifid licence.

“We are now seeing all the banks starting to figure out where they will [establish] their branch networks. Once it is clear where the banks are basing themselves, then we can follow that capital. It may not be right to put it in Luxembourg. We are following the tea leaves quite closely.”

Ashmore is in a more precarious position than Schroders, as it does not have a presence in mainland Europe, but sources more than a quarter of its assets under management from EU-based clients.

Tom Shippey, chief financial officer of Ashmore, said recently: “It could be that we need greater substance in Europe. We have plans, but have not acted on them. Until there is greater clarity, we are not moving.”