One assumes that Álex Cruz, the chief executive of British Airways, was told by IAG why he is being ousted, but the parent company was not prepared to share. Luis Gallego, one month after he succeeded Willie Walsh at the top of IAG, merely thanked Cruz “for all that he has done” in a flat, two-sentence public sendoff. The departee gets to stay for a while as chairman, but the “transitional” arrangement looks distinctly short-haul.
Gallego could, though, have argued that BA under Cruz, while it delivered fat profit margins in pre-Covid times, failed in many other departments. When BA’s traditionally loyal pilots complained during last year’s dispute about years of penny-pinching at the airline, they struck a chord.
IT failures, data breaches and M&S sandwiches were the notable features of Cruz’s reign before Covid. Profit maximisation excited shareholders but left BA as little more than an upmarket version of easyJet on European routes. Is that all BA aspires to be? Cruz last year won a £6.5bn five-year investment programme from IAG to accelerate modernisation, especially in long haul, but its effects are yet to be felt. In any case, the pandemic could cause a rethink. The likes of Emirates and Qatar Airways may not be trembling.
BA was branded “a national disgrace” by the transport select committee over its treatment of staff during the Covid dispute. In one way, the description was unfair, since the company didn’t, in the end, trigger the controversial “fire and rehire” clauses. But the saga also hinted at BA’s failure to prepare the political ground. Under Cruz – and Walsh, for that matter, since they were a partnership – it looked as if the airline didn’t care about how it is regarded on its home patch.
In theory, the promotion of Sean Doyle from Aer Lingus would allow a rethink – an attempt to reclaim an identity for BA that has been lost amid years of cost-cutting. In practice, one suspects, that’s not the idea. The airline industry may never recover to 2019 levels. Doyle may have got the gig because it’s marginally easier for a new boss to try to cut even more costs.
Testing negative
Would banks’ IT systems melt if instructed to process zero or negative interest rates? From the Bank of England’s point of view, it’s wise to check. If there’s even a chance of negative rates being adopted, Threadneedle Street needs to know that a new tool wouldn’t fall apart on first use.
Almost absurdly, the “operational readiness” exercise also wants to hear from lenders about an even tighter definition of “near-zero” rates than the current 0.1%. How many decimal places could banks handle? Would 0.001% be operationally safe? Would 0.00001% work?
Such fine calculations point to a non-technical reason why negative rates would be a desperate measure: they just feel wrong. That objection isn’t trivial. If the aim is to stimulate economic activity, the effect might be the reverse if consumers and businesses conclude (not unreasonably) that central bankers think the sky is about to fall in.
A parallel consideration applies to banks’ lending appetites. Net interest rate margins – the difference between interest income received and interest paid – are being squeezed already. Rather than forcing banks to lend more at rock-bottom rates, another turn of the screw might provoke more internal cost-cutting if lending opportunities are deemed not to exist. A banking system in retrenchment mode is not what a recovering economy usually needs.
The Bank knows those dangers, of course, which is why it will probably prefer another round of quantitative easing before it seriously contemplates negative rates. It would also be hard to take such an historic leap without a 9-0 or 8-1 majority on the monetary policy committee; the numbers aren’t there today.
But we’re clearly being warmed up for the idea that less than zero is a possibility. The Bank’s last monetary policy report offered four pages on the pros and cons, and now the banks have been told to check their computers. Let’s not pretend, though, that it’s just a technical step. Negative interest rates are a last resort for when nothing else has worked. Hope it never happens.
