XL collapse exposes chaos of capitalism

Saturday’s Morning Star has a very informative editorial which details how and why the tour operator and airline XL went bust:

Madness of the market

ONCE again, capitalism has shown its cuddly, people-friendly face with the collapse of holiday giant XL Leisure Group.

Around 85,000 people stranded abroad, several hundred thousand advance bookings dishonoured, staff finding out that they didn’t have a job in mid-flight, over 1,700 jobs potentially vanishing and the Unite union not even being informed by the company that it was in trouble with its refinancing arrangements after a major bank pulled out on August 14.

And yet, in the full knowledge that it was, indeed, in trouble and desperately trying to arrange a bail-out, the companies in the group continued to take people’s cash and make bookings that there was precious little chance that they could honour.

Not that this implies any dishonesty or deliberately dodgy dealing by the companies. Far from it – at least in the terms of the market economy.

The logic of capitalism meant that they had to continue trying to trade their way out of trouble and that same market-oriented logic said that they could not allow any hint of trouble to become public knowledge because people would obviously then cease to book with the companies, thereby sealing their fate.

Indeed, as late as August 31, a company spokesman was saying that “the XL Leisure Group is experiencing strong trading, with bookings for 2009 already outperforming last year.”

But, as for the long-suffering passengers, they inevitably get the sticky end of the deal and, the less well off that they are, the stickier it becomes.

Granted, customers well off enough to book full package deals through travel agencies are covered by the CAA air travel organisers’ licensing scheme and will be offered repatriation flights or their money back if they have an advance booking.

And, if they booked by credit card, their card insurance should cover them.

But people not having credit cards to book with, or booking a flight only, because they could not afford the full package, will face an extra fee to get home.

And it’s not only the passengers. The staff have an even worse situation to deal with.

No jobs and an industry that is contracting by the day, with airlines such as Alitalia and Zoom either collapsing or in terminal decline and a resulting glut of unemployed staff on the jobs market.

So, who is to blame for this situation?

In 2004, the Times reported that a major British bank “is poised to become the largest oil trader in the City of London as banks rush to profit from the soaring oil price and booming oil speculation market.”

In 2008, that same bank pulled the rug out from under XL because of financing associated with fuel. In other words, a major oil speculator shuts XL because the company can’t pay the price for fuel that the speculators have driven up.

And the bank’s partner in financing XL – a major Icelandic bank – acquired the still-profitable French and German XL subsidiaries on Friday morning after the rug-pulling exercise, in what can only be described as a perfect example of asset-stripping, although it would probably claim that it was saving what could be rescued from the stricken company.

But the fact remains that, if the company was stricken, it was the banks that did the striking.

Talk about having your cake and eating it.

It is difficult to imagine a better example of the amoral chaos of market capitalism or, for that matter, a better reason for social ownership of banks and big businesses generally.

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5 Responses to “XL collapse exposes chaos of capitalism”

  1. themissingshadow Says:

    Yes and no. Market capitalism is the cause for XL airlines’ demise, but not for the reasons you pointed out.

    You mentioned that oil speculators caused the massive recent increases in crude prices. Granted, oil speculators play a part in the setting of oil prices. But as The Economist quite rightly pointed out: “But they [set prices] on their expectations of future trends in supply and demand, not on whims. If they had somehow managed to push prices to unjustified heights, then demand would contract, leaving unsold pools of oil.” (http://www.economist.com/opinion/displaystory.cfm?story_id=11670357)

    In fact, I’d even say that airlines are great friends with oil speculators. They help the airlines hedge oil prices (obviously a major cost in running an airline). That is, when the speculators think oil prices are too low given the supply and demand of oil, they start buying contracts. Oil prices then rise from the increased demand of oil and market correction, and vice versa. This stabilises oil prices. Very important if you’re an airline.

    Secondly, according to conventional economic knowledge, it is beneficial to society in the long run that XL went bust.

    In an industry as competitive as the airlines (try making a list of all operating airlines in the world), the airlines would only be expected to make normal economic profit (enough revenue to cover total costs + opportunity cost). When difficulties rise through the industry, the least efficient business (ie. XL) would be kicked out of the market as they are making losses and therefore cannot compete. Then the competitors gain market share, and gain economies of scale. Costs are reduced, and thus prices are reduced. Everyone is better off.

    When I say everyone, I also mean XL’s employees. Well, in the long run anyway. True that they will be unemployed for the moment, but a lot of the employees (pilots, flight attendants, maintenance people etc.) have very high training costs. I’ve heard that to train a pilot it costs upwards of £25k. The airlines who would be looking to increase their operational capacity would be snapping them up in a jiffy. Frictional unemployment then would be kept to a minimum.

    Laissez-faireism has its ups and downs. This case happens to be the type of job it excels at.

  2. charliemarks Says:

    The boss of BA says 30 more airlines will go bust. This will mean less competition, less incentive for costs to be reduced. It will also mean a lot of airline staff lose their jobs – perhaps making it easier for airlines to hire and fire staff, but the erosion of the pay and conditions won’t result in lower prices paid by consumers but bigger payouts for shareholders and top management.

    XL wasn’t making losses, as far as I am aware it was unable to secure funding promised it when the management bought it out from the previous owners. Presumably, had the management not bought it out and created this funding issue, XL would have survived.

  3. themissingshadow Says:

    I would have to agree with your reasoning in the first point. Less competition in an oligopolistic market does mean less incentive to reduce prices. However, judging from the CAA’s list of Type A operating licence holders (http://www.caa.co.uk/default.aspx?catid=183&pagetype=90&pageid=340), I doubt BA’s chief meant the 30 airlines are British, European or be alternatives to UK consumers. The global economic slowdown means that many airlines around the world, with less-than-sound business models will be under threat. This means that the UK airlines market will likely remain competitive. Perhaps you would give me a link to his quote?

    Also, LESS incentive does not necessarily mean NO incentive to reduce prices. The likes of BA and Virgin are able to hold high(er) prices because they differentiate their products to be an ‘experience’ of traveling. On the other hand, low-cost airlines such as XL and easyJet purely sell a ‘transportation’ product between A and B. Therefore, they target more at the price elastic consumer. This results in behaviour similar to Bertrand competition. They are more likely to use price as their marketing edge and thus lower prices should be introduced if costs are lowered.

    As for the funding issue, I doubt that XL was still a profit-making airline when it was forced to shut down in the short run. The short-run shut down revenue is determined by the costs it will incur by operating (variable costs). If they exceed that, then they will be able to pay some of their fixed costs, which is the same whether they operate or not. Hence, if XL was able to exceed this point, then they will still operate to the long run. We can deduce from XL’s decision to shut down in the SR (ie. now), is that they cannot even cover their variable costs. The funding is meant to cover its liabilities during (what they hope to be) a short-term loss.

    Furthermore, if XL was able to provide evidence that it was still making a profit, I’m sure the people it owed to would be confident that they will eventually get their money back and would be interested to delay the payment, for a premium of course.

    From Phil Wyatt’s (XL CEO) own words (http://news.bbc.co.uk/2/hi/business/7612044.stm), I am almost certain that did not happen.

  4. Ian Says:

    Yet all those people suffered.
    You, missing shadow, are prepared to tolerate that. A lot of people are beginning not to.
    Not exactly the best way to build confidence in Laissez-faireism is it?

  5. charliemarks Says:

    I don’t know if themissingshadow is bigging up laissez-faire capitalism. It’s not the best time to be doing it, anyway.

    Do you have a blog missing shadow?


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