302520151050
2002 2017The fortunes of banks since the crisis
All other banksBanks in emerging-markets economiesReturn on
equity, %CrisisThe Volcker Rule effectively
banned banks from gambling their
own funds in order to make a
profit. But as banks reduced their
trading activities since the crash,
they have struggled to make
similar profits elsewhere, as this
data from McKinsey shows.SOURCE: MCKINSEY & COMPANY.
ANALYSIS OF 1,000 BANKS IN 70
COUNTRIES, EACH WITH ASSETS
TOTALLING MORE THAN $2BN.!
2520151050
2002£350,000
Total annual pay of one Ryanair pilot in the
UK by 2021 – up from £158,000 – if wage
demands are met, the airline claimsBusiness
Pilot power can put Ryanair staff in
driving seat despite healthy profits
I
n a memo to all pilots on Aug 16,
Ryanair’s Eddie Wilson pleaded
with them to abandon plans to walk
out. “This strike is set against the
threat of a ‘no-deal’ Brexit in just eight
weeks’ time, [and] when Ryanair
profits have fallen 41pc over the past
two years”, he wrote.
Wilson, one of chief executive
Michael O’Leary’s top lieutenants,
continued with what appeared to be a
none-too-subtle threat. Any walkout
would come with Ryanair having a
“surplus of more than 500 pilots
(which must be cut this winter)”.
Yesterday, Ryanair was defeated in
the High Court in London as its late
attempt to block a strike by UK pilots
failed, hours after a similar move in
Ireland was successful. The Irish
carrier called UK pilots’ pay demands
“unreasonable” – a charge rejected by
Balpa, the pilots’ union. “We offered to
meet Ryanair management at Acas to
negotiate a resolution, but instead they
attempted a legal bludgeon. That’s
backfired,” said Brian Strutton, its
general secretary.
Like other airlines, Ryanair has seen
profits squeezed, with a string of
warnings. But this ought to be put into
context: Ryanair has been, and
remains, a profit-making machine.
Until comparatively recently, no one
could touch its success. For every
pound in sales it generated 20p profit.
Others booked bigger revenues but
struggled to match Ryanair’s bottom
line returns. The age-old saying
“revenue is vanity, profit is sanity”
seemed particularly pertinent.
Ryanair’s lawyers had argued that
industrial action by Balpa would cause
“significant reputational” damage.
The rise of the pilot proletariat has
given the carrier an increasing
headache. There was the snafu over
holidays in 2017: Ryanair “messed up”
rosters, as hundreds of thousands of
customers faced cancellations. Last
summer saw concerted action across
Europe as crew from five countries
walked out in the airline’s worst day.
One in six flights were cancelled.
Now, as it battles increasingly usual
disruption by air traffic controllers on
the Continent and delays to more fuel
efficient Boeing 737 Max aircraft, pilots
demand a pay increase. Ryanair claimsBritish pilots’ demands amount to a
rise of up to 121pc. It has cited an
example where one would see total
pay leap from £158,042 to £349,922 by- As with most disputes, the reality
is likely to be much more complex.
It’s easy to get drawn into the
weeds, but whether it’s Ryanair’s
pilots or ones from British Airways
- also facing action – those flying the
planes are sick of seeing their
corporate overlords making big profits
and dishing out chunky dividends.
The reasons differ. For BA, staff
reckon benefits are continually
salami-sliced, and a pay increase of
11.5pc over three years does not
compensate for that. Ryanair is slightly
different; more a realisation of class
consciousness. A fragmented
workforce is now unionised,
empowered to attack healthy margins.
Wilson may well argue that such
profits have shrunk. That is true – but
they remain industry-leading. Despite
a tumultuous year of downgrades,
Ryanair made a net profit of £838m on
£6.9bn revenue over the past 12
months, says Bloomberg – it still takes
12p of profit on every £1 of sales.
Rival easyJet, by comparison, has a
profit margin less than half that.Forecasts for the year to September
are it will make 5p on every £1.
Compare this with “legacy” airlines:
BA owner IAG makes 9p; Lufthansa,
4p, and Air France KLM just 1p per £1.
Of the major listed airlines, only
Wizz Air, focused on central and
eastern Europe, can match Ryanair’s
margins. The Irish carrier is three
times its size, however.
The action by Ryanair pilots puts
the airline at an existential crossroads.
If it gives in, its low-cost model could
be chipped away at in years to come. If
it stands firm, the cost to its bottom
line, while not inconsequential, is
comparatively small. Damian Brewer,
an analyst at RBC Capital, estimates
five days of industrial action could cost
€30m (£27m) on a worst-case scenario.
“We see a small material but limited
impact” from such strikes, he adds.
Contrast this with the impact on BA.
It told the High Court industrial action
would cost it £45m a day. Brewer
reckons strikes could cut annual
profits by a fifth. For BA, industrial
disputes are an “elevated risk.
Historically, well-paid pilots can afford
to lose salary short term for longer-
term gain.”
James Goodall, a Redburn analyst,
does not think the difference will be so
stark: “The true cost to IAG is likely
lower than 10pc [of profits].”
The 24-hour strike by Ryanair’s UK
pilots begins at midnight. The airline
said UK flights would operate as
normal – though (like its booking
terms and conditions) with a caveat:
“We cannot rule out some small flight
delays and/or flight changes.”Change in the air: Ryanair passengers in the UK face a pilots union strike from tonightREUTERSShackles are off
for US banks as
Volcker rule is
watered down
P
aul Volcker, whose
decades-long career in
Washington saw him serve
under six presidents, once
said the only useful
innovation from banks in
recent history was the automatic teller
machine. Everything else, he claimed,
was dubious.
“Banks have become much more
obsessed with trying to make money
by trading between themselves,” the
former Federal Reserve chairman told
The Daily Telegraph in 2012. “There are
whole crews of people sitting in back
rooms figuring out complex new
products to sell to customers that
promise to protect them from losses in
the stock market over the next million
years but which, of course, never do.”
His campaign to curb risky bets on
Wall Street led to a piece of legislation
being named after him, the Volcker
rule, that effectively banned banks
from gambling their own funds to
make a profit and was one of the more
controversial pieces of legislation
brought in after the financial crash.
Big banks hated it.
“For every trader, we have to have a
lawyer, compliance officer, doctor to
see what their testosterone levels are,
and a shrink [asking them], ‘what’s
your intent?’” complained JP Morgan
boss Jamie Dimon in 2012. “No, we’re
going to make markets for our clients,
give them the best products, services,
research and prices. It’s a good thing
in spite of what Paul Volcker says.”
Now, after years of lobbying to have
the wording of the reforms watered
down, US banks have gained a victory2,300 pages and 400 rules designed to
make the banking industry safer in the
wake of the last crisis.
It was signed into law by Barack
Obama in 2010 to ensure that a global
meltdown like the one seen in 2008
would not happen again, with the
unpopular Volcker rule being part of
the package. Bank shares then soared
in 2017 when Trump argued that
Dodd-Frank “made it impossible for
bankers to function” and ordered a
review of the landmark reform. Last
year, a decade after the crisis, he then
rolled back what he coined “crippling”
rules he said were “crushing” lenders.
But bankers are not on the cusp of a
golden era on Wall Street. While the
Volcker tweaks are a boost, experts say
the move does not mean a return tothe dodgy bets that helped spark the
last crisis.
“In the end [the revisions] probably
don’t change the core of what banks do
and how risky they’re willing to be, as
this is not the only rule that applies to
them,” adds Massari. “It isn’t clear
either to regulators or the industry,
frankly, how much risk reduction the
Volcker rule itself has accomplished.”
Since the rule came into force, the
world has also moved on. As well as
strict rules already limiting what risk
banks can take on (and requiring
thousands of compliance staff ), banks
have already reshaped their teams and
closed their once highly lucrative
proprietary-trading operations. It is
not clear how much of a change this
rewrite will have in practice.Nevertheless the move is likely to
anger Volcker. Now 91, he has
previously told The Telegraph that his
big regret was not being five years
younger so that he could be better
placed to help fix the greed of bankers,
politicians and half-baked financial
reform. He questioned how much the
Wall Street boom years ever translated
into tangible wealth for society.
“There are a lot of people in the
banking world, especially at the big
banks, that say forget about it, we’re
back to normal. Leave us alone,” he
once said. “But there has to be
recognition that the job is incomplete.
This, after all, is no ordinary recession.
This is a recession on top of a complete
financial breakdown and it will take a
very, very long time to recover.”It’s Christmas come
early for bankers as
legislation brought
in after the financial
crisis to stop risky
bets is softened,
writes Lucy Burton
as US financial regulators finally
agreed to soften it.
Jelena McWilliams, chairman for
one of the US watchdogs responsible
for implementing the rule, said it had
been one of the “most challenging”
post-crisis reforms for the industry to
implement due to how “extremely
difficult” it is to distinguish what
qualifies as proprietary trading – when
a bank buys and sells on its own
account and puts its capital at risk.
“Meanwhile, banks that do relatively
little trading are required to go
through substantial compliance
exercises to ensure that activities that
have long been considered traditional
banking activities do not run afoul of
[the rule],” she added.
The rewrite angered other
regulators. Democrat Martin
Gruenberg, McWilliams’ Obama-
appointed predecessor, voted against
the changes because he said they
would “effectively undo” the ban on
proprietary trading and therefore
allow systemically important banks to
engage in risky bets. The concern is
that this could put taxpayers at risk.
Many big US banks chalked up huge
losses before the crisis because of their
gambles – in 2007, Morgan Stanley lost
$9bn (£7bn) on a massive bet related to
mortgage derivatives, while a year
later Merrill Lynch lost nearly $16bn
and Deutsche Bank almost $2bn.
“There was a real concern coming
out of the financial crisis that banks
were engaged in taking risky bets with
their own money at the expense of the
public,” says Washington-based
lawyer Jai Massari. “That was a fair
concern, and this was a piece of the
overall regulatory puzzle.”
But Massari says the unpopular rule
has been costly and confusing,
angering bankers further. “The
regulation includes the idea of
prohibiting or restricting activities
that the bank does with a short-term
intent. This has been a source of
confusion,” she explains. The intent
element of the rule has been scrapped.
The win for Wall Street comes years
after Donald Trump pledged to carry
out a “very major haircut” on the
Dodd-Frank Act, which spans some‘For every
trader, we
have to have
a lawyer,compliance
officer,
doctor ... anda shrink
asking them,‘What’s your
intent?’’‘This is no
ordinary
recession.
This is arecession on
top of a
completefinancial
breakdownand it will
take a very
long time torecover’
As UK strike action hits the
carrier tonight, Oliver Gill
finds it better-placed thanrivals to withstand trouble
The Daily Telegraph Thursday 22 August 2019 *** 31
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