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Sunday, 14 August 2011

UK riots: resembles more of the Third World, bring up questions about society, moral decay! Anger still burns





London’s Blitz today

BEHIND THE HEADLINES WITH BUNN NAGARA

As Britain resembles more of the Third World, what awaits developing Third World countries after development?

THE young men looting from the shops were not in Haiti, at least not anymore. The others coordinating more trouble for the government with their BlackBerrys were not in Egypt’s Tahrir Square either.



They were in London, capital of the once-global empire on which the sun never set. How did a great city that once ruled much of the world gravitate to the depths of a battle-strewn Iraq or a lawless Somalia?

It was not the first time that wanton violence had erupted in a city that sees itself as a leader of the “civilised world” after it had sent countless “civilising missions” around the globe to bring the “natives” up to speed on living a fuller and more meaningful life.

There was rioting two years ago when London hosted the G20 summit, and another eruption in the poorer parts of South London in the early 1980s, among others. But this time seemed the most serious: even a middle-class suburb in northwest London like Ealing had not been spared, with fires reminiscent of the wartime Blitz.

After street violence spread through the city from Camden, Clapham and Hackney to Lewisham, Peckham and Woolwich, it fanned out to other major cities across the country. Evidently the natives in Britain have been restless, and it could be that they felt excluded from living a fuller and more meaningful life.

For many of the youths on the rampage, living a better life meant having that new pair of sports shoes, the latest cellphone or the big flatscreen TV in the shop window – without having to pay for it. And thus the looting.

The apparently untraceable BlackBerry messaging system among fellow users also came in handy when avoiding police surveillance. Thus the “struggle” for the freedom to have what they’ve always wanted, by “liberating” snazzy items from the shelves of retail outlets.

Troublemakers seemed to have been encouraged by the fact that both the prime minister and the deputy prime minister had been abroad on holiday at the same time. But the urgency of attending to the troubles has meant that nobody has asked why have a deputy at all if both were going to be away simultaneously.

Several outcomes have been painful in their predictability. Politicians rushing home to address the problem have criticised the police handling of the riots, the police have rejected the criticism while claiming to have some of “the best officers in the world”, and liberal NGOs are concerned that the offenders might be punished too harshly.

Two issues now stand out as requiring some soul-searching before making the tough decisions necessary.

One concerns how the mainly youthful offenders are to be treated. The need for quick justice in the courts to deal with the many cases has caused some quarters to be anxious about the quality of the judgments and sentencing.

Another concerns the style of policing, particularly when initial responses from the force seemed inadequate. But efforts to alter the Metropolitan Police’s standard operating procedures have met with resistance.

Two related challenges for Downing Street are its insistence on going through with its 20% or £2bil (RM9.8bil) cuts to the police budget over the next four years, and the plan to engage an American policing consultant to advise on changes.

Both issues have further alienated the force from the government of Prime Minister David Cameron, who still insists on proceeding with them. The opposition Labour Party and the general public are largely on the side of the police.

A Guardian/ICM poll across Britain during the week found that 44% disapproved of Cameron’s performance, against 30% who were satisfied with it. Some 45% found the police performed well against 27% who felt otherwise.

A 56% majority of the public also felt that the police were already under-resourced before any cuts, against 41% who felt the force had what it needed to maintain law and order.

As for the reasons for the rioting, 45% cited the criminality of rioters, 28% saw their lack of respect for society, 8% believed it was the lack of jobs for youths, 5% said it was the police shooting death of a young man in Tottenham, 4% blamed the government, 2% blamed the police, 2% blamed the economy and only 1% felt it was racial sentiment.

However, it need not mean that racism is insignificant. Among the few deaths so far, three had been of Asian Muslims in Birmingham by a hit-and-run driver, although public attention has focused on the single white victim in Tottenham.

If racism is a bigger factor now than before, the problems before Britain are set to grow exponentially. In much of the earlier rioting, race was not a factor despite appearances as disillusioned individuals joined in against the established order.

As I made my way to the centre of rioting in Brixton some three decades ago, I asked a local for the precise location. “Oh, you mean the frontline!” he said, with a sense of dread and eyebrows raised.

I found the spot and it never seemed as terrifying as what Britons generally have had to experience in 2011. Things have obviously deteriorated, and might still worsen further.

Yet no other country can be so smug or self-righteous as to say it is immune to the kind of problems Britain has lately experienced. Neither Thailand nor any Arab or other country is insulated from such social disruptions.

Britain as pioneer has been proud of being “the mother of democracies” and the father of capitalism as the original “workshop of the world”.

If its troubles are a sign of things to come, other rapidly developing countries may want to consider some contingency plans within easy reach.


London riots bring up questions about society

MIND MATTERS By RAJA ZARITH IDRIS

I AM one of the many thousands of Malaysians who studied in England in the 1970s and early 1980s. Since then, I have visited England, specifically London, three times – for an alumni weekend in 2009 and for other invitations I received twice last year, first in October, when I visited the Oxford Centre of Islamic Studies and gave a talk to Malaysian students, and again in December, after receiving an invitation to discuss Islam and programmes carried out for the Muslim community there.

I also met up with some students from Johor. So, at a Malaysian restaurant I sat, surrounded by these young, bright students studying at different colleges in London, some doing engineering, others medicine. Initially, there was some awkwardness both on my part and theirs – until I asked them about the Tube (London Underground) and taxi fares. I told them I used to take the Tube and the bus and that I could only afford to take a taxi if I had not used up the monthly allowance my father gave me. Talking about public transport fares then and now seemed to break the ice. I didn’t seem so alien after all.

When news came in about the London riots, I thought about our Malaysian students who are studying there. I wondered about the safety of this particular group of Johor students whom I had met.

We’ve all seen footage of the riots in London and in other British cities. Like in the United States, many people in Britain and other countries in Europe are facing unemployment, less spending power and falling property values. Some British journalists were of the opinion that moral decay and the yawning gap between the rich and the poor were two of the many reasons which caused the riots.

Moral decay

Peter Oborne, the Daily Telegraph’s chief political commentator, in his article “The moral decay of our society is as bad at the top as the bottom” wrote: “Indeed, I believe that the criminality in our streets cannot be dissociated from the moral disintegration in the highest ranks of modern British society. The last two decades have seen a terrifying decline in standards among the British governing elite. It has become acceptable for our politicians to lie and to cheat. An almost universal culture of selfishness and greed has grown up.”

I emailed my English boarding school friends to ask if they and their families were all right. One of them had seen the video of Mohd Asyraf Haziq Rossli bleeding on a street before getting robbed. She wrote back: “I saw the clip of the youth being robbed and it made me feel sick and very angry that people could behave in such an inhumane way. The fact it was a visitor to the UK makes it much worse and I hope he recovers well and does not think the majority of the UK is like this. I feel parenting has a great deal to do with this and there has been a loss of respect for authority, elders and community.”

Another friend, a doctor with the National Health Service, wrote: “London was quieter last night. The police advised us to shut the practice early and send the staff home which we did. The high streets look like battle zones with shops boarded up or shuttered.

Divided we stand: Riot police facing a mob in Hackney, north London, on Monday. — AFP
 
“It is really unbelievable with the fires and the looting making it feel a bit like civil war! We have a disenfranchised, disconnected and discontented generation who we need to re-engage.”

We Malaysians, however, shouldn’t be so smug and think that our country is far superior than Britain. We, too, have a “discontented generation”, with many young people who are unemployed or who choose to remain unemployed. And we have gangsters too.

We have a huge number of single mothers who are left by their husbands to fend for themselves and their children. We have unwed mothers. We have far too many cases of incest. We have drug users and drug suppliers. We have animal trafficking. We have heard and read about child abuse.

At the same time, it could not have escaped our attention that there is a simmering tension between the different racial communities. Religious authorities make conflicting media statements which leave most of us bewildered rather than reassured. Who should we believe? And why can’t they sit down and argue the issues at hand?

We have again and again failed at agreeing to disagree. Since it is Ramadan, and even before the London riots began, I had started to think again about our society and our social problems. Being hungry does that to you. We become introspective, we question our values and our priorities.

One of the things I realised – and one which has become more and more blatant over the years – is that we place more value on our outward appearances. Thus, designer handbags, shoes and clothes emblazoned with logos are what we strive to possess because owning them means that our husbands are successful or that we ourselves are successful in our own careers.

We have become superficial and we definitely defy the saying of not judging books by their covers. Many affluent middle-aged women have taut faces, no sagging jawlines, and flawless skin. And yes, I say this with much envy because I do not have great skin; I have more chins than I would like and my eyebags are reaching the proportions of the must-have Birkin handbags.

Similar concerns

We do, therefore, have similar concerns with the already-developed countries: we have made it a priority to have material things rather than striving to be good, decent people.

It has become unfashionable to talk about moral values, integrity, spirituality and all other things which we may or may not possess but which cannot be seen or touched physically. We struggle with all things intangible. We prefer to have possessions which we can see, touch and hold.

As Hisham Hellyer said during his lecture titled “Islamisation in the 21st Century: Islamic Renewals”: “For despite the wailing and moaning about the ‘evil West’ and its corrupting influences that one so often finds within the Muslim world, the Muslim world at large is rushing to become Western as much as humanly possible. And it is not rushing to imbibe those laudable aspects of Western civilisation that do continue to exist through the grace of God, despite the many problems that exist in the West ... The Muslim world sees the technological advancements of the West, and rushes to be like the West ... forgetting that actually, the mark of progress according to the Islamic worldview is an increase of taqwa, not material wealth.”

So, do we, in Malaysia, also have that “universal culture of selfishness and greed” which Oborne wrote about when describing society in Britain? I would like to think that we don’t but a part of me knows that we do. I don’t see much effort at giving back to society or of wanting to learn about those who live wretched lives. It is hard for me to ignore that despite our rush to be a developed country we still have many social issues which need to be addressed, if not solved. I cannot look the other way and ignore the poor who live in deplorable conditions in some parts of Johor Baru. Our cities have grown but together with this growth is the increase of the urban poor. If they are filled with anger or frustration, it is because we have not made enough efforts to listen to them, or to help them.

One of the things I saw, and which I will never forget, was of men and women queuing up to get their wang ihsan after the floods of 2006. They stood patiently in the grounds of a mosque as a government officer wrote down their names and addresses.

A couple of years ago, I was flipping through one of those glossy society magazines and I saw a designer handbag that cost RM90,000. Would I have asked my husband to buy it for me? No, because the sight of those flood victims standing in line to receive just RM500 makes such a purchase sinful. How many families would the cost of that handbag help feed? Thinking about this, I would like to understand more about taqwa, and what it truly means. I don’t need to know about wealth because I already live a privileged life.

For Malaysians, the London riots should not be seen as something that would never happen here or that we do not have young people who are frustrated by life’s unfairness. We should instead realise what we should do because it is our responsibility towards the young people of this country. They deserve a chance at a better life. And they shouldn’t have to be part of a riot for us to realise that.

The writer is Chancellor of UTM; Royal Fellow, School of Language Studies and Linguistics, UKM; Royal Adviser of the Malaysian Red Crescent Society, and holds a Bachelor of Arts in Chinese Studies from the University of Oxford.

Anger still burns in epicentre of UK riots

by Marc Bastian 

LONDON, August 14, 2011 (AFP) - Tottenham in north London is still smouldering with anger and frustration, one week on from the unprecedented wave of rioting, arson and looting that broke out here then swept across England.

Last Sunday residents of the multi-ethnic neighbourhood were assessing the scale of the damage after a night that saw running battles with riot police, homes and businesses reduced to cinders and stores smashed into.

But while the clean-up continues and businesses get back to normal one week on, the tension has not dissipated.

Tottenham High Road, the neighbourhood's main thoroughfare which was the scene of last Saturday's explosion of violence, remained a crime scene for a week, taped off by the police as they gathered evidence.

Saturday should have seen the area streaming with football supporters for Tottenham Hotspur's match against Everton as the English Premier League season kicked off, but the game was postponed for safety reasons.

"We're closed since last Saturday," a Turkish restaurant owner said as he finally reopened for business, a week on.

"People never demonstrate here to protest. Everybody's unhappy, frustrated. Economy, racism. And suddenly it all explodes," he said.

The trigger for last Saturday's riot, which then sparked a wave of arson, looting and disorder across London and then to cities beyond, was the death of Mark Duggan.

The 29-year-old was shot dead on Thursday, August 4 by armed police operating with officers from Trident, the unit of London's Metropolitan Police that deals specifically with gun-related murders in the black community.

He was stopped in a pre-planned attempted arrest.

A non-police issue handgun was recovered from the scene. The Independent Police Complaints Commission, which investigates all deaths involving officers, said there was no evidence of an exchange of shots.

Last Saturday's events began with a peaceful march to Tottenham police station on the High Road from Broadwater Farm, a 1960s public housing estate that is notorious across Britain for a deadly 1985 riot.

However, within hours, rioting broke out.

"The people wanted police to know that they're messing up," reckoned 14-year-old Dillz Shah.

His friend Jeffrey Freeman said: "The people wanted revenge for Duggan's killing.

James Cardelle added: "My dad thinks Duggan was a very good man, he knew him."

Duggan lived on Broadwater Farm, a collection of ugly-looking grey social housing blocks.

"He was a nice guy. So sad," said Mohammed Abrar, 22, from beneath a grey hood.

The October 6, 1985 Broadwater Farm riot followed riots a week before in Brixton, south London.

They were sparked by the stroke death of a black woman during a police search at her home on the Tottenham estate.

Youths rioted, attacking police with petrol bombs and bricks. Shots were fired at officers and a policeman was hacked to death by a mob in some of the worst urban rioting in Britain of the past 30 years.

Then, as now, fingers were pointed at police "lies", but also at "anger" provoked by governments past and present.

In a hairdressing salon opposite a burnt-out two-storey building, the black clientele lambast the authorities and the upper echelons of society.

"They abandon the population"; "the government has tripled the tuition fees"; "they cut the benefits"; "they evict people whose children were involved in the riots"; "these bankers have stolen our money", they say as they discuss the situation.

Perry Linton, a 50-something, is "frustrated" by a society in which "we worked hard, very hard, to get what? Things went worse".

Linton adds: "Racism is a big issue".

Christina Showunmi, a mother in her 40s, replies: "Racism? I don't want to think about it, otherwise it will affect my attitude towards other people. So I just block it out of my mind."

"True", other customers say. "We do the same".

Stella Saunders, 60, was having her nails painted blue.

"The youth are hanging around, have no jobs. If the factories were open, it would keep them busy. Everybody needs hope and an income," she said.

If not, despair is simply passed on from generation to generation.

"If you have no hope at 14, 15, how can you become a good parent?" she said.

Showunmi warned: "This will happen again and it will escalate. The government will make it happen again."

Related posts:

Anarchy in the UK - London Riots Sparked by Police Beating, Poverty, Ethnic differences...

Anarchy in UK - London Riots: Malaysian student mugged...

Lawsuits with Tajudin Ramli, Is it time to settle?





Is it time to settle?

OPTIMISTICALLY CAUTIOUS By ERROL OH

IT was only this week that most of us found out about the efforts to settle all lawsuits between Tan Sri Tajudin Ramli and several government-linked companies (GLCs), including a few listed entities. According to Minister in the Prime Minister's Department Datuk Seri Nazri Abdul Aziz the Government had been mulling over the out-of-court settlement for the past six months. It was reported that Nazri sent a letter to the GLCs this month, informing them that the Government and the Finance Ministry had agreed to settle all civil claims against Tajudin.

However, it appears that the possibility of a “global settlement” of the suits have been floating around for longer than half a year.

Last December, the now delisted DFZ Capital Bhd uploaded on the Bursa Malaysia website a circular by Singapore-listed Esmart Holdings Ltd, which was acquiring a 75% stake in DFZ. In discussing the material litigation of Atlan Holdings Bhd (the vendor in this transaction), Esmart touched on the developments in a particular case and said: “In view of the global settlement in respect of all suits concerning Tan Sri Dato' Tajudin Ramli (TSDTR), the said matter is now fixed for mention on Jan 12, 2011.”

A similar reference “the global settlement in respect of all suits involving TSDTR” popped up in the notes to Atlan's quarterly report for the period ended November last year.

Atlan's legal entanglement with Tajudin is a legacy issue arising from its 2004 purchase of a 32% block of shares in Naluri Corp Bhd from Pengurusan Danaharta Nasional Bhd. Tajudin lost control of Naluri following the Asian financial crisis.



A more interesting bit of information surfaced in Axiata Group Bhd's quarterly report for the period ended Dec 31 last year. In providing an update on its material litigation, the company said: “The Court has requested the parties to mediate and TSTDR has proposed a global settlement for all the cases involving TSTDR. The parties have since agreed to mediate the pending disputes.”

Axiata appears to be one of the GLCs whose lawsuits with Tajudin are likely to be withdrawn following the Government's agreement with Tajudin. Khazanah Nasional Bhd is a 39% shareholder of Axiata, whose subsidiary Celcom Axiata Bhd was once among Tajudin's prime businesses.

Malaysia Airlines (MAS) is another former Tajudin asset that's now a part of the Khazanah stable. Not surprisingly, the national carrier too has legal disputes with him. However, to date, MAS has yet to say anything about the change in status of its suits involving Tajudin.

Neither has Telekom Malaysia Bhd (TM), which (along with subsidiary Telekom Enterprise Sdn Bhd and 22 others, including Danaharta and Celcom) is a defendant in a counterclaim by Tajudin, who is seeking RM13.4bil, among other things.

So why haven't Atlan, Axiata, MAS and TM made any announcements about the global settlement? Atlan and Axiata have disclosed the development in the notes to their financial statements and quarterly reports, but this is still a step away from highlighting the information.

It has been established that these companies' lawsuits involving Tajudin are indeed material litigation, and Bursa Malaysia's listing requirements include “the commencement of or the involvement in litigation and any material development arising from such litigation” among the examples of events that may require immediate disclosure.

Of course, there's room to argue that the global settlement is very much work in progress, with many details yet to be worked out. However, shouldn't the investing public be alerted when there's a proposed global settlement on the table and it may result in the conclusion of several suits with billions of ringgit at stake?

Nazri was quoted as saying there was no special deal between Tajudin, the Government and the GLCs for the parties to agree to the settlement of the suits. He added that it was up to the parties involved to decide what to do next. “It is their right if they want to proceed with their court case,” he said.

As listed companies, they are obliged to take into account the interests of minority shareholders as well. It's impossible to please every shareholder, for sure, but whatever the decision of each company, the board and the management need to be transparent and consistent, and their rationale ought to be persuasive. If a company decides to drop a lawsuit it has filed, particularly one that seeks to address big losses, it owes shareholders an explanation.

For example, an Axiata subsidiary, Rego Multi-Trades Sdn Bhd, commenced proceedings in 2005 against Aras Capital Sdn Bhd and Tajudin for amounts due to Rego pursuant to an investment agreement with Aras Capital and an indemnity letter given by Tajudin. In turn, Tajudin filed his defence and instituted a counterclaim to void and rescind the indemnity letter and claim damages. Said Axiata in annual report 2010: “The board of directors, based on legal advice received, are of the view that it has good prospects of succeeding on the claim and successfully defending the counterclaim if the same were to proceed to trial.”

Similarly, both TM and Axiata have expressed confidence that they can put up a winning defence against Tajudin's RM13.4bil counterclaim.

Perhaps it's good for everybody or at least, for most people if the Tajudin-related suits are settled out of court. If that's so, the listed companies should have no problems presenting that case to their shareholders.

Executive editor Errol Oh has just realised that we often overlook the listed companies' disclosures on material litigation.

Saturday, 13 August 2011

Who will solve MAS’ operational problems?






The deal with AirAsia reads like the rationalization of the airline industry but does little or nothing for Malaysia Airlines' operations

AirAsia and Malaysia Airlines aircrafts at Kua...Image via WikipediaWhile MAS has award-winning products and services, a competitive cost base, and only slightly below average load factors, our yields are dramatically lower than our competitors. – Idris Jala then CEO of MAS in February 2006 before turning around the badly ailing airline within a year.

AT the end of the day, the alliance between Malaysia Airlines (MAS) and AirAsia achieved via share swaps between their major shareholders does nothing by itself to improve MAS’ operations (see our cover story this issue for full details).

In fact a misguided overemphasis on MAS focusing on being a premium full service carrier (FSC) can have dire consequences on its revenue and viability as we shall explain.

What is clear from the figures in the chart is that the national airline has a severe revenue management crisis, which it must solve or perish. The yields broadly track the airline’s operational profits.

The problem with the yield and hence revenue is not the product, for MAS is rated consistently among the top airlines in the world for service.

The problem is not capacity utilisation because seats are on average filled three quarters, despite increases in capacity.

The problem is pricing. Despite a good, and even excellent, product it is not able to price it properly and this is reflected in its yield, which is the revenue per revenue passenger km flown (sen per RPK – the average amount an airline gets for flying a paying or revenue passenger one km.). Hence there are no profits but losses now.



If we look at the RPK in the chart for the first quarter of this year, it is back to what it was in the first quarter of 2006 after Datuk Seri Idris Jala joined MAS in December 2005. Idris’ quote above in February 2006 shortly after he took over is exactly applicable to MAS today, over five years later!

An examination of the chart shows that since Idris came in to MAS in December 2005, MAS had experienced a relentless increase in both RPK as well as revenue per available seat km or RASK (available seat km is a measure of capacity obtained by multiplying seats available by the kms flown and totalling them) up to end-2008.

The increase in RASK at the same time indicates that the seat factor (how much seats are filled, obtained by dividing the RPK by the ASK) or capacity utilisation was maintained at healthy levels.

Maximising revenue is a function of trying to control three key variables – capacity, capacity utilisation and fares. When any one of these increases, revenue increases if the other two at least stay where they are. The ideal is when all three increase simultaneously.

The issue is complex to say the least and is at the heart of the profitability of any airline. Costs, in contrast, are much easier to control and quantify. But in revenue management you need to have a good feel for what price you can charge without affecting capacity utilisation.

For this you need very good people who can feed the right information to some of the most complicated and complex modelling systems in airline operations. And you need to be constantly refining this because the situation changes all the time and from day to day.

Most FSCs like MAS have a basic fare to fill most of their seats. But with an average seat factor of say 75%, one quarter of the seats are empty and wasted if they are not utilised. They target these seats to be sold too, often at lower prices, because they bring in revenue at the margin almost all of which goes straight to profit because it is incremental.

Now here’s the paradox: MAS, like any other FSC, must in areas where the load factor or capacity utilisation is low compete on the back-end or economy class with the low cost carriers (LCCs). Not to do so would make it severely uncompetitive as an airline.

If the flights are likely to be full, MAS should move to higher prices and if they are not, than the airline has to offer discounts – sometimes considerable discounts – to fill up the seats and improve capacity utilisation. The conditions for these seats are like for LCCs – inflexible schedules and early bookings but low price.

The trick is to do this without actually cannibalising your current base customers who are willing to pay a premium for flexibility and full service and to charge a rate the market can bear for the front end – business and first class where demand is not that price sensitive.

Now, lets look at the chart again. MAS’ yields increased steadily and peaked in the fourth quarter of 2008 for a gain of 60% in just three years and exceeding even that of Singapore Airlines, indicating excellent revenue management.

It took a massive dip in 2009 along with other airlines in the aftermath of the global financial crisis which started in the last quarter of 2008. Most airlines recovered after that but MAS did not. Idris left in the third quarter of 2009 to head the Performance Management and Delivery Unit and become a Cabinet minister.

Singapore Airline’s yield in 2009 fell to 25.7 sen per RPK from 31.3 sen per RPK (at current exchange rates), down 18% and MAS’ fell from 32.9 sen per RPK to 23.4 sen by the fourth quarter of 2009, down a massive 29%. But in the first quarter of this year, SIA’s was back up to 29.9 sen per RPK but MAS’ continued to languish at 22.7 sen, even lower than that at the height of the crisis!

The difference between SIA’s and MAS’ yield now is a massive 7.2 sen. MAS has estimated in the past that one sen in yield translates to about RM500mil in revenue a year. That means that if MAS can increase its yield to that of SIA’s – not impossible, it has done it before - that’s an extra RM3.6bil in revenue.

Since this is incremental, it means an operating profit of over RM3bil assuming MAS’ operating profit this year is likely to be less than RM600mil!

That is basically the problem at MAS – its yields have not recovered post the world financial crisis which affected airlines very badly in 2009. If MAS focuses on getting its yield back while keeping costs down, it’s back in business and in a great big way too.

MAS is an airline. The argument that ancillary services will make most of its money is false, although that income is useful. It can and must make money from the airline operations, although there will be cyclical downturns.

The guy (or gal) who will turn MAS around has to understand airline fundamentals and if he has no experience in how pricing affects revenue in the airline world, he must learn pretty fast. And he has to be pretty fixated on costs and have a good eye for market opportunities. Someone like Idris.

Back to the deal. It is good for AirAsia, some of it for good reasons and some for bad reasons. It is good because AirAsia can get routes and compete with MAS on the long, medium and short haul. But bad if the intention is to cut competition through uneconomic means.

MAS should be able and allowed to compete on economic terms with AirAsia in the same way that AirAsia can – the competition must cut both ways. That is the key to a more vibrant airline sector. If MAS can increase its revenue overall and make money by offering cheaper fares on some routes, they must be permitted – and indeed encouraged – to so.

By all means collaborate via common procurement, maintenance, training and the like to bring costs down but allow full economic competition on pricing. Don’t carve the market out rigidly but let the markets overlap on the fringes as they do in reality.

Let MAS be a full service carrier on all sectors but with the liberty to compete on pricing when the economics dictate it. Let AirAsia do its low-cost thing – which it has done so well and with so much benefit for travellers – wherever it wants to and give it access to any route it wants.

And let Firefly do what it will from Subang with no restriction, meaning it does not have to be an FSC.

Then we have the best of both worlds – the most collaboration to bring down costs with the most competition to keep efficiency up, deliver excellent service and low fares. Then we will truly recognise the three elements in this equation – the two airline groups and the customers without whom the first two don’t exist.

Managing editor P Gunasegaram would like to quote another turnaround man Lee Iacocca, the one who took Chrysler back to profits against all odds sometime back: “In the end, all business operations can be reduced to three words: people, product, and profits.”

US no longer ‘AAA’, Eurozone the next?






US no longer ‘AAA’

WHAT ARE WE TO DO By TAN SRI LIN SEE-YAN

STANDARD & Poor's (S&P's) had on Aug 5 cut the US long-term credit rating by a notch to AA-plus (from AAA). This unprecedented move reflected concerns about the US's budget deficits and rising debt burden. It called the outlook “negative,” indicating that another downgrade is possible in the next 12-18 months.

According to S&P's, the Aug 2 debt deal which cut spending by US$2.1 trillion, didn't go far enough: “It's going to take a deal about twice the size to stabilise the debt to GDP ratio.” It also stressed what it saw as the inability of the US political establishment to commit to an adequate and credible debt reduction plan: “The effectiveness, stability & predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.” Moody's Investors Service and Fitch Ratings haven't followed S&P's move causing a split rating. They had earlier (on Aug 2) affirmed their AAA credit ratings for the US, while warning that downgrades were possible, grading the outlook as negative. At the same time, China's only rating agency (Dagong Global Credit Rating) downgraded the US from A-plus to A saying the deal won't solve underlying US debt problems.

US downgrade

What does a rating downgrade mean? For the US, it will affect its borrowing costs eventually and immediately, investor opinion of US assets. According to Sifma (a US securities industry trade group), the downgrade could add up to 0.7 of 1 percentage point to US Treasury yields, thereby increasing funding costs for US public debt by some US$100bil. But the US dollar has a special position as the numeraire of global transactions; it is also a reserve currency, and often regarded as a safe haven in times of uncertainty. Ironically, in the recent sell-off in equities world-wide following the S&P's downgrade, US government bonds was a big beneficiary. Its benchmark 10-year bond yields fell 21 basis points on Monday to 2.35%, the biggest one day drop since January 2009; by Wednesday, it was 2.14%, the lowest yield on record. Two year US Treasuries yield touched a record low of 0.23% and then, fell further to 0.184% on Wednesday. In the panic, Treasuries appear to be still the way to go.

With the downgrade, US no longer warrant the top-tier rating it enjoyed since 1941 (Moody has had a AAA on the US since 1917). At AA+, the US is still considered to have a “strong” ability to service its debt. Only Canada, Germany, France & UK still carry triple-A at S&P's. The downgrade didn't affect US short-term rating which remains at A-1+, the highest at S&P's. In a follow through, S&P's downgraded numerous government related enterprises (notably Fannie Mae and Freddie Mac which together hold more than one-half of US mortgages), 73 investment funds (fixed income funds, hedge funds, etc) and 10 insurance companies for their large holdings of Treasuries. But banks were spared on the implicit “too big to fail” policy of the government. Nevertheless, the US bond market retains widespread appeal. At more than US$35 trillion at end-March, this market is broad, liquid and deep. The Treasuries market alone has US$9.3 trillion debt outstanding. But in the end, the market decides. Consider Japan S&P's downgraded it in 2002. Today, Japan is still able to borrow freely & cheaply. As of Aug 9, interest rate on Japan's 10-year bonds stood at just 1.045% and 30-years, at below 2%. In practice, for the US, a double A-plus still works like a de facto triple-A.

Market rebound: Traders work on the floor of the New York Stock Exchange on Thursday — AP
 
Immediate global sell-off

When markets opened following the weekend downgrade, a global panic sell-off in equities took over.  There was a lot of fear and uncertainty in the markets, reflecting a confluence of three main factors:

● uncertainty about the US economy faltering, raising the risk of a double-dip recession;
● worries that the downgrade could further undermine US consumer confidence & business spending adding another layer of anxiety on the global economic outlook; and
● fear the euro-zone debt crisis will spin out of control, spooking investors.

All this took its toll. Stock markets plunged around the world with funds flowing into havens, such as gold (up 60% since 2010, surpassing US$1,800 a troy ounce), Swiss francs (up 24% against euro and 32% on US dollar over the past year) and ironically, US Treasuries. In Asia, markets closed at their lowest levels in about a year. Key benchmarks in Hong Kong, Seoul, Mumbai and Sydney skidded for the fifth consecutive day. Shares in China, Taiwan and South Korea plunged sharply before recovering some ground. All closed nearly 4% lower on Monday. In Hong Kong, the Hang Seng Index had its worst day since the 2008 financial crisis, falling another 5.6% on Tuesday; it had fallen by 16.7% in the past six sessions, or more than 20% from its recent peak. South Korea's Kospi was down 3.6% and Indonesia's main stock exchange fell 3%. At its close, the KL Bursa lost another 1.7% on Aug 9 (-1.8% on Aug 8). Japan's Nikkei fell 2.2% to its weakest level since the March earthquake. India's Bombay stock index declined 1.6%, its fifth drop in a row.

The Dow Jones Industrial Average (DJIA) recovered 1.5% on Tuesday after a record 635 point fall (-5.5%) in sell-offs on Monday. The German DAX closed further down 5% and the Paris CAC 4.7% lower while the FTSE 100 in London fell another 3.4%. The Stoxx Europe 600 index ended 1.4% higher following a 4.1% slide on Monday, although underlying sentiment remained extremely fragile. The VIX which tracks stock market volatility, reached its highest since the initial Greek debt crisis in May 2010. It rose 20% to 38.5 on Monday afternoon and then to 40.5 on Tuesday, reflecting extreme fear and emotional trading. It measures the price investors pay for protective options on the S&P's 500 index. After Monday's sharp share-price drop and the previous week's poor performance, China and Hong Kong aren't the only markets at or near bear territory. Stocks in Germany & France are now down more than 20% (definition of a bear market), from highs reached in the previous year. India's benchmark Bombay Sensex is down 20%, and Japan's Nikkei is off 16.5%.

A day after US stocks received a boost from the Fed to keep interest rates low until 2013, markets in the US and Europe resumed their plunge on Wednesday. The fear: politicians across the Atlantic won't be able to manage the significant headwinds buffeting the US & European economies. Woes were focused on France, where its bank stocks plunged amid worries it may lose its triple-A status. The Paris CAC-40 index fell 5.4%. In the US, the DJIA was down 4.62% (-520 points) wiping out Tuesday's surge. The Fed had run out of bullets. Asian stocks advanced Wednesday with sentiment helped by a strong Wall Street rebound. However, gains in most markets lacked the passion observed on the way down. Hong Kong was up 2.3%, South Korea, 0.3% and Taiwan, 3.3%. All three were still down more than 10% so far in August. Japan was up 1.1%, Australia, 2.6% and China, 0.9%. But Stoxx Europe 600 was down 3.7%. Expectations are for the markets to remain choppy. On Thursday, most Asian markets were back in negative territory. But Europe closed stronger (up about 3%) and the DJIA surged by 4% (+423 points).



European contagion 

Italy and Spain, the euro-zone's third and fourth largest economies, have a combined GDP of nearly 2.7 trillion euros, about 30% of the eurozone total. For nearly two years, the European Union (EU) has been trying to stem the unfolding debt crisis. The July 21 Greek bailout bought some time not much to ward off further contagion. The European Central Bank's (ECB) decision on Aug 7 to buy Italian and Spanish debt represents a watershed in EU's continuing battle against turning ECB into the lender of last resort. The ECB has insisted the main responsibility to act lies with national governments. Given worries of a new bout of contagion sweeping European and global markets, ECB defended the new intervention as restoring the “normal functioning of markets through a better transmission of monetary policy.” ECB's continued bond-buying brought benchmark Spanish borrowing costs for 10-year bonds down to 5.019% on Tuesday, close to their lows for the year. Italian 10-year bond yields also fell to a one month low of 5.143%. Both countries' yields had approached 6.5% last week a level that eventually escalated to push Greece, Ireland & Portugal into bail-outs. Analysts estimate ECB could have bought up to 10 billion euros, a small fraction relative to the size of Spain & Italy's debt markets. Italy's debt alone is 1.8 trillion euros.

Market sentiment aside, the purchases did little to change the fundamental backdrop in Europe where economic growth has slowed even in the “core” nations of Germany & France. Signs of stress remain despite the positive market reactions to ECB's decision. Deposits at ECB, for example, hit a 2011 high of 145 billion euros on Monday, reflecting banks' reluctance to lend inter-bank preferring the safety of ECB. There is a limit to how deeply ECB can be drawn into the fiscal misadventures of its members. Concerns are mounting on the French economy because of its high debt levels (85% of GDP, already above the US & rising) and weak growth prospects. Germany, in much better shape, isn't immune either. Already, the cost of insuring German bonds against default using credit-default swaps (CDSs) rose above 85 basis points, higher than insuring UK bonds for the first time on Tuesday, despite the London riots. There is growing concern the new austerity measures in Italy & Spain will slacken their struggling economies, plagued also by social unrest.

What's wrong with the US economy?

The recession ended two years ago. The stumbling recovery may turn out to be the worst ever. Most indicators are not reassuring unemployment at 9.1% is still too high and jobs creation too slow; GDP growth is faltering, income growth continues lagging behind; household wealth is falling; banks are not lending enough; and consumer expectations have not been positive. In the last eight recoveries, lost jobs were regained within two years of recession's end. This recovery is still seven million jobs below peak employment in 2008 and about two million fewer than if unemployment was held below 8%. The US economy will remain lacklustre for some years because of heavy household debt, a financial system deeply scared by mortgages, and a dysfunctional political establishment. Heavy household debt and a dismal job market have hurt consumers' confidence, further dampening their willingness to spend. The only bright spot is exports, reflecting the weak US dollar and still booming emerging economies. Unexpectedly, the pace of growth in US services fell in July to its lowest level since February 2010. Taken alongside disappointing manufacturing data, the services sector showed-up an economy with weak hopes of a rebound in the second half of this year, after an anaemic first half. According to Harvard's Martin Feldstein, “This economy is really balanced on the edge. There is now a 50% chance that we could slide into a new recession.” Even Prof Larry Summers now concedes: “The odds of the economy going back into recession are at least one in three.”

The US problem is more a job and growth deficit than an excessive budget deficit. The diagnosis of the run-up in debt out of control spending by the Federal government, is exaggerated. Indeed, the “cure” of severe spending cuts is likely to make recovery more difficult. The real problem lies in the fall-off in tax revenue. From 20% of GDP in 1998-2001, tax revenue has fallen steadily: averaging just 17% of GDP from 2002-08 and then, to below 15% in 2009-10. About 50% of the rise in deficit was due to the downturn because of “automatic stabilisers”, reflecting cyclical revenue falls and higher spending to assist the unemployed and other transfers to help the poor. They contribute to demand and assist to “stabilise” the economy.

The US rating downgrade is a warning bell. On present trend, its debt burden is unsustainable and the US political system seems unable to reverse it. To do so, it needs faster growth can't cut its way to growth. What's required is tax reform and a will to restore revenues back to the 20% of GDP trend; a prospect most Republicans have castigated. At issue is not the US government's capacity to service its debt, John Kay of the Financial Times pointed out. It is the “willingness of the government to repay.” If sovereign borrowers meet their obligations, it is only because “they want to.”

Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my.

Simple way to understand US Economic Situation










Simple way to understand US Economic Situation:

Federal Budget 101 Letter - LA