Praying for a safe passage

THE finances of package tour firms always have been precarious. But who could ever imagine that a firm like MyTravel, which in its best year made profits of £211m, could run up losses of £911m after write-offs?

Chief executive Peter McHugh dismisses much of the losses as being on paper. Be that as it may, it is a sum larger than MyTravel's total earnings over the previous five years.

The big question is whether the group can survive. Yes, says McHugh, it has the customer loyalty, the financial facilities and the working capital to soldier on. It still has its licence from the Civil Aviation Authority and has posted the bond necessary to bail out holidaymakers should it all turn to custard.

One would not rate its chances highly. Travel firms are a little like banks. Once customers get the scent of difficulty they desert in droves, taking their deposits elsewhere and the cupboard is left bare. In the case of MyTravel, it is particularly naked as the group also happens to be an airline with £1bn of leases off balance sheet, in addition to other liabilities.

Not surprisingly, it has seen a turnover of senior executives. Big shareholders such as Fidelity International are clearly hoping the present team led by McHugh will turn things around.

But the door has been wide open with a dozen executives (many confusingly calling themselves directors) leaving. More than half of these were at a senior level, leaving the company with a severance bill of £4.5m. Sure, people do go in difficult circumstances, but there is also a danger than the knowledge base of the company has been seriously eroded.

MyTravel's collapse in value from £2bn to £50m tells its own story. The value of its convertible bonds has almost disappeared off the chart. This is a group hanging on by its fingertips, with no prospect of real profits until 2005.

At some point the banks and the authorities, no doubt in the off season, may yet have to decide whether McHugh can pull it off - against the odds.

Pensions angst

THERE is a strong air of complacency about the pensions papers that accompanied the Pre-Budget Report. The long-term public finance report reached the conclusion that even if the rest of Europe turned out to have a serious problem, we in Britain would be fine.

The taxation of pensions paper showed a dangerous tendency towards arrogance, threatening to abandon the proposed reforms unless the objectors stopped whingeing.

Amid the mountain of Treasury waffle, the vexed question of the rising deficits in company schemes is barely touched upon. A note from former Boots corporate finance chief John Ralfe - for the Royal Bank of Canada - suggests that the size of the pensions problem at several Footsie firms is seriously understated.

Ralfe considers that if British Airways and BT - two firms with black holes in their funds - had used the 'bond' method of valuation pioneered at Invensys, then the outcome would be different.

Ralfe estimates that at BT the deficit would be £7.5bn, rather than the £2.1bn reported, requiring the company to make an extra annual contribution of £800m. This would be a fearful prospect for all of us who are BT shareholders.

More seriously at BA, because of its trading difficulties, the deficit in one of its two key schemes would be £1.6bn instead of the £900m estimated in last month's actuarial valuation.

This would mean an extra top-up of £200m, bringing the total funding requirement to £330m a year. In the remote event that BA became insolvent, it would be likely that the 57,000 employees/ deferred pensioners would receive less than 50% of their entitlement.

Such alarming calculations demand that the Treasury make the protection of occupational schemes a priority. Otherwise we could be in as much trouble as our derided euroland partners.

Chancellor's CPI

IS inflation really a thing of the past as Gordon Brown claimed in his statistics-laden Today programme confrontation with John Humphrys? Not a bit of it.

The size of the Pre-Budget Report, or Autumn statement as it used to be called, has soared from 160 pages when Ken Clarke was still at the Treasury in November 1996 to a recordbreaking 893 pages this year (including two reports on the housing market). That, in Brownese, is a rise of 458%.

As for tax receipts, they have climbed from £280bn in 1996-97 to an estimated £422.8bn in 2003-04 or by 50.7% in cash (non-inflation adjusted) terms. Now tell us that we live in a low tax economy.