Backroom Boys
Page 8
When Lamont was reporting all this to the Select Committee, he said that it would take ‘a few months or so’ to confirm that BA’s plan was working, that they were ‘getting the extra traffic they think is possible’. And then he made early use of a formula that was going to be repeated so often during the privatisations of the 1980s, in a multitude of variations, that it would virtually become a Thatcherite mantra. ‘The future in markets and the future in sales in any company are always subject to great uncertainties.’ Yes, and shares can go down as well as up. Sometimes this careful shrug as a public asset was transferred into the marketplace insured the government against a nasty surprise for investors, as in the case of the Rover Group, or the water companies, or British Coal. At other times, it covered the possibility that the asset in question might turn out to be a lot more productive than anyone had realised, once full-on commercial exploitation of it began.
Concorde, it turned out, fell into the latter category. As the results of BA’s new strategy began to come in over the next few months, the airline’s estimated operating profit for the plane was revised upwards again. It rose to a likely £10.2 million for 1982–3, and £10.7 million per year thereafter. When the British officials studying options (1), (2) and (3) as a follow-up to the October 1981 summit with the French saw this, it gave them furiously to think. Concorde’s ever-changing balance sheet now supported another possibility altogether. BA’s profit had crossed (or rather would cross) the £10 million-a-year threshold; total net cost to HMG of supporting the plane before BA’s profit was offset against it had dropped to an average of only £8 million a year (£40.9 million divided by five). BA was slated for privatisation anyway within the next few years. So could BA not take over Concorde now? Could it not cover the plane’s costs entirely out of profits, and take the whole thing away to where it need never be the responsibility of ministers, or ministries, or Select Committees again? This would certainly be an ideologically desirable exit. It would be both a foretaste of the greater privatisation to come, and a kind of potent symbolic conversion of something that had previously seemed to signify the absolute opposite to the Thatcher agenda. Concorde flies boldly into the private sector! What a spectacular vindication that would be of ‘the Tory philosophy’! In fact, the redemption-by-profit of Concorde would create the terms on which Mrs Thatcher herself could consent to be proud of it, as a token of the national greatness she continued to believe in even as she presided over the final massacre of Britain’s industrial base. If the plane could become an attribute of the managerial genius of virile, risk-taking John King, it would lose the stain of its origin among civil-service aerodynamicists and British Aerospace shop stewards soaking up the taxpayers’ money.
Events now moved fast. At the Anglo-French ministerial meeting in May 1982, Lamont put the idea to his French counterpart, M. Fiterman. Supposing that Britain replaced its official obligations where Concorde was concerned with a set of equally binding commercial contracts, would that count, to France, as abiding by the Treaty? The French agreed that it would; the government could propose the plan to BA, on the crucial unspoken assumption that if it didn’t work out, Britain would not be reverting to state support of the plane. It was privatise or bust – the French accepted that. So a letter was despatched to Sir John King at BA headquarters, spelling out an ultimatum. The Department of Industry would be dropping Concorde’s support costs, come what may, at the end of March 1983. Would he care to pick them up? King asked for time to think. He said – maybe.
*
On 1 April 1982, Argentine troops had invaded the Falklands. While King considered, the British task force sailed, landed, fought a war and won a victory which would ensure the survival of Mrs Thatcher’s government. Concorde’s little military cousin played a part: the delta-winged Vulcan bomber, built to deliver the British nuclear deterrent in the days before Polaris. The last Vulcan squadrons were due to stand down in the summer of 1982, but it was decided to use the planes up rather than retiring them. The speed governors were removed from the plane’s throttles, for longevity wasn’t an issue now and it didn’t matter if the pilots wore out the Vulcan’s Olympus 301 engines, ancestors to Concorde’s Olympus 593 powerplants. Paint was scraped from long-disused refuelling probes. The mankier planes were cannibalised for spare parts. Accompanied by a fleet of tanker aircraft, the Vulcans set off to fly the entire length of the Atlantic from north to south. It took eleven tanker-loads of fuel, pumped across in mid-air, to get two Vulcans from Britain to the Falklands, stopping off at Ascension Island en route. The Vulcans’ age soon showed. The last ones had been manufactured in 1964, and by now their systems were fragile. Refuelling probes snapped off in flight; cabin pressurisation failed; missiles jammed in the bomb bay of one Vulcan, forcing it to land, extremely carefully, in Rio de Janeiro. Still the fat triangles came whipping in at Mach 1 towards Port Stanley, the grey swells flickering by 250 feet below, black exhaust from the Olympus 301s ruling a quadruple line across the sea from horizon to horizon. Still they soared as they reached their target, still they each dropped their 21,000 lb of explosives onto the Stanley runway, as the Vulcans projected the last remnants of the power they had been commissioned to preserve.
The same family of technologies that made this journey possible made Concorde’s daily run to New York possible too. One was the mirror image, the inevitable twin, of the other. In ‘Operation Black Buck’, as they code-named the Vulcan campaign against Port Stanley, the history of Britain’s V-bomber force ended with a bang no one predicted in a war no one foresaw. Yet it was Concorde’s seemingly routine transit across the Atlantic that was the true wonder, for it passed the test set by Leonardo da Vinci, inadvertently, long before the dawn of real aviation. Wondering what use might be found for the flying machines he dimly envisaged, Leonardo suggested that people might ‘seek snow on the mountain tops and bring it to the city to spread on the sweltering streets in summer’. Out of the brazen August sky over Florence cool flakes from the Alps might flutter down; passers-by in sweating Renaissance Rome might lift their faces to be refreshed. It was an idea that became grimly ironic from almost the moment that flight became practical at the beginning of the twentieth century. Almost as soon as they were invented, planes were pressed into service to kill city dwellers rather than to refresh them. Gotha raids on London, Stuka raids on Guernica, Wellington raids on Dresden, B-52 raids on Hanoi – the Vulcan sorties of the Falklands War joined the list, to be followed by all the air attacks of the two Gulf Wars and the NATO strikes against Serbia. But, now and again, flying eludes the irony in Leonardo’s dream and serves the civil delight he first thought of. Concorde did that. Passers-by in the hot streets of London and Manhattan would stop when they heard the rumble and tilt their heads to see the unmistakable silhouette go by. It scattered intimations of grace which could fall into a frantic urban day as coolingly as any flurry of cold white stars. It dropped (as it were) snow, not bombs.
*
John King said maybe in May 1982 because taking over responsibility for Concorde involved a whole extra dimension of risk for BA.
Till now, the airline had only had to cover its own running costs with the income it earned from operating Concorde. Money from Concorde ticket sales came in; payments went out for salaries, fuel, maintenance, airport charges and spare parts. What was left after these costs had been deducted formed BA’s operating profit as it had been defined in all the discussions to date. All the other charges associated with keeping the plane flying were borne by the government. Now, though, it was being suggested that BA should expand its balance sheet to include all the transactions that presently took place between the government and the plane’s manufacturers.
BA’s dealings with the aerospace companies had been nice and simple and limited up to then: just the usual relations between a buyer and a set of sellers. When BA needed a part for one of Concorde’s Olympus engines, they went to Rolls-Royce. When they needed something for the airframe, they went to British Aerospace
. To replace a piece of the fuel system, they went to Aerospatiale. The companies had a catalogue price for each part and BA paid it. Simple. The problem was that the production lines turning out these spare parts had, again, been set up on the assumption that there’d be far more than just two customers, BA and Air France. Manufacturing spare bits ’n bobs for a plane you’ve built is usually a lucrative business. In fact, some aviation companies generate the bulk of their profits from supporting the products their clients bought earlier, Rolls-Royce’s present-day business model for its Trent aero-engine being a case in point. Here, however, the catalogue price that the contractors charged for the spares didn’t nearly cover the cost of creating them. The curse of the inverted pyramid had struck again: big cost structure, tiny utilisation of the capacity. Every year there was a shortfall, which the French government took care of where Aerospatiale and the engine specialist SNECMA were concerned, and the British government covered for Rolls-Royce and British Aerospace, in effect paying them a direct annual fee for sticking with Concorde. This was not optional. Without the spares Concorde would swiftly be grounded. So if BA were to become the sole custodian of the British Concorde fleet, it would have to take over the government’s role and start paying off the contractors’ shortfall on top of the list price for the spare parts. Which changed the whole basis on which BA calculated its operating profit. Suddenly the airline was no longer looking at a projected surplus of £10 million a year, but at a situation pushed way back towards the bare break-even point. John King had to ask himself if he was willing to tie up the chunk of BA’s capital that would be required to operate the plane, when the prospects were so uncertain of getting the kind of return that would justify the risk. Could the money be better deployed elsewhere? Was the ‘halo effect’ worth it?
King’s first priority was to get the yearly subventions to Rolls and BAe reduced to the point where he could see a clear profit margin re-emerge. Through the summer of 1982, BA pressed the contractors to cut costs. The revised estimates they presented first were refused by BA. King had a strong hand and he knew it. The March 1983 deadline was coming, when the government would cut off Concorde support payments unilaterally. BA was the only candidate to take them over. Essentially, he pointed out, BAe and Rolls had the choice between earning less from their Concorde departments and earning nothing at all. The contractors took the point. Assisted by the ingenuity of their Concorde staff, who were often committed to the plane in the same way that BA’s Concorde pilots were (and King was not), they came up with a minimised plan for its support. BA’s accountants crunched the figures. The £10 million-a-year surplus was gone for good, but an operating profit had reappeared in the projections. It varied between £3.5 million and £5.4 million, giving a £23 million total pot of profits over the next five years. OK. This was tight but it was doable. There was enough here to proceed to the next stage of negotiations, for Concorde’s operational finances were only half the problem. There still remained all the questions to do with ownership.
On 13 December 1982, Sir John King wrote a formal letter to Iain Sproat, the Under-Secretary of State for Trade. He laid out BA’s terms. If the airline could have the right to abandon Concorde in future; if in that case the airline would be safe from ever after paying the contractors to make spares for Air France; if, above all, the price was right – then, there was something to talk about. BA was ready in principle to take on Concorde. The government thanked the airline for its ‘positive attitude’, and in recognition of it, extended the deadline by one year to make time for negotiations. State funding for Concorde would now cease from 31 March 1984, and this time the date was final, because after that the money was already committed elsewhere. In fact, the effective deadline would come a trifle sooner. For the necessary legislation to be passed in parliament and the legal papers to be drawn up ready for March 1984, contracts would have to be agreed by December 1983. The Anglo-French side of the talks would be handled by the Concorde Management Board, the long-established Treaty body where the cogs of the two national bureaucracies meshed. But to thrash out the vexed issues remaining on the British side, a Review Group would be set up where the representatives of the Departments of Trade and Industry (now merging into the DTI) would face off against negotiators from BA.
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The events of the next year took place in a selection of conference rooms scattered around the DTI’s concrete behemoth of a building on Victoria Street. The members of the Review Group rarely seemed to gather in the same room twice. Sometimes there would be a scenic view out in the direction of Westminster, and sometimes there would be a window facing onto an airshaft, or no window at all, but there were always jugs of water on the table, and big cut-glass ashtrays, this being the period before British government offices became smoke-free zones. Fitted together afterwards in the memories of the participants, the different meetings became one long meeting. It was like a film in which the actors flicked abruptly from chair to chair and the backgrounds changed, yet the same conversation went on uninterrupted, hour after hour. Bruce Mac-Tavish, aide to Lamont at the Select Committee hearing and now Head of the Concorde Branch at the DTI, co-chaired the sessions with Brian Walpole of BA’s Concorde Division. Each was flanked by colleagues. Rolls-Royce and British Aerospace were not represented: when input was needed from, for example, Brian Trubshaw, by then head of BAe’s Concorde department, DTI officials would hold separate talks and report the results back. In theory, of course, everyone sitting around the expanse of institutional tabletop was a state employee, since BA was still nationalised; but the company men and the government men were divided by their opposing interests as much as any two parties are when one is buying and the other is selling.
A flurry of subordinate items had to be gone through, such as the question of how much product liability insurance should be taken out when the planes changed hands. But three main issues dominated. First, there was the question of who would pay for the parts of the fatigue testing programme that still remained to be done, even with the huge rig at Farnborough out of the picture. King’s letter to Iain Sproat had argued that the government should, on the grounds that it was ‘primarily concerned with design validation and aeronautical research’. Nonsense, said the government negotiators now, the tests were exclusively for in-service support; but anyway, they pointed out, using on King his own tactic against the manufacturers, the government’s contracts for doing the fatigue work had already – past tense – been terminated, with effect from 31 March 1984. Did BA really expect ministers to start all over again and go back to Parliament and ask it to vote new money? Surely you jest, they said. BA would either pay for it, or it would not get done, and Concorde would not fly. Met with this unassailable logic, BA withdrew the gambit. Or, as it said later in the bland prose of the Review Group’s published report, ‘BA concurred in this assessment’. Perhaps King had only been trying his luck anyway; seeing if he could pull a fast one on dozy bureaucrats. BA accepted the costs: £8.4 million for the rest of the fatigue programme, plus an eventual wind-down cost of £1.8–3.4 million. Assuming that BA was budgeting for the worst case, this made for a first charge of £11.8 million against the £23 million profit pot.
Then came the matter of quashing the old 80/20 profit sharing agreement. The government had never actually been paid any money, because there had never been any profit to share until 1981, and after that BA had been entitled to subtract all the losses of previous financial years for accounting purposes. Before saying goodbye to this last acknowledgement of the British state’s role in providing BA with its aerial Ferraris, the DTI team wanted the taxpayers to get their slice of at least one year’s profitable operation. They wanted 80 per cent of the estimated profit for 1983–4, once the last of the aggregated losses had been taken off the top. It came to £7.2 million. It was the government’s by right, under the existing contracts, so there was no real scope to negotiate. BA accepted the calculation. Total charge so far against the £23 million pot of profits: £19 milli
on.