Bad excuses for bad businesses

Almost two hours late and on his third pair of trousers, our head of multi-asset investments, David Coombs, isn’t in the mood for half-baked equivocations by UK company managers.

Airplane wing in the air

By David Coombs

Last week I ended my Ditch the Models tour in Jersey. That sounds like the last-hurrah of a has-been band, but I promise it gets better (or, perhaps, worse)!

I flew to the foggiest of all the foggy isles from Southampton Airport courtesy of “Flymaybe”. This was days after Flybmi (Flydefinitelywon’tbe) had entered administration, blaming Brexit among other things.

As you will be aware, Flybe’s share price has recently nose dived (sorry, couldn’t help myself). Brexit? My Jersey flight was delayed an hour 40 minutes; the last time I attempted this route it was cancelled. My overnight bag, which I carried on board with Aer Lingus, easyJet and BA on this tour, was deemed excessive by 2 centimetres and I was charged £80.

A Flybe agent was hanging by the security queue to ensure all passengers had their cabin baggage checked for size. Hastily assembled Flybe-branded cardboard boxes were used to measure. The agent admitted the company’s limit was now smaller than other airlines.

There were no warnings on Flybe’s website or flight confirmations regarding this. The fact they had staff patrolling the security queue and had new (exceptionally short-term) boxes felt to me that this was a cynical attempt to catch people out and improve short-term cash flow. Many passengers, both in Southampton and Jersey, were appalled. So I believe this business’s woes are not about Brexit.  It’s a bad company run by poor management that think treating customers appallingly is the way to a profit. Companies like this deserve to – and ultimately will – fail.

I have been struck by the number of UK companies blaming Brexit for poor results. I’m sorry, but I am wholly unconvinced. Retail companies want governments to intervene on business rates so they can get a leg-up on Amazon. I would prefer that they remodelled their businesses to make them more relevant to customers rather than looking for indirect subsidies.

Have you noticed there is always something to blame? Fickle customers, the inconsistent weather (in the UK – surely not), Brexit, the government, Amazon, the list goes on …

I do think many quoted companies in the UK have a real constraint, however: our high-dividend culture. I think many companies would benefit from cutting dividends and using the cash to reinvest more into their businesses. I think this would help many ailing companies futureproof themselves from the fast-developing world of e-commerce. Unfortunately, chief executives are reluctant to do this, as their top shareholders (probably fund managers with their own income requirements) will vote with their feet. The exodus of cash-hungry investors would cause the share price to tank, busting the value of all those options dangled in front of management and probably even costing the chief executive their job.

In my more idle moments, I wonder if this is a good part of why the UK has such a dismal record of investment. UK Research and development spending has been virtually stagnant at just 1.5% of GDP since the mid-nineties. That’s well below the US’s 2.75% blue-sky spending and even that of the sclerotic EU.

Some British companies would probably be better off going private, ending the dividend altogether and fixing up their business models. Once done, they could come back to the market in much better shape. Let’s face it though, that is not going to happen.

A no deal Brexit will, in all likelihood, precipitate a recession in the short term and I regret this will continue to provide poor management teams cover to hide their inadequacies. I reiterate that we seek to invest in companies that align the customer with the other stakeholders, and not after or – worse – ignored altogether. We believe companies that do this will survive Brexit and the threat of disintermediation.

Those that don’t (Flymaybe) will fail – spectacularly quickly or they will meander to a slow death. That is capitalism. We need to invest thoughtfully as opposed to passively. We need to invest in the US and Asia, where capital, on the whole, produces a better return.

I bet the hedge fund manager sitting on a big stake in Flybe has never set foot on one of their planes.

Photo by Leif Inge Fosen on Unsplash.