How could they have been so silly as to single source it ....
Indeed, how could they have been so silly ....
Well, management are incentivised for profitability and increased dividends. And profitability this year, not at some date 10 years down the line.
Back in 1997 Bob Ayling (remember him) and crew were looking to get some increase in the finances by selling off the catering arm. So what was it worth ?
As it stood, not a lot. 5 times annual profits (not much) plus the scrap value of the equipment that wasn't just leased. Not much there either. Say £1m.
OK. But sell the business with a contract to supply some BA meals for the next 5 years. Now you could get £10m as the buyer can see guaranteed revenue.
What about a longer contract, for the next 10 years. Now it's worth £25m.
And what about an EXCLUSIVE contract for the next 10 years, keeping any competitor from growing at Heathrow. Now it's worth £50m.
OK Mr Ayling, we can have either £1m, £10m, £25m or £50m in cash for catering. Which one do you want ? Which reflects most in your bonus for this year. By the way, you are off at the end of this year, aren't you ....
Any problems they stacked up for the future are completely by the by.
Many shares in companies like BA are held by pension funds, who are under constant pressure to report maximum CURRENT YEAR income from their investments. It all got solemnly reported in league tables in 1997 as "Good/Bad investment profits by pension funds", in the same newspapers who are currently criticising the BA single-sourcing. Again futures are someone else's problem. So that's why Bob Ayling was on the incentive deal he was on. The pension funds in turn were paying out pensions to those who wanted the maximum cash return in the current year. Quite possibly half the pensioners being paid out by a pension fund in 1997 are dead now and therefore couldn't have cared less about any long-term future problems.