International
Tuesday Newspaper Review - Irish Business News and International Stories
By Finfacts Team
Aug 29, 2006, 09:10

The Irish Independent also reports that Irish construction companies have won contracts valued at €76m for the building of the controversial Corrib gas terminal at Bellamaboy Bridge in north Mayo.

The Irish Times reports that Fine Gael has called on the Government to clarify the "very unusual" circumstances surrounding the signing of a €56 million computer contract between the Health Service Executive (HSE) and iSoft, a British firm at the centre of two inquiries into accounting irregularities.

It has emerged that the Department of Finance gave oral rather than written approval for the contract, which was then signed outside of business hours on Saturday, April 30th, 2005.

The contract was also the subject of a query to the Attorney General's office for advice on whether it complied with official tendering procedures.

It is likely that the contract will now fall within the remit of separate inquiries by two British financial watchdogs, which will concentrate on the firm's activities in the 24-month period ending April 30th, 2005.

The inquiries centre around concerns that the firm inflated revenues by incorrectly including contract revenue it had yet to receive.

Specifically, the Financial Services Authority will be investigating whether iSoft misled investors through incorrect claims about profitability. The Accountants Disciplinary Board is also to investigate more detailed aspects of the firm's accounting policies.

The firm last Friday posted losses of more than €500 million after it was forced to make major adjustments to its accounting procedures.

Its own auditors, Deloitte, have also raised concerns that it had incorrectly included revenue in its accounts "earlier than it should have been".

The firm's share price has plummeted since the revelations, while key staff involved in the controversy have either left or been suspended.

The firm holds one of the biggest technology contracts in the world, the €9 billion overhaul of the British National Health Service's patient record system, which is already two years behind schedule. The €56 million contract with the HSE is for a similar project in Irish hospitals.

The HSE has said €10 million has been paid to iSoft for its work to date, and that it was monitoring events "closely in the UK". However, it said there were various "safeguards" in the contract that protected the HSE's interest.

Concerns about the iSoft contract were first raised in the Dáil by Fine Gael last November.

Yesterday, Fine Gael leader Enda Kenny said that following the latest revelations about iSoft, the Government "must now explain if the irregular handling of this €56 million contract is part of the investigation being carried out by UK watchdogs".

He called on the Government to clarify if the events in the UK meant the original contract was now in jeopardy.

When the contract was first raised last November, the HSE said iSoft was originally chosen as preferred bidder in early 2003 following a full procurement process, but that the signing of the contract was delayed because of the restructuring of the health service at the time.

Yesterday a Department of Finance spokesman said the department provided verbal approval for the spending on April 29th. This was followed by written approval early the next month.

Emmet Oliver in The Irish Times writes that international attention on the airline is growing as its market launch date is announced.

The Government has finally announced its intention to seek a listing for Aer Lingus on the London and Dublin stock exchanges, with a separate private placement of shares in the US.

We know it will happen in September, not October as some reports suggested, and we know what the funds will primarily be used for - fleet renewal. But despite all the talk at Government and company presentations yesterday, the key judgment on the sale has yet to be delivered.

Dermot Mannion, the airline's chief executive admitted as much yesterday when he said: "It's now time for us to submit ourselves to the judgment of the market".

That judgment will be delivered within weeks and the valuation put on Aer Lingus will be keenly watched.

Indications last night were that the company could attract a valuation of €840-€940 million, with some optimists plumping for €1 billion.

The good news for the carrier is that analysts in the UK and Ireland, so far at least, have been broadly supportive. Far from being a liability, the presence of Ryanair in its home market has helped sentiment for the airline.

The sense that Aer Lingus has managed to compete with Ryanair and still maintain decent margins is lauded by analyst opinion. But there is some concern about where the growth is going to come from.

For example an EU-US "open skies" deal has still not been agreed and while the US is clearly a market worth exploiting, just how many lucrative US routes are waiting to be tapped by Aer Lingus?

There is also a sense that Aer Lingus will not be able to grow aggressively for some time, even with the best of intentions.

For example if it ordered a new long-haul fleet tomorrow it may not get possession of these aircraft for several years, although cancellations by other airlines can help to free up planes.

Both Airbus and Boeing have long queues of customers, many ordering far more planes than Aer Lingus will ever buy.

Its current long-haul fleet (seven Airbus A330s) has an average age of nine years, but several are significantly older. The problem is many of them are simply incapable of flying to long-haul destinations like Hong Kong or Sydney.

So while long haul is the key growth driver, overnight success in this area is not likely. With investors facing uncertainties like that, Aer Lingus stock will have to be attractively priced, although nobody likes to use the word "cheap".

The issuing shortly of a price range for the shares will wipe away some of the uncertainties. The company is anxious to have the broadest price range as possible so that its options are kept open right to the end.

The international attention on the airline is unprecedented. For example, Aer Lingus is the first airline to float in London in six years. The airline's management team has not previously been exposed to this level of scrutiny, although its executives believe the airline, with its hybrid offering of short and long haul, will chime with the investment community at home and abroad. Aer Lingus's cost base is well ahead of other flag carriers.

The airline industry is notoriously unpredictable and it is conceivable that the eventual price could be influenced by a specific event, even something relatively tangential like a pronouncement on oil prices by an Opec official can move airline stock prices.

Trading at Aer Lingus for the first half of the year is believed to be in line with last year. That would mean operating profits of €70-€75 million. Sales are likely to be down, however.

While its new Airbus short- haul fleet gives the airline higher capacity, its average fares are falling and that has pulled down revenue.

However, while the first half of the 2006 results are important, most analyst opinion is already shifting toward 2007. The airline has hedged only 17 per cent of its 2007 fuel requirement and with prices stubbornly hovering just over $70 a big decision has to be made on at what price to lock-in.

But the fuel is of relatively minor importance compared to the decision facing the airline and its team of advisers in a fortnight's time. That remains the price it puts on the airline.

The Irish Examiner reports that the ISEQ index capitalised on Friday’s strong numbers, pushing ever closer to the 8,000 point level of May.

The ISEQ index mirrored gains on most European bourses closing 43.63 higher at 7,917.47.

The financials had a mixed session. AIB added 1c to €20.20 and Anglo-Irish was the only other positive in this sector adding 12c to €12.92. Bank of Ireland dropped 13c to end the day at €14.83, while Irish Life and Permanent followed this negative trend shedding 5c to €19.25.

The construction sector was a positive driver on the market overall with CRH jumping 37c to €26.17, Kingspan and Grafton rose 8c and 6c with the former ending at €14 and the latter at €10.36.

Elan had a very strong day, tacking on 41c to €12.60. Ryanair also gained 13c to close out the day at €7.23. This came on the day that Aer-Lingus announced its flotation.

The Financial Times reports that Universal Music, the world’s largest music company, is backing a start-up that will allow consumers to download songs for free. It will rely on advertising for its revenues, offering a different business model from that of Apple Computer’s popular iTunes music store.

The move reflects music companies’ willingness to experiment as they try to capture some profit from the boom in digital distribution still dominated by illegal file-sharing networks.

The service, SpiralFrog, represents a departure from Apple’s 99 cents-a-song business model and other legal download services which charge a subscription fee by being completely free. It is due to start up in December.

A report released last month by the International Federation of Phonographic Industries revealed there were still 40 illegal downloads for every legal one.

Although Apple’s iPod and its iTunes music download service has 80 per cent of the market for legally downloaded music, competition is expected to hot up in the run-up to Christmas.

This year, the IFPI has predicted that 60m music players will be sold worldwide, many of them MP3 players not compatible with Apple’s services.

As well as start-ups such as SpiralFrog, established companies are getting ready to flex their muscles. Microsoft is to launch Zune, which will offer music players and a music download store. MTV has launched Urge, a service that has downloadable music and music videos via subscription.

“Offering young consumers an easy-to-use alternative to pirated music sites will be compelling,” said Robin Kent, SpiralFrog’s chief executive and the former head of the Universal McCann advertising agency.

Mr Kent has held talks with labels Warner, EMI and Sony-BMG and hopes they will be lured by the surge in online advertising.

Merrill Lynch last week raised its forecast for the sector’s growth, predicting it would expand by 35 per cent this year in non-US markets to $11.6bn (Ł6.1bn). US growth is expected to increase by nearly 30 per cent to $16bn.

Perry Ellis, the fashion company, said it would advertise on SpiralFrog. Levi’s, Aeropostale, Benetton and others have expressed interest. “Our audience is into music and can be more easily reached on the web,” said Oscar Feldenkreis, president of Perry Ellis International.

Other music services are looking to advertising for their revenues. The new Napster allows consumers to listen to up to five tracks for free while they view advertising. Meanwhile, video-sharing sites, such as YouTube, have held talks with music companies about showing music videos, which would then be supported by advertising.

Mr Kent said his research revealed that young consumers would be willing to endure advertising as long as the brands and products were relevant to them.

The FT also reports that Gordon Brown, the chancellor of the exchequer, on Tuesday issues a fresh call for public sector pay restraint, saying he is calling on Whitehall departments to base all public pay settlements next year on a 2 per cent target, below the 2.5 per cent average pay rise achieved in 2006.

Writing in the Financial Times, in his first public comments since the summer, Mr Brown gives an upbeat assessment of UK growth, declaring that the country’s economic performance “has defied the pessimists once again”.

But Mr Brown also warns that the world has been through “a turbulent few months” and says that all governments must remain wary of economic risks.

He singles out the threat of higher inflation as one of the central challenges, praising the recent quarter-point rise in interest rates by the Bank of England as “forward-looking and pre-emptive”.

Preparing for the start of a new political season at Westminster – one that is almost certain to see Mr Brown succeeding Tony Blair as prime minister within 12 months – the chancellor appears confident that UK growth will exceed the Treasury’s 2-2.5 per cent forecast in 2006.

But in spite of what he calls the “resilience” of the UK’s economic performance this year, Mr Brown also warns that the world economy continues to face “global risks” and “an uncertain autumn”.

In particular, as he prepares for next month’s annual meetings of the World Bank and IMF in Singapore, Mr Brown expresses fears that a surge of protectionist sentiment is developing across the world.

Domestically, and as he prepares for a possible leadership contest next year, Mr Brown pledges that he will “resist easy options” and seek to “strike the right balance between keeping tax low and the needs of public investment and stability”.

The New York Times reports that the Chrysler Group, which depends more heavily on sales of pickup trucks and sport utility vehicles than any other Detroit automaker, said Monday that it expected gasoline prices to remain at $3 to $4 a gallon for the rest of this decade.

The comments by Thomas W. LaSorda, Chrysler’s chief executive, are the first time a Detroit automaker has issued a specific forecast on gas prices since they began climbing to $3 a gallon and higher.

Ford’s chief sales analyst agreed Monday that high gas prices were not a temporary phenomenon, although he did not cite a price range. The analyst, George Pipas, said the auto company expected gas prices to remain high, volatile and unpredictable.

Together, the comments signal a recognition that the two automakers may have to fundamentally change their product mix to put more emphasis on fuel-efficient vehicles — a move General Motors says it already is making.

Mr. LaSorda, who had traveled here for the start of production of a four-door version of the Jeep Wrangler, was asked whether gasoline prices had peaked. “I would hope so,’’ he replied, “but we’re planning internally as if it is $3 to $4 a gallon.”

Mr. LaSorda said Chrysler had prepared a business model based on the assumption that gas prices would remain in that range for the next three to four years. That is about the period of time it takes for an automaker to develop a new vehicle.

“We are looking at it as if it’s going to be much higher, rather than hoping it comes down,” Mr. LaSorda said. He added, “Hopefully we can fight back.”

If Chrysler’s assumptions are correct, it spells more trouble in the near term for the traditional Detroit companies, whose sales and market share have dropped this year as consumers have shifted away from big vehicles to more fuel-efficient models.

About 75 percent of the vehicles that Chrysler sells are pickups, sport utility vehicles and minivans, compared with about two-thirds of the sales by the Ford Motor Company and about 60 percent of the vehicles sold by General Motors, according to the industry statistics firm Autodata.

By contrast, the lineups at Toyota, Honda and Nissan are still more than 50 percent cars, one reason Japanese auto companies have achieved sales records this year.

Although Chrysler plans to introduce more fuel-efficient vehicles in coming months, it may face a struggle to lessen its dependence on sport utility vehicles and pickups. Indeed, Mr. LaSorda said that Chrysler believed there would still be a market for vehicles that seat five or six passengers.

Given the long lead time auto companies require to develop new vehicles, "I don’t know if they will be able to come out with new products that quickly,” said Jesse Toprak, a senior analyst with Edmunds.com, a Web site that offers car-buying advice.

Last month, Chrysler’s share of the American market dropped to just 10 percent, compared with 13.3 percent in July 2005. Chrysler fell to fifth place in July, behind G.M., Toyota, Ford and Honda.

Chrysler is not the only company feeling the pinch of higher gasoline prices. Industrywide, pickup truck sales have dropped about 17 percent this year, while sales of sport utility vehicles are down about 9 percent. Car sales, by contrast, are up 3 percent, according to an Edmunds estimate.

Mr. Toprak said none of the Detroit auto companies thought high gasoline prices would hurt sales so much. “They saw it as a temporary phenomenon,” Mr. Toprak said.

Gasoline prices have dropped about 15 cents the last two weeks, to a national average of $2.78 for unleaded fuel, according to the Lundberg Survey. That has led some analysts to predict that prices have peaked for the year, since gasoline is generally cheaper in the fall than during the summer vacation season.

Asked about gasoline prices, Mr. Pipas, of Ford, said, “We don’t see the price of gasoline returning to the levels that we all enjoyed in the 90’s and the early part of this decade.”

He went on, “The base case assumption around which we’re planning our business is that gas prices remain high. The days of inexpensive gasoline are gone.”

Mr. Pipas declined to be specific about how high gas prices may rise. “I think only a fool would forecast gas prices,” he said.

G.M. forecasts prices internally but does not disclose the figure, said a spokesman, John M. McDonald.

G.M. has been promoting the fuel efficiency of its car lineup, saying it offers more models that get 30 miles per gallon in highway driving than any other company. Through July, those vehicles accounted for about 34 percent of G.M.’s overall sales for 2006, according to an estimate by Edmunds.

Mr. McDonald said G.M. was paying more attention to the fluctuations in gasoline prices, rather than the level itself. “It’s the fluctuation that makes people nervous,” he added.

Officials at Toyota and Honda, which have both gained market share this year because of their reputation for fuel efficiency, said they were prepared for a sustained period of high gasoline prices.

“We don’t anticipate that gas prices are going to drop significantly,” said Chuck Schifsky, a Honda spokesman. He added, “We’ve known for a long time that this was coming, and it’s liable to get worse before it gets any better.”

Mr. Toprak at Edmunds said automakers were rattled by the prospect of another hurricane like Katrina, which sent gas prices soaring a year ago. “Who knows what is going to happen? It could make a worse-case scenario even worse,” Mr. Toprak said.

The NYT also reports that with parts of South Dakota at its epicenter, a severe drought has slowly sizzled a large swath of the Plains States, leaving farmers and ranchers with conditions that they compare to those of the Dust Bowl of the 1930’s.

The drought has led to rare and desperate measures. Shrunken sunflower plants, normally valuable for seeds and oil, are being used as a makeshift feed for livestock. Despite soaring fuel costs, some cattle owners are hauling herds hundreds of miles to healthier feedlots. And many ranchers are pouring water into “dugouts” — natural watering holes — because so many of them (up to 90 percent in South Dakota, by one reliable estimate) have gone dry.

Gov. Michael Rounds of South Dakota, who has requested that 51 of the state’s 66 counties be designated a federal agricultural disaster area, recently sought unusual help from his constituents: he issued a proclamation declaring a week to pray for rain.

“It’s a grim situation,” said Herman Schumacher, the owner of a livestock market in Herreid, S.D., a small town near the North Dakota line where 37,000 head of cattle were sold from May through July, compared with 7,000 in the corresponding three months last year. “There’s absolutely no grass in the pastures, and the water holes are all dried up. So a lot of people have no choice but to sell off their herds and get out of the business.”

Drought experts say parts of the states most severely affected — Nebraska, the Dakotas, Montana and Wyoming — have been left in far worse shape because of recent history: several years of dry conditions, a winter with little snow and then, with moisture reserves in the soil long gone, a wave of record heat this summer.

By late August, rain had fallen several times in some areas, but Bob Hall, an extension crops specialist at South Dakota State University, said it amounted to “a drip in a bucket.”

“The bottom line is that even if we got relief starting today, at this minute,” Dr. Hall said, “it would take a few years economically to recover.”

As if earless, shriveled cornstalks were not enough, farmers and ranchers say they carry a sense that their counterparts elsewhere seem to be doing just fine, leaving them with what feels like an invisible disaster, unnoticed by the outside world. Some farmers in Midwestern states like Illinois, Indiana and Ohio, as well as some in the eastern sections of South Dakota and Nebraska, tell of a respectable growing season.

Even here in Mitchell, about 70 miles west of Sioux Falls, some residents did not grasp the scope of the drought until the Corn Palace, this city’s tourist-luring castlelike civic center wrapped in hundreds of thousands of ears of corn, announced that because there was not enough of the crop, it would not redecorate this year for the 2007 season.

“We don’t have any record of anything like this happening before,” said Mark Schilling, the director of the Corn Palace, a campy, 114-year-old landmark promoted on highway billboards with endless corn puns.

“But if there’s not a crop, there’s not a crop,” Mr. Schilling said quietly.

After weeks and weeks with little rain and high temperatures, one farmer, Terry Goehring, watched the mercury spike to 118 degrees in his Mound City, S.D., field one day in July. That was it. Mr. Goehring, who has farmed since 1978, sold half his 250 head of Angus cattle.

“There was no corn,” he said. “There was no hay. We had nothing. And in that moment, I knew there was no choice.”

Climatologists with the National Drought Mitigation Center at the University of Nebraska-Lincoln said scientists deemed the weather conditions and its effects in the areas of the worst drought a once-in-50-years experience.

In some cases, it has been worse than that. On July 15, a weather station in Perkins County, S.D., near North Dakota, recorded a temperature of 120 degrees. That matched the highest ever reported in the state since the start of such record-keeping in July 1936, said Brian Fuchs, a climatologist at the Nebraska center.

Given such conditions, it is hardly a surprise that crop estimates are so gloomy. Steve Noyes, deputy director at the South Dakota field office of the government’s National Agricultural Statistics Service, said the winter wheat crop here had shrunk by 43 percent from last year’s; alfalfa hay is expected to be down by 35 percent; and 22 percent of pasture land is deemed “very short,” with 35 percent “short,” figures significantly worse than those of a year ago.

For the most part, commodity prices have not been affected, said Greg Lardy, a beef cattle specialist at North Dakota State University. While the region affected is hard hit, Dr. Lardy said, it has not been large enough to leave a mark on prices, particularly since some other regions have experienced strong seasons.

A walk through the fields of David Gillen, whose family has farmed in White Lake, 35 miles west of Mitchell, since 1897, is a tour of a drought. While some fields have survived, others are not worth harvesting. There, corn that should have been lanky by now is short and yellow, and many stalks carry no ears: the pollination, which should have occurred at the end July, never happened at all, given the extreme heat.

“This is my favorite time to be out here looking at the fields,” Mr. Gillen said. “But there’s nothing to see.”

While the soybean fields may improve with the recent rains, it is too late for this year’s corn, a circumstance that surely would have made the creators of the Corn Palace cringe.

In 1892, the Corn Belt Real Estate Association decided it made sense to nail ears of corn to the side of the palace as a salute to the bounty that the region’s soil could produce, and as a retort to those (including Lewis and Clark) who seemed to doubt that these seemingly wild lands could be farmed.

So for years (and through three different palaces in Mitchell), annual themes (like the “Space Age” in 1969 and a “Salute to Rodeo” this year) have been captured in images made all of corn here, at a cost, in today’s prices, of about $140,000 a year. But as this summer proceeded and the sun blazed on, the palace board nervously monitored the fields whose dramatically colored corn goes to the palace, waited for rain and consulted with an agronomist.

With fields of certain colors struggling, the board decided the murals it had planned for the 2007 theme, “Everyday Heroes,” could not be created, said Mr. Schilling, the palace’s director. Wade Strand, the farmer who grows all of the palace’s colored corn, took the news “pretty hard,” Mr. Schilling said.

Looking back, Mr. Strand said he had believed that he had grown enough corn. He said he had hoped the designs could be made without orange tone and shades of black and light red. “But they felt that the colors I was missing were strategic to the theme,” Mr. Strand said.

Mr. Schilling said he believed that the current murals would remain intact through a second year, though he acknowledged that they might fade a bit. The vulnerabilities now, he said, are the risks inherent in art, or anything, made of corn: the effects of birds and wind, sun and heat.