Debenhams looks to be in a hole as it heads into downturn loaded up

OUTLOOK

A blip, an aberration, a cock-up by the Office for National Statistics, or just another reminder that the bleak inevitability of lower living standards warned of this week by the Governor of the Bank of England has yet fully to be appreciated by the profligate British shopper?

According to official figures this week, retail sales last month rose at their highest rate in nearly 30 years, apparently oblivious to the credit crunch, rising prices and the fast slowing economy. Yet if this was indeed the case, it hasn't taken long for the gloom to reassert itself.

By yesterday, John Lewis, the department store and supermarket retailer to the middle classes, was reporting a sharp fall in sales for last week, while shares in Debenhams were plummeting on broker suggestions that the company might soon need to refinance itself.

As our story on page 52 reports, credit insurers are becoming so concerned about the risk of default on the high street that they are either refusing or scaling back cover in supplying to some retailers. Blacks Leisure is the latest company where suppliers have struggled to get cover on pre-existing terms, but it is by no means the only one.

Companies that can't obtain insurance are less likely to supply, and therefore need fewer employees. Slowly but surely, the crunch which began life as a faintly unreal loss of trust between bankers is working its way deep down into the real economy, with rising mortgage rates and now more restrictive credit insurance.

None of this bodes well for the high street. PiperJaffray, the investment bank, is particularly bearish about the outlook for Debenhams, which it reckons is now so squeezed by excessive debt and declining sales that it has few options but to raise additional capital from investors or bankers, even after cutting the final dividend. First the banks, then the housebuilders, and now the retailers. Like a falling row of dominoes, one by one all are being forced to come cap in hand to shareholders.

Debenhams has been an accident waiting to happen ever since being acquired by private equity back in 2003. In repeated recapitalisations, the new owners then stripped the business down to the last lightbulb, before a couple of years ago flogging the hollowed-out husk back to gullible stock market investors. The shares are now worth a quarter of what they were relisted at. The company's previous private equiteers have long since pocketed the spoils and flown the coop, leaving ordinary shareholders and bankers to sort out the mess now that the laws of economics are reasserting themselves.

We've already seen some smaller retailers go to the wall. Eventually there will be a biggie, notwithstanding last month's apparent rebound in high street sales. Every downturn has its corporate casualties. As the tide recedes, the wrecks disguised in the good times by the swirling waters become exposed. A number of masts are already peeping up above the retreating waves.

That's the trouble with airlines

The launch this week of OpenSkies, an offshoot of British Airways that seeks to take advantage of liberalisation in air travel between Europe and the US, seems to fly in the face of the grim reality of soaring costs and fast slowing demand that afflicts the airline industry.

Willie Walsh, the British Airways chief executive, has expressed the view that there is at least one positive in the present downturn - that lots of weaker players will go bust, thereby reducing the problem of overcapacity. Yet here he is further adding to the problem rather than subtracting from it.

So why is British Airways doing it? On the plus side, OpenSkies is a rather different beast to the growing number of European airlines which have either already gone bust or are deep in the mire. For the time being, it is just one aircraft, operating largely at the premium end of the market, on just one route - Orly/New York.

This might seem to make it similar to Silverjet, which went belly- up last week. What's different is that OpenSkies has the full weight of the BA marketing and operational machine behind it. What's more, it's very much an experiment in the new, deregulated environment that's meant to exist between America and Europe. As an airline that expects to survive the current downturn largely intact, BA has to be in this space, even if for a time it's likely to be loss-making.

All the same, it's not exactly the best time to be starting a new airline. Analysts at Morgan Stanley this week warned that the present implosion would be worse than both the early 1990s and the one that followed in the wake of 9/11. With demand slowing, airlines should by rights be cutting fares to support traffic volumes. Steeply rising fuel costs are forcing them to do the very reverse, creating the potential for a vicious downward spiral in passenger numbers.

The International Air Transport Association is forecasting that on the basis of current oil prices, the industry as a whole will lose more than $6bn this year. Even relatively strong airlines such as British Airways, with operating margins of more than 10 per cent in the good times, will struggle to make money with fuel costs so high.