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In this week’s Commercial Awareness, we discuss personal debt, issues around PCP, Ryanair’s response to their cancellation crisis and the RBS chairman gives his thoughts on Brexit.
Personal debt on the rise
In recent years, personal debt has been increasing and now stands at £201 billion across the UK - in touching distance of the £208 billion peak during the 2008 financial crisis. The debt is largely due to borrowing on credit cards, personal loans and car finance, but should we be worried about the levels of debt? The Bank of England clearly is and has issued a warning about the rise banks face. After stress testing different scenarios, they reported banks could incur a £30 billion loss if an economic downturn caused higher unemployment and interest rates. Despite the lessons of the financial crash a decade ago, the implication is that banks are underestimating their exposure to bad debt (debt which the consumer will not be able to pay back). The Bank has already told financial firms to increase their reserves of capital to protect themselves against this bad debt.
With interest rates set at an all-time low of 0.25%, it’s cheaper for consumers to borrow capital, but this doesn’t mean they definitely should be. Figures suggest 8.8 million people in the UK are borrowing to pay for essential bills. Either they don’t have sufficient funds to afford their living costs or they aren’t living within their means. While credit card lending is up 9% a year and personal loans up 7%, it’s actually a new trend in purchasing cars which is leading to the biggest rise in personal debt (15% annually).
What’s PCP and why’s it important?
Personal Contract Purchase or PCP is a finance deal changing the way the UK purchases cars. Instead of buying the car outright, the consumer can pay a deposit for a new car, then monthly payments for two to four years. At the end of the contract, the customer has the option to pay a remaining pre-set fee to own the car outright (known as a balloon payment) or give the car back. There have been suggestions that the deal doesn’t always benefit the consumer, but there could be wider economic implications for this type of financing.
The checks on people that sign up to a PCP deals has been widely criticised for not being thorough enough, so they could be selling cars to customers who are at high risk of defaulting on their monthly payments. This shouldn’t be a problem because in this case, the car company can repossess the car and sell it second hand. However, there’s a suggestion that car manufacturers have been over-valuing the future value of these second hand cars - therefore they won’t be able to make as much money on them overall. With more consumers than expected giving the cars back after the contract and also defaulting on payments, this could create a blackhole in the finance for car manufacturers and companies that underwrite the debt.
Questions to ask yourself… How involved should government organisation be in controlling personal debt? What will be the impact if interest rates rise?
Companies to watch
The budget airline is still dealing with the fallout, after they cancelled over 20,000 flights during the autumn and winter. This means 400,000 people have now been affected by cancelled flights, which has been blamed on problems with pilot holiday rotas - the airline claims they have re-routed or refunded 90% of these passengers, but still could face legal challenges due to their response.
The hardline CEO Mike O’Leary took the step to publicly pledge to Ryanair’s pilots offering improved pay and clearer career progression - 900 pilots left the company last year, and O’Leary is keen to avoid any more staff dissatisfaction. This appears to not have had the desired effect and there is talk amongst pilots to organise some form of industrial action against the firm.
Despite these woes, the firm had a 10% increase in booking compared to the previous year. Undeterred by the recent troubles, customers still have the appetite for cheap deals on their holidays.
RBS Chairman Sir Howard Davies has warned the government it has six months to make significant progress on a transitional deal with the EU before financial firms start triggering contingency plans to move their workforce abroad. It comes at a tricky time for the UK, after some rounds of negotiation have stalled in recent months. There’s the suggestion that the EU isn’t in any hurry to carry out talks, hoping over time big business relocates workers from London to EU business hubs. This is not a widespread opinion, but the focus is definitely on the UK to drive the talks forward, despite the political uncertainty over Theresa May’s government.
Like many, Sir Howard Davies has called for more certainty before the new tax year begins at the start of April. However, he did add in his speech that RBS would see a “relatively small” number of jobs move away from the EU if contingency plans were to be activated.
Questions to ask yourself… How can Ryanair improve its reputation after the cancelled flights? Should business be the government’s priority when negotiating a Brexit deal?
Books on the comeback
It was a big week for publishers as 505 new titles were released on a single day (known as “super Thursday”). The period between now and Christmas is essential for book sales - last year, it’s reported that 66 million books were bought in the run up to Christmas. There has been a recent trend for boosts in print sales, while demand for ebooks has tailed off. In 2016, book sales increased by 8% compared to the previous year, but ebook sales declined by 3%. This trend goes against expert predictions a few years back, but it appears that customers in a digital age are aiming to cut down their screen time as much as possible. Plus, a physical book makes a better gift.
This is welcome news for book shops, who have struggled recently against the competition from ebooks and Amazon. Due to the sheer scale of Amazon, they are able to offer prices which means making little to no profits on some of their biggest selling titles. Book shops don’t enjoy this luxury, so aren’t able to compete on price.
Question to ask yourself… What can book shops do to remain competitive in the market place?