Here's an idea to send Lady Thatcher completely over the edge: turn British Airways into a European firm

If you want to see the nation state holding out against the forces of globalisation, look at the international airline industry. Even after a global downturn has undermined the profitability of the so-called national flag carriers, it is unbelievably difficult for an airline from one country to merge with a foreign rival.

Most of the intercontinental airlines make colossal losses and are therefore cutting their fleets and staff numbers. If this were any other industry, the big companies would now be taking each other over and pensioning off an entire generation of superannuated trolley dollies, heartless as that would be.

However, international agreements prevent this industry, which has played such a big part in globalisation, from reconstructing itself on global lines. It all comes down to the arcane system for allocating landing rights to airlines. They are granted to British Airways because it is British, and to Lufthansa because it is German - and not because either offers a reasonable service to travellers. In other words, Lufthansa's right to fly from Frankfurt to Tokyo would immediately be nullified if it ever ceased to be a German company.

International aero-political law (whatever that may be) states that more than half of BA's shareholders have to be British, and more than 50 per cent of KLM's have to be Dutch. Airlines can be privatised, but they cannot be bought and sold on the international capital markets. So although BA is desperate to buy KLM, there are big obstacles in its way.

Lufthansa and BA have recently predicted that Europe's 15 or so international airlines will shrink, through consolidation, to just three within the foreseeable future, with Air France as the third member of the surviving troika. But this cannot happen without a fundamental overhaul of the nationality test for the allocation of airport slots. What is being mooted in Brussels is the creation of a new European identity for EU-based airlines. For the purposes of landing rights, BA would no longer be British, but European.

This would represent a significant transfer of national powers to Brussels, and will therefore be controversial. So the main benefit could be that the shock will be enough to drive Lady Thatcher completely over the edge - you may remember that she savaged a BA promotional display with her hanky a few years back, when her favourite privatised company took the Union flag off its tail fins.

However, even with this incentive, European ministers cannot simply ordain that all their airlines should henceforth be seen as corporate citizens of a European superstate - though they are fearful that, in the absence of such change, US airlines will become utterly dominant. For the reform to have any force, BA's new European passport would have to be recognised in Washington, Tokyo, Moscow and the seats of all world governments.

Having said all that, big has rarely been beautiful in this industry. Most of the intercontinental airlines are lumbering, inefficient fatties that have served their shareholders extremely ill. The smaller, no-frills, short-haul airlines - notably Ryanair and easyJet - are vastly more impressive as businesses.

The analysis we do at QUEST shows that only easyJet and Ryanair have any kind of half-respectable record of earning more than their financing costs over the past decade.

But I retain a naive belief that the market, not ministers, should determine how many airlines can be sustained.

I asked Rod Eddington, BA's chief executive, about all this recently. He said that BA would not drop the "British" from its name, because he is persuaded that the brand has a following. But this Australian businessman employed no patriotic defence of the corporate moniker. Quite right, too.

Merrill Lynch has constructed a new City confidence index, the WWQ, which stands for "Who Will Quit?". The world's biggest securities firm has offered generous voluntary redundancy terms to around 50,000 of its 64,000 brokers and bankers. The quantity and quality of those who take the cash (which will run well into seven figures for some) will speak volumes about how the megabucks end of the financial services industry sees its own future.

The striking thing about Merrill's behaviour is that it is being remarkably unruthless about the way it is pruning its costs. Its voluntary package implies that it does not much mind who leaves the bank. It has come over all soft left when "downsizing", after decades of running itself on the Darwinian principle that only the biggest fee-earners should thrive and survive.

Merrill has said it may refuse to allow its top stars to leave. But anyone refused permission to depart is probably going to be pretty limp and demotivated for some considerable time. And there is also a risk that the SVPs - or stupendously vacuous plonkers, those utterly incapable of finding such remunerative employment elsewhere - will be those who will refuse to be budged, in the expectation that Merrill will at some point be forced to make them an even more generous offer to go.

I suppose I should applaud Merrill's eschewing of the ruthless hire-and-fire mentality that characterises so much of its industry. I know I ought to feel compassion for the poor little rich kids whose futures have been blighted by the investment banking recession. But all I see is a great franchise behaving rather oddly.

Robert Peston is editorial director of QUEST(TM);; e-mail:

This article first appeared in the 12 November 2001 issue of the New Statesman, The New Statesman Essay - The Empire strikes back