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QUEST MEANS BUSINESS

Greenspan Testifies on Capitol Hill; Interview With CEOs of Daimler, Renault-Nissan

Aired April 7, 2010 - 14:00:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


(BEGIN VIDEO CLIP)

ALAN GREENSPAN, FMR. CHAIRMAN, U.S. FEDERAL RESERVE: I was right 70 percent of the time, but I was wrong 30 percent of the time.

(END VIDEO CLIP)

RICHARD QUEST, HOST, QUEST MEANS BUSINESS: That's an awful lot of mistakes in more than 20 years, Alan Greenspan, on his role in the financial crisis.

Tonight cars showing with a difference, the bosses of Daimler and Renault tell us about their new pact.

And what a carry on, the airline that says you'll have to pay to take your own bags on the plane.

I'm Richard Quest, and yes, I mean business.

Good evening.

It was a reputation once thought unassailable. Now, once again, on the line Alan Greenspan, the former chairman of the Federal Reserve under four U.S. presidents, has been defending his tenure as head of U.S. central bank in a high-profile hearing in Washington, as the affects of the worst financial crisis since the great depression still linger.

How much responsibility did Alan Greenspan accept and how much did he simply say was victim of circumstance. Maggie Lake is in New York and joins us. I read a large part of his testimony. He basically says that financial mishaps, and misdeeds, and crisis, are inevitable.

MAGGIE LAKE, CNN FINANCIAL CORRESPONDENT: That's right, Richard. Thinks happen, right? But he did sort of address his role in all of this. And it was interesting to watch it live on television. You know he's out of public office. He doesn't have a job on the line, but you wouldn't have known that with his posture and how vigorously he was defending his record and taking on the question from the panel there. You know, he is the-he has his legacy at stake as you said, for sure. And that means the world to Alan Greenspan.

And this panel, put together to sort of get to the bottom of the sub- prime crisis, to make sure it doesn't happen again, where pretty direct; a lot of people blame Greenspan's Fed for sowing the seeds of the sub-prime housing market. By keep interest rates too low for too long, and really taking their eye off the ball, in terms of supervising what was going on in the financial system. This is how Greenspan responded.

(BEGIN VIDEO CLIP)

UNIDENTIFIED MALE: Would you put this all under the category of, "Oops! We should have done it."?

GREENSPAN: No, I-when you have been in government for 21 years, as I have been, the issue of retrospective and figuring out what you should have done differently, is a really futile activity, because you can't, in fact, in the real world do it. I think-I mean, my experience has been, in the business I was in, I was right 70 percent of the time, but I was wrong 30 percent of the time. And there are an awful lot of mistakes in 21 years.

(END VIDEO CLIP)

LAKE: An awful lot of mistakes, but he says that, the monetary policy that they had in wasn't one of the things that lead to the crisis. Instead he blames a lot of other things. He points to securitization of these loans, of Fannie and Freddie, of the rating agencies, pretty much everywhere else, not the low interest rates. That alone wasn't the problem. I don't know, 70/30, I don't know how you judge that record, Richard.

QUEST: The one-there are two other things, though, that I-that caught my eye. First of all, he consistently maintains it is not possible to take the air out of an asset bubble without causing potentially greater devastation. And the second thing is, he does go on again, and again, and again, and say that the answer is not less or more regulation on innovation, but capital adequacy.

LAKE: Yes, I mean, this is the thing. And to fine tune that a little bit. I don't think that Greenspan or any members of the Fed think that you can't tackle an asset bubble. What they're saying is interest rates aren't where you need to do it. Not only are they too broad, but as you point out, and as they say, you run the risk of causing other problems. Remember while he was at the Fed there were all the Asian crisis-there were multiple crisis that they were fighting. And you'll remember he was the committee that saved the world. So, you know, it is sort of, which one are you going to address? Instead, where they think you can fight asset bubbles is on that regulatory side. Making sure the banks don't take too much risk and I think that is where they think that mistakes were made and they'd like to see that part changed.

QUEST: All right. Maggie Lake, who is in New York. Many thanks, Maggie Lake joining us with the Greenspan testimony.

Here in Europe it may not be a double dip, but it is certainly doesn't look like a vigorous recovery. Officials figures show the economy of the Euro Zone stagnated in the last quarter of 2009. It was a revised report, the original estimate had been for a tiny 0.1 percentage point rise in GDP across the 16 countries of the Euro Zone.

Growth figures varied from one country to another. In France, for example, you are looking at a 0.6. Germany, well, look at that, 0 percent, as it ground to halt; Italy's economy, actually contracted; Greece, we know all about the misfortune. And if we look down at Ireland a slump down there on Q4 of 2.3. We know that Ireland got the serious problems as the government reacted to its own debt problems with deep spending cuts. And incidentally, keeping this here for one second, this-as the debt spending is brought under control in Greece, and other countries, the theory is this could well be repeated elsewhere.

Alarm bells are sounding beyond the Euro Zone, the OECD says growth in the nations that make up the G7 is losing steam as governments start to cut back on stimulus programs. Pier Carlo Padoan is the chief economists of OECD. He joins me now, live, from Paris.

Sir, if you are-and I looked at the numbers and by and large you are revised forecast down come largely from Japan, the U.S., and Germany. If we are saying Q4 was as good as it gets for the time being that is pretty pessimistic for the first half of this year.

(BEGIN VIDEO CLIP)

PIER CARLO PADOAN, CHIEF ECONOMIST, OECD: Well, we're not really, actually pessimistic for the first half of the year. There have been differences across countries, as you were mentioning, with the U.S. doing better than the Euro area countries. And the United Kingdom sort of in between, we are not saying that growth is decelerating. We are saying that growth will be stabilizing as we move forward, towards more longer-term trends, which are more normal.

QUEST: Right. But-but, did that assume then that the growth we saw in the fourth quarter was very much pendulum swing, bounce back growth?

PADOAN: It was to some extent. There was also a possibility of a glitch in the last quarter, so we are looking at the new figures which are more encouraging than the same figures we produced for the same kind of exercise in November. So, we continue to be moderately optimistic about the recovery.

QUEST: The warning we've heard from Ben Bernanke today, we've heard from various British-the British prime minister, who of course is in the midst of an election campaign-that now is not the time to withdraw stimulus packages-you obviously sign up to that view. When is going to be the time to withdraw stimulus?

PADOAN: Now it is the time to announce credible programs for withdrawal. And next year for most countries it is the time to do it, to implement it. Of course, there are some exceptions, like Greece for instance. There they needed to do it now, and fast.

QUEST: You see, announcing a credible program merely invites everyone to say, well, get on with it and do it, surely.

PADOAN: Well, of course, but this is the time where governments sort of use their political capital, their credibility capital. So, countries will put on the table programs and markets will judge those programs also based on the past experience they had for those countries.

QUEST: No good news on the jobless front, really, is there. If economies are stabilizing or slowing at the sort of rates of growth that you've got for next year, 2.4 in the U.S., 1.1 in Japan, Euro Zone, 1.9. That is not sufficient to bring down sizable unemployment numbers.

PADOAN: It is not in the short term, although unemployment has probably peaked in the United States. We have to wait a little bit longer to see employment recovering. Especially in Europe, where however, appropriate measures need to taken to allow reallocation of labor force towards more dynamic companies and sectors.

QUEST: Mr. Padoan, many thanks, indeed, for joining us from Paris tonight. Much appreciated. Look forward to having you on the program again to discuss these important matters. Many thanks, indeed.

Now, on a day when sobering economic news, as you have just been hearing, was to the fore, there was precious little else to inspire European investors. But we need to bring you the markets.

(DESK BELL CHIMES)

The major indices were down at the close. And the banks were amongst the worst performers. It was Greece's debt crisis that resurfaced. BNP Paribas lost close to 3 percent in Paris. Energy and mining stocks. BHP Billiton was down 2.6. You'd expect that if commodity prices are a bit dodgy and growth is looking uneven and uncertain, that is what you get with commodity prices.

To the U.S. markets, which are down.

(DESK BELL CHIMES)

And 27 points. 11,000! Investors have been extremely cautious. General Motors posted a $4.3 billion loss in the second half of the year. We'll talk about that. And there are the lingering concerns on sovereign debt, that have taken their tolls. But frankly, 26 points between friends, we won't worry too much about at this hour.

You are up to date with the main business and market movements. Now the news headlines for you. Fionnuala Sweeney is at the CNN News Desk.

(NEWSBREAK)

QUEST: When we continue QUEST MEANS BUSINESS, social networking web sites would have you believe it is a small world. It seems even cyber space isn't big enough for Bebo and Facebook. Bebo maybe forced to say bye-bye and we'll explain in just a moment.

(COMMERCIAL BREAK)

QUEST: There have been plenty of mistakes in the new economy, but a multi-hundred million dollar misstep was made by AOL. The Internet firm, which was once part of CNN's parent company, Time Warner, is effectively admitting its strategy for social networking, hasn't worked. It is now looking to sell or simply shut down its once popular site, Bebo.

I call it Beebo, others may call it Baybo, but this is what it is. And it is a sorry tale, whatever it is. It was bought in 2008, $850 million was spent on it. At its peak it had about 40 million users worldwide. But the unpalatable, unprofitable and unpleasant truth about Bebo is just wasn't making money. And would have required considerable, needs significant investment in the future. That was money that AOL either doesn't have or wasn't prepared to spend. The amount of sums involved for the company which had just been spun out of Time Warner, simply was too much. It couldn't see the future. Remember, AOL is itself a company in transition, seeking its new direction.

With that in mind, this of course could be the main reason. Tough competition, 208 million Facebook users in the United States. There have been numerous other failures. Comps (ph) score, five, Bebo, 5 million users. How can anybody compete with a 209 of Facebook. Can anybody compete with the 209 million of Facebook. That is a question for Debra Aho Williamson, who joins me now from Seattle.

A straightforward question? Is Facebook unbeatable?

DEBRA AHO WILLIAMSON, E-MARKETEER.COM : That is a great question. And speaking abut AOL for a moment, they really don't have a Midas touch when it comes to Internet acquisitions. So, Facebook, I think is perceived well in the business community, because it is independent and because it has been able to be very successful as an independent company. And grow to, as you mentioned, enormous numbers of users worldwide, 450 million last count, worldwide. That is huge.

QUEST: Right.

WILLIAMSON: And it is hard to believe that anything could stop Facebook.

QUEST: So, to take your point to its conclusion, AOL has not only made the right decision, it has made the only decision that was logical.

WILLIAMSON: It was a decision they should have made a long time ago. Basically once the acquired Bebo it became very clear, I believe, both within the company and in the financial community that Bebo just wasn't what it was cracked up to be when AOL acquired it.

QUEST: Debra, I-

WILLIAMSON: I think the only thing that Bebo had as a legacy was that it was one of the first social web sites that got marketers involved and created micro sites and deep branded communities. And so they did create a model that Facebook and other social networks are following, in terms of how to get marketers involved. But ultimately they just didn't have enough users to be successful in the long run.

QUEST: Now, tell me then, let's put Facebook behind us and Bebo and all of the others, what is the next site that people half my age and younger are using, playing with, that those of us over 45 haven't even heard of, but that actually we'd better learn about in the near future?

WILLIAMSON: Sure, well, I think the one that is getting the most buzz right now is called "foursquare". It is a mobile social network where you check in at different locations, restaurants, bars, clubs, where you are at. And you tell your friends where you are. And right now not too many users, but it is growing rapidly. It has gotten some attention and possible acquisition rumors related to Yahoo.

It is interesting for a couple of reasons. First of all, because it is tied to your mobile phone, which as you know, just about all of us have mobile phones right now. It also ties into the fact that we want to let people know what we're doing. There is a constant need to let people know where you are.

QUEST: Right.

WILLIAMSON: What you are doing. That sort of thing. So, I think it is really one to follow.

QUEST: We will follow that and maybe talk about that on tomorrow's program. And hopefully you will come back and talk to us. And keep people on the wrong age of 45, like me, on the right track when it comes to these things. Debra, many thanks indeed, for joining us.

I was telling you that we are watching events taking place in Prague. Let's go to Prague at the moment, where you can see the aircraft sitting on the tarmac. That is President Medvedev's-of Russia--plane. Just arrived, the president is in the Czech Republic for a summit meeting with President Obama. You will be aware of course that they are going to sign a nuclear treaty, a landmark nuclear treaty with Russia, a much-needed diplomatic achievement for both men.

And we are just waiting of course, whether or not Mr. Medvedev will speak about events taking place in Kyrgyzstan. Judging by the fact that the cares are waiting, I suspect not.

We'll come back in just a moment. This is QUEST MEANS BUSINESS. Good evening.

(COMMERCIAL BREAK)

QUEST: President Medvedev arriving in Prague, in the Czech Republic. He's there to sign the START Treaty with President Obama. A treaty intended to reduce the number of nuclear weapons held by the U.S. and Russia.

We are waiting, of course, to see on this arrival whether or not he is going to make any comments concerning the events in Kyrgyzstan today, the anti-government protests. I don't think we need to wait too much longer to get the answer to that. Straight into the limousine and straight out of the airport.

We won't waste any more time on that. We will bring you up to date, of course, with the events in "WORLD ONE" in a short while.

Now, what do you do if you cross a Mercedes with a Renault and then add a dash of a Nissan? The answer, according to the three giant automakers is lower costs, greener cars, and of course, better business.

Renault, Nissan, and Daimler, have officially announced a deal that we have been waiting for, for the past few days. These are the terms of the alliance. Now it is an interesting one, a three-way alliance that has a 3.1 stake, equal stakes that go in different ways. It is small, of course, compared to the Renault and Nissan alliance, where it is over 40 percent. This is just 3.1. But it is the significance of bringing these three carmakers together. And one must clearly wonder, longer term-they say it is for benefits in the short term-but longer term, what is behind it all? This is what is behind it all. Joint projects between Renault, Nissan and Daimler, particularly relating to electric cars and light vehicles, they are going to pool their resources, technology, and reduced costs.

They estimate-now this is interesting-they estimate that profits combined could be boosted by $5 billion over the next five or six years. Now that is not a worth sniffing at. The auto crisis, of course, as you are aware, between them Renault, Daimler have lost $3.4 billion. First loss since the company was privatized 13 years ago. Daimler, very checkered recent past. Of course, it bought Chrysler, Daimler-Chrysler, some of us are still old enough that we automatically say that. Got rid of Chrysler. Then, of course, it has just been fined by regulatory authorities in the U.S. for breaching the corruption act. So Daimler, interesting company at the moment, but huge losses. They believe this deal has a huge sense to it.

My colleague, Charles Hodson, spoke to Daimler's chairman, Dieter Zetsche, and Carlos Ghosn, who is president and chief exec of Renault Nissan. He asked them about the rationale for this alliance.

(BEGIN VIDEO CLIP)

CARLOS GHOSN, PRESIDENT & CEO, NISSAN-RENAULT: This cross-chair (ph) holding is meant to encourage a very deep cooperation and higher level of transparency between all the organizations. You know, our engineers, our product planner, all the people who have specific skills, they are little bit afraid to share their knowledge if they have the impression that the corporation is limited in time, or temporary.

Whenever we give the signal that this is for the long-term, this is going to very deep, this is going to last for a while. They are going to open up and we are going to have a kind of win-win cooperation starting. That is what we meant by this. So, we don't want to focus about how much shares we have with each other, we want to focus into making every single project, you know, deliver on the synergies. And we have plenty of time to do that. And we want to make sure that it starts with specific, you know, outcomes, specific synergies before, eventually, eventually, considered something else, but today we are not.

CHARLES HODSON, CNN INT'L. CORRESPONDENT: OK, but Dieter Zetsche, what is your vision for this alliance in perhaps five or, realistically, in 10 years even?

DIETER ZETSCHE, CHAIRMAN, DAIMLER: Well, we are very well set on the large car, premium segment. Nobody is better positioned than we are. We were lacking some scale on the small car side and with small engines. This issue has been addressed with today's alliance. But by starting there, we meanwhile find that we have many more opportunities going together. And on that basis, for instance, on the CO2 side, we will make major progress together. Electric vehicles, nobody is more determined to go for large volume production cars, than Renault is. The same applies for Daimler. And on that basis, including Nissan, we are a combination which is second to none. And these are, of course, these days very, very important things, which will in 10 years from now differentiate our selves from the entire competition in a positive way.

HODSON: Carlos Ghosn, one of the things that intrigues me about this is that no doubt from the consumer's point of view nothing very much is going to change. But from the manufacturers point of view, from the point of view that Renault, Nissan, and Daimler, all sorts of interesting things are going to happen. Manufacturing is going to be switched and all sorts of different directions. Really, you are going to be manufacturing, where ever seems easiest, cheapest and most appropriate. Is that about fair?

GHOSN: Yes, but you know the consumer is going to see some things. I mean, I'm sure that the next Smart and the next Twingo are going to become more attractive. They are going to be much more competitive. They are going to be much more reliable than what they already are today.

You know, when we are talking about changing power train, where for example we are going buy some big diesel engines, put them-from Daimler, put them in Infinity it is going to allow Infinity to be much-and the consumer of Infinity, to see better engine, a diesel engine in their car.

So the consumer is going to see some benefit. But we don't want the consumer to see too much benefits because at the end of the day, we are all interested into keeping very brand separate and keeping each company with its own identity. So we don't want any confusion on the market.

(END VIDEOTAPE)

QUEST: That is the chiefs of Renault-Nissan, and Daimler. The focus, also on the office sector, on Wall Street where investors have seen some earnings, from General Motors. The earnings are pretty unpleasant. Stephanie Elam is in New York.

The lessons that we saw, and whenever I hear these large numbers, I take them with a pinch of salt, because if you look into the numbers, you can usually find a reason they wrote off something. They sold something, whatever.

What was the reason for General Motors?

STEPHANIE ELAM, CNN FINANCIAL CORRESPONDENT: Yes, it is true. It is a really large number, Richard. General Motors reported a nearly $3.5 billion loss in the last three months of 2009. And that brings the company's total losses, since emerging from bankruptcy last July to more than $4 billion. But you are right a not of that has to do with fees related to working out something with their unions. If you take that out they're saying their fees were more in line-I mean their losses were more like $600 million. So that shows you that they were way higher, because of what they were dealing with the UAW.

Now, the results that they did post were much worse than what Ford and Toyota reported. Both reported profits in the period. The thing is it is not all bad news for GM. They did manage a 15 percent increase worldwide auto sales. And they said that they see a strong chance of returning t profitability this year, they haven't been there since the early part of 2007, Richard.

QUEST: The Dow Jones, we still can't get to 11,000. Now, look, I don't doubt for one moment that we will get there, at some point in the next few weeks. But it really is hard slog.

ELAM: It is. It is just a slow moving time. It does not help that we don't have really anything to look at. You see right there. Look at that, 10,911. It is like, close, but no cigar. Then it keeps sliding back a little bit, but investors a bit jittery. We have had these choppy sessions and if you think about the rally that we have had over the last few weeks. It wasn't like we were doing over 100-point gains here or there. It is a little bit here or there that we have had been doing it.

So, the moves haven't been huge in either direction. Just people aren't feeling confident enough to get into the market. And I think a lot of it has to do with the fact that they want tangible numbers from companies saying they things are getting better and they haven't really had that. And they wont' have until we start getting the first quarter earning season numbers in here. They are on their way, because the quarter is over. But that hasn't helped out, so right now we are just kind of floundering about.

QUEST: We don't like floundering about. We'll flounder next week. Many thanks, indeed, Stephanie Elam in New York.

Another on parliaments on Wednesday. The party leaders at Westminster clashed over who got it right on the economy. They all say they got the key to Britain's recovery. A general election has been called and we are hear the views of one the U.K.'s best known businessmen, in just a moment.

(COMMERCIAL BREAK)

QUEST: The party leaders at Westminster clashed over who got it right on the economy. They all say they've got the key to Britain's recovery. The general election has been called and we'll hear the views of one of the UK's best known businessmen, in just a moment.

(COMMERCIAL BREAK)

QUEST: Hello, I'm Richard Quest, QUEST MEANS BUSINESS.

This is CNN.

The British prime minister, Gordon Brown, has enjoyed his last session of PMQs -- prime minister's question time -- before the country goes to the polls next month. On this program on Tuesday, we forecast the economy will be the main election battleground. Well, it wasn't a great act of prophecy, as you probably knew, as well.

The heated clashes at Westminster illustrated the point. The Conservative leader, David Cameron, accused the p.m. of threatening to wreck the economic recovery by proposing a new payroll tax. Mr. Brown defended his track record.

(BEGIN VIDEO CLIP)

GORDON BROWN, BRITISH PRIME MINISTER: Once again, I have to tell them about what happened during this recession and what we had to do to take this country out of recession. We had to nationalize Northern Rock, and they opposed it. We had to restructure the banks. Business supported us and they opposed it. We had to take action to secure help for the unemployed. Businesses support the Future Jobs Fund. They opposed it. We had to take action to help homeowners. Business supported it. They opposed it. And we had to take action to help small business itself and they opposed the bonds that were necessary.

(END VIDEO CLIP)

QUEST: Now, just a taste of what people are putting up with in the U.K. as a month of campaigning is underway. Whoever gets the job of Chancellor of the Exchequer or finance minister in the next government has that economic tightrope to talk, a fact that's not lost on the U.K. business community. Over the next few weeks, we'll be checking in with leading executives, not to ask how they're going to vote, but to get their take on the policies that they're hearing from all the parties.

I've been speaking to Sir Martin Sorrell, chief exec of the advertising group, WPP.

What did he want from a campaign?

(BEGIN VIDEO CLIP)

MARTIN SORRELL, CEO, WPP: The message is that anybody is going to have to deliver if they're dealing with the issues realistically, are pretty -- pretty unpleasant ones. You know, we have to cut spending. We have to increase taxes. We have to establish priorities. Some of the services that we've become used to are -- are going to be less, are going to be less well done and less executed -- executed less well.

So -- so essentially, the message that the politician has to deliver, if they're being brutally frank and brutally honest, is a very unpleasant one and not one likely to capture votes.

QUEST: The policy issue...

SORRELL: So I -- I want to get it out of the way...

QUEST: But the politicians have gone...

SORRELL: (INAUDIBLE).

QUEST: -- as close as they dare to telling us...

SORRELL: Whoa, whoa, whoa.

QUEST: -- that it's going to be nasty ahead.

SORRELL: Well...

QUEST: Before you (INAUDIBLE)...

SORRELL: Well, the only...

QUEST: -- only a fool doesn't know that there's something really unpleasant after the election.

SORRELL: No, because some -- some -- I mean the labor line has been we can't cut early because if we cut early, we're going to create a double dip or a further recession. The Tories have taken the view -- if you can call them Tories -- they've taken the view so far that -- that really what we've got do is to -- to cut a little bit earlier, although when they get dragged into this issue about aren't you going to make things worse, people start to get a little bit nervous.

QUEST: OK. So now assume -- give some free advice, gratuitous advice -- the best kind.

SORRELL: Well...

QUEST: The best type.

SORRELL: In relation to what?

QUEST: If you were one of the parties and you were advising the parties...

SORRELL: Yes?

QUEST: -- which it's fair to say you're not.

SORRELL: Right.

QUEST: So for the avoidances of any confusion...

SORRELL: Right. Right.

QUEST: -- would you be going for a very, very hard-hitting...

SORRELL: Yes.

QUEST: -- campaign...

SORRELL: Yes.

QUEST: -- that takes no prisoners and leaves blood and gore on the table behind?

Or would you go softer softly?

SORRELL: Well, I think on -- on the one hand, Labor will argue that they have the experience and they may have got us into this problem or -- or partially been responsible for getting into the problem, being in power for 13 years. I mean most governments, when they've been in power for about 10 years, they start to -- start to -- to waver.

So, on the one hand, you -- you're saying I have the experience. I mean which jobs in the world would you recruit somebody with -- for who -- who hasn't got any experience?

I mean Blair and Brown came in with no experience.

QUEST: Right.

SORRELL: Obama comes in with no experience. They learn on the job. Cameron and Osborne are going to come in with no experience. So from the Labor side, you would argue we are the -- the party of experience. We know what needs to be done. We're going to take the tough -- the tough measures, but we're going to do them without getting us into further trouble.

If you're on the Conservative side, what you say is it's time for a change.

QUEST: Do you fear a hung parliament?

SORRELL: You know, basically, the -- the choice is -- is this, I guess, at the end of the day. If the Conservatives get in, they will be tougher, they say. They'll be harder. They'll -- they'll come in just like the acquisition of a company. They'll come in and say the books are worse than we were told.

(LAUGHTER)

SORRELL: I mean, things are much worse than we were told, so we're going to have to be even tougher. And if Labor gets in or retains power, they'll have to be tougher than they've said, but they say they will be softer and fairer and they will not cut as significantly as the Conservatives. And we may be faced with -- with -- hold on a second. We may be faced with a sterling crisis. I mean that may be -- this may be a rerun of history, where we have had Labor governments, socialist governments that have been too soft and have got us into financial issues and sterling issues and IMF issues that have been remarkably unpleasant.

(END VIDEO TAPE)

QUEST: Sir Martin Sorrell talking to me on the election.

Now, in just a moment, hitting air travelers in the pocket -- well, the U.S. airline Spirit is going where no other airline has gone before. It's a seriously advancing charge, in a moment.

(COMMERCIAL BREAK)

QUEST: As a frequent air travel, we all know from bitter experiences the price of tickets is merely the tip of the iceberg. Few were expecting this. Spirit Airlines, a carrier from Florida, says it will start charging for any carryon luggage that does not fit under the seat in front of you. The price of stowing something in the overhead could be up to $45.

Spirit believes this will keep the price of a ticket down.

I'm joined from New York by George Hobica, the president of airfarewatch.com.

George, George, oh, George, we've -- I mean for goodness sake, what next?

GEORGE HOBICA, PRESIDENT, AIRFRAREWATCHDOG.COM: You know, air fares are so low -- they really, really are, you know, especially adjusted for inflation and even not adjusted for inflation. And the airlines are still losing money. And I'm not an apologist for the -- for the airlines. And I wish everyone could fly for free, but -- but they can't.

Spirit has zero dollar fares sometimes, or one cent fares or $9 fares. And in -- in fact, the airlines could save a ton of money if everyone basically prohibited people from carrying on luggage.

QUEST: Right.

HOBICA: I mean back in the day, this was all you were allowed to bring on a plane, this little -- this little flight bag. And -- and life was easier. You didn't -- people didn't fight over overhead space and nobody got conked on the head when something fell out of the overhead bin.

QUEST: Well, hang on. Hang on. Hang on. Hang on. Let's -- this is a -- but the fact is, so you -- it's the unworkability of this plan. Yes, if I've got a garment carrier bag, that's obviously going to be chargeable to go in the overhead.

But what about my briefcase that I suddenly decide to put in the overhead?

HOBICA: Well, your briefcase would go under your seat and that will be free. Brief -- strollers are free. There are exceptions. You know, cameras, your coat, your hat. There are -- you know, personal items -- a small backpack is free. And I think that's reasonable.

QUEST: It's a mine field, George.

Do you actually approve of this?

HOBICA: Yes, I -- I'm going to get so much hate mail -- hate e-mail if I say I approve of it. So I'm not going to say I approve of it. I -- I see that it could save so much time for the airlines. It takes a half an hour to...

QUEST: But...

HOBICA: -- to load a plane because people are putting stuff in the overhead and they would have fewer planes and they'd be able to -- to keep fares down if they had fewer planes...

QUEST: All right...

HOBICA: -- because the fares...

QUEST: All right, hang on...

HOBICA: -- (INAUDIBLE) in the air more.

QUEST: All right. Hang on, though. Let's -- so they had a fee for putting the bag in the hold of the aircraft. The first bag costs $25, $30.

HOBICA: Yes.

QUEST: They -- so to get over that, people now put them in the overhead. Now, they're going to charge for the overhead. But people still need to carry something -- if you're going away for three or four days, you can't put all your smalls in a -- in a little handbag.

HOBICA: You know, this -- there's something called -- and I'm not being facetious here -- FedEx Ground and UPS Ground. And I'm -- I'm going to Las Vegas for Memorial Day, which is one of our bank holidays here in the U.S. And I am sending everything five days ahead to my hotel, the Wynn Hotel, and I am putting everything -- my book and my sweater in this bag. And it costs less than checking a bag. It only costs about, I think, $40...

QUEST: Right.

HOBICA: -- to send.

QUEST: George, I need you...

HOBICA: But a...

(CROSSTALK)

QUEST: . to take a picture and e-mail to me what goes in that little bag that you bring onto the plane, if you will, please.

George, many thanks, indeed for joining us from...

HOBICA: Thanks, Richard.

QUEST: Thank you, from New York.

And just in the absolute spirit of openness, Spirit has confirmed to us tonight that they will appear on this program and will talk to us about this new policy. Maybe they will explain about how this spirit of flying has a new dimension.

Tonight's Profitable Moment.

An airline charging for carryon bags to go in overhead compartments. I've heard of some hair-raising things, but this takes the biscuit. It's the practicality of it.

What happens when I want to put my briefcase up there?

What if I want more leg room?

Will I get charged?

What happens if I paid for the space, but when I get on board, it's all taken up?

Look, I'm not a fool. Ancillary revenues are an important part of airline income. It started with paying for food, then checked in baggage. You pay extra for emergency exits with those extra leg room.

Look, tickets are not dirt cheap anymore. Next week, I'm flying from New York to Atlanta, more than $400 for the two hour flight.

This latest bit of charging seems mean-spirited.

We'll talk to the company next week.

I'm Richard Quest in London.

Whatever you're up to in the hours ahead, I hope it's profitable.

"MARKETPLACE AFRICA" is next.

This is CNN.

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