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QUEST MEANS BUSINESS

American Airlines Files Chapter 11; Eurozone Bailouts with Polish Foreign Minister Calling for Bigger Role by Germany; British Autumn Economic Forecast; James Murdoch Reelected as Chair of BSkyB; Analysis of American Airlines Bankruptcy; UK Braces for Strike; Dominique Strauss-Khan Political Plot Allegations; Italy in Danger Zone; Italian Entrepreneur's Campaign Urging Italians to Buy Government Debt; European Weather Outlook; Profitable Moment: Chapter 11 Working as Intended

Aired November 29, 2011 - 14:00:00   ET

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


RICHARD QUEST, HOST, QUEST MEANS BUSINESS: Tonight, American Airlines' Chief Exec tells me, "Filing for bankruptcy protection was difficult, but necessary".

(BEGIN VIDEO CLIP)

THOMAS W. HORTON, CHAIRMAN, CEO, AND PRESIDENT, AMR CORPORATION AND AMERICAN AIRLINES: -that the best decision was to pursue a full restructuring of the company to make us more competitive and successful for the long term.

(END VIDEO CLIP)

QUEST: "The wind's blowing, the leaves are turning brown". It's a truly autumnal statement from the British Chancellor. And the clouds still hang over BSkyB. Controversy as James Murdoch's reelected chairman.

I'm Richard Quest. I mean business.

(BEGIN VIDEO CLIP)

(END VIDEO CLIP)

QUEST: Good evening. American Airlines announced today it is seeking protective bankruptcy while it attempts to regain its competitive edge. American filed for Chapter 11. The planes will fly, wages and bills will be paid, and most important of all - and well worth a ring to make the point - all passenger tickets are still valid. American is being reorganized under the supervision of the U.S. courts. Tonight, the new chief executive explains the decision and what happens next for one of the world's biggest airlines.

It's a serious matter for American, but in that airline industry, everybody's at it. Part of the reason Americans struggle to stay competitive is because rivals beat them to actually going into Chapter 11. Delta and Northwest - now, both of these airlines - Delta and Northwest - filed for Chapter 11 way back on the same day in 2005. The two then merged to create Delta in 2008.

U.S. Airways has been through Chapter 11 twice. First, in 2002 - again in 2004. And United Airlines and Continental both did it and then merged. Unfortunately for American Airlines, the pressure finally became too much. Competing against all these other carriers that have driven down their costs right into the basement. And this is the cost that is, perhaps, one of the most serious.

Fuel costs are up some 40 percent in the last quarter. It adds more than half a billion dollars to American Airlines' bills. Now, it's the single largest expense, but you would rightly say to me, "Oh, hang on a second, Richard, all airlines have to pay their fuel bill, so that can't be the reason".

No. It's this. Labor costs. American has 800 million more in its labor bill than the rivals Delta and United. It's tried to negotiate with the unions, unsuccessfully. Now, since those talks have gone nowhere, they will be done under the auspices of the bankruptcy court through Chapter 11.

But look at these numbers. Now, this is a 10-year chart of American. This is the "boom days" if you like. Here we enter the recession - this, of course, was 9-11, which we must pay just respects to for one second, that's when it comes down. This is the "boom days", you have the recession pulling right the way down - higher oil prices, global recession. And the share price falls even further today, down 80 percent, just today. So, just some $.33. Largely, of course, because the shares will become worthless in Bankruptcy reorganization.

Now, the Chief Executive, Thomas Horton, admits the financial situation was untenable. Though he is still insisting it will be business as usual for American. He's replaced Gerard Arpey at the top. I asked Tom Horton why such dramatic action as Chapter 11 was necessary.

(BEGIN VIDEOTAPE)

HORTON: It was a very difficult decision, but we think the right decision at the right time to get our company competitive and make it successful again. As you probably know, Richard, over the past decade - a very difficult decade in the airline industry - virtually all of our big competitors in the U.S. took this step. And, as a consequence, they lowered their cost and improved their capital structure in a way that simply made them much more competitive.

And, you know, the folks at American have worked very hard and honorably to avoid that path over the last decade. But it became clear to us that that gap was just too wide now. It had become untenable and it was time for us to address it, turn the page, and begin to put our company on the path to a much more successful future.

QUEST: You see, on October the fourth, AMR put out a statement saying it was not your goal or preference to go into Chapter 11. So I'm wondering, what change or what finally tipped the decision that you took? What was the tipping point?

HORTON: Yes, it never has been our goal or preference, of course. And our actions over the last decade would clearly indicate that. But I think we concluded that the gap between our cost structure and the rest of the industry had become too wide and really just not something we could sustain any further. And, at the same time, you know, great economic turmoil in the global economy and high and volatile oil prices.

So, all of that taken together created an atmosphere where our board felt that the best decision was to pursue a full restructuring of the company to make us more competitive and successful for the long term.

QUEST: Your employees watching this worldwide, and particularly, of course, in the United States, will want to know the implications. If we take the United, the Delta, the other examples - there have been givebacks, pensions have been cut back. Longer hours for less money. So, can you sketch out what you envisage happening for your employees?

HORTON: Well, I think the most important thing is that day one, the Chapter 11 filing itself, won't cause any changes to wages or benefits. Of course, our objective here is to make the company more cost competitive so, down the road, there may well be changes. But there's a process wherein we will sit down with our union leaders and with our non-organized workgroups and work through the best way to reach the best outcome for the greatest number of people. So that's what we're going to do. And we're going to do it under the supervision of the courts.

QUEST: And fliers watching and passengers who are buying tickets - now, you and I have talked about this before and I've been around the aviation industry long enough to know - from the passengers' point of view, it matters not a jot. Your planes will still be flying and you'll still probably be serving Champaign in first class. But can you reassure passengers that this is not going to have any effect?

HORTON: Well, that's quite right. It's business as usual at American Airlines. And all of the people of American Airlines will continue to dedicate themselves to providing great customer service for our customers. That is our mission. Our schedule will continue. Our flights will continue to operate. It is very much business as usual. And, in fact, it is our view that, in the long run, as we make our company more competitive and successful, we'll even have further opportunities to invest in our product for our customers.

(END VIDEOTAPE)

QUEST: That's the Chief Executive - the new Chief Executive of AMR - American Airlines. You can hear more from him later in the program. Tom Horton on the day that they filed for bankruptcy.

In a moment, we might arguably talk about another bankrupt situation - the Eurozone and a meeting to save it. Not everyone's pulling in the same direction. Poland's Foreign Minister has a message for Germany. The Minister is with me after the break.

(COMMERCIAL BREAK)

QUEST: Tonight, Europe's finance ministers are working on plans to bolster the bailout fund. Echo (ph) Finn (ph) from the Eurozone's 17 member nations are in Brussels, looking at ways to leverage up the bailout EFSF stability facility. The idea - to prevent more countries from being sucked into a debt crisis spiral. In the last few moments, they have agreed to have Greece have its next installment of bailout cash. The Dutch Finance Minister, Jan Keest De Jager, says the IMF may have to chip in to stop the fund falling short.

Also on the agenda is the introduction of common Euro stability bonds. There was a very sharp and brisk warning from Poland's foreign minister, who said it's time to call on Germany to do more. Radek Sikorski says no one else can save the Eurozone - Berlin must step forward. His exact words were, "I will probably be the first Polish foreign minister in history to say so, but here it is - I fear German power less than I'm beginning to fear German inactivity".

The minister joins me now from Warsaw. Minister, when you said that statement - you fear inactivity more than German power - you obviously knew that was going to catch attention. And basically, you wanted them to realize the seriousness of this situation.

RADEK SIKORSKI, FOREIGN MINISTER, POLAND: Absolutely. And I said it in Berlin in the presence of two former presidents of Germany and the foreign minister of Germany. I believe that we are still the largest economy, but the Eurozone needs attention and Germany, the largest economy of the Eurozone - which has benefitted the most from the current arrangements and is not actually an innocent victim, because Germany also broke the stability pact. So, there is an onus on Germany to take action and that's what my speech in Berlin yesterday was about.

Poland has the presidency of the European Union, but we are not actually in the Eurozone.

QUEST: So when you hear Minister Schobel and Chancellor Merkel saying that they're not in favor of stability bonds, they do not believe the ECB should be the lender of last resort, and they do believe that treaties should be reopened - what is your reaction?

SIKORSKI: We have a short-term problem and an important medium-term problem to fix. Short-term, we need to save the Eurozone by whatever technical means. Medium-term, we also have to change the treaties to make Europe more governable and thereby restore credibility. Because this crisis is not only about debt. It's really about credibility - whether Europe can work in the long run.

QUEST: Right. Since, well, you put that firmly on the table, the fact is, Europe doesn't have any credibility. That's the long and short of it when it comes to handling this crisis. 18 months on, Mr. Minister, and it's getting worse, not better.

SIKORSKI: Well, steady on. We are still the largest economy. As Europe, we have some first-class companies. We are still one of the richest areas on earth and, in many respects, the envy of the world. But we do need to put the finances of some member states in order. And we are now discussing ways of doing it. So that next time, sanctions, for example, for breaking the debt ceiling or the deficit ceiling are automatic and cannot be broken by political will.

QUEST: You say that, though, but if you take, for example, yesterday's meeting with President Barroso, Van Rompuy, and President Obama. The U.S. President was quite blunt - you'd say it helped, but he did warn that Europe is playing with fire. So, I'm wondering, how close do you think we are to a crisis situation from which it will be very difficult to recover?

SIKORSKI: Well, I think we could say the same to the United States. I think you just had a little mishap with the commission that didn't come to an agreement on your budget cuts. So I think we have, both in Europe and the United States, a crisis to do with deleveraging our economies from the crazy heights caused by government overspending and by irresponsible financial engineering. And we need to make our political systems work to fix it.

QUEST: I know you don't believe in the apocalyptic rhetoric that some have put out, but do you believe that time is so short, now, that if they don't do something - or you don't do something - then, really, we are looking at a calamity?

SIKORSKI: We'd better not risk it. And it's better to act because what we propose are sensible rules. For example, here in Poland, we've had a constitutional limit on indebtedness. It has to be below 60 percent since 14 years ago. And so, these are the kinds of things we want to introduce because they make sense in their own right.

QUEST: Finally, do you believe that Europeans - ordinary Europeans in the union, citizens of the E.U. - have a right to better governance and decision making than we've seen so far during this crisis?

SIKORSKI: Yes, I think we need to give European institutions more capacity to act. While, at the same time, making sure that our democracy survives - that the rights of the member states are protected and also that there is democratic parliamentary supervision over a streamlined and more capable European commission.

QUEST: And isn't that trying to square the circle? Every time you try and do that, sir, some country comes out and says, "No".

SIKORSKI: Well, you had those discussions at the beginning of your republic. Alexander Hamilton fixed the issue of debts incurred by your states during the war of independence by a deal whereby solvent Virginia agreed to take part in the mutual guarantee of debt. Massachusetts was less solvent. And that's why your capital is on the Potomac.

QUEST: Mr. Minister, thank you very much for joining us from Warsaw tonight.

We'll continue our look at the situation in Europe. This time for a non-Eurozone member. The U.K. Finance Minister, George Osborne, has warned the crisis in the zone is damaging Britain's economy. In his autumn statement to Parliament, he halved the growth the U.K. forecast for this year and next and said austerity targets set out in March won't be met. Critics are calling it an admission of failure.

CNN's Jim Boulden has more.

(BEGIN VIDEOTAPE)

JIM BOULDEN, CORRESPONDENT, CNN (voiceover): Despite a summer of discontent with students protesting over a rise in tuition fees, plus London riots, which included a large amount of looting, and looming public sector strikes, the British government said Tuesday, "Steady as she goes".

UNIDENTIFIED MALE: The autumn statement, Mr. Chancellor of the Exchequer.

BOULDEN (voiceover): Finance Minister, George Osborne, like finance ministers around Europe is trying to find ways to stimulate the economy without abandoning the vow to slow spending and hack away at the huge budget deficits.

But how to do all of that without plunging the economy back into recession? On Tuesday, the mood darkened. Britain's growth will be less than one percent this year, nearly half what was predicted earlier in the year. And it could get worse.

GEORGE OSBORNE, UNITED KINGDOM FINANCE MINISTER: But if the rest of Europe heads into recession, it may prove hard to avoid one here in the U.K.

BOULDEN (voiceover): Still, Osborne confirmed leaked plans to boost infrastructure projects like 35 new road and rail investments. Plus money for small businesses and home building. Critics have said all along that the government should worry less about what markets think, and more about creating jobs, not cutting them. The opposition demands a plan B.

ED BALLS, SHADOW FINANCE MINISTER: With prices rising, with unemployment soaring, families, pensioners, and businesses already know it's hurting. And with billions pounds more borrowing to pay for rising unemployment - today we find out the truth - it's just not working.

BOULDEN (voiceover): With other governments watching carefully, Britain vows to eventually cut borrowing costs, in part through unpopular public sector pension reform and job cuts. Plus raising the national sales tax. Though even that has not been enough to meet its original targets.

VICKY PRYCE, SENIOR MANAGING DIRECTOR, FTI CONSULTING: There's no way in which the deficit reduction targets are going to be met during the period that the government has set itself. So, we have to face inevitability, but actually, they're going to be borrowing more.

BOULDEN (voiceover): The government says borrowing will fall, just a little later than hoped.

OSBORNE: We are the only major Western country which has had its credit rating improve. Italy's interest rates are now 7.2 percent, and what are ours? They are less than two and a half percent. Yesterday, we were even borrowing money more cheaply than Germany.

BOULDEN (voiceover): So a longer period of austerity is now on the cards, which could mean even more discontent. Britain already faces the biggest public sector strike in decades on Wednesday. Jim Boulden, CNN, London.

(END VIDEOTAPE)

QUEST: When we come back, James Murdoch has survived a big shareholder vote. The BSkyB chairman has lost key support. A report after the break.

(COMMERCIAL BREAK)

QUEST: BSkyB shareholders are keeping James Murdoch as the chairman, but they do so under protest. Nearly a fifth opposed his staying at the job. 19 percent against Mr. Murdoch. An extraordinarily large number, bearing in mind that often on these votes, it's just rubber-stamping all the way. James Murdoch is the son, obviously, of Rupert Murdoch and he's under fire for the way he's handled the phone hacking scandal at News International.

He runs that as well, of course. The parent company, Newscorp owns 39 percent of BSkyB. It was forced to give up its takeover bid when the scandal broke. It is extremely complicated - the machinations of who has what and where. But as CNN's Nina dos Santos reports, when it comes to the BSkyB vote, the unrest was clear.

(BEGIN VIDEOTAPE)

NINA DOS SANTOS, CORRESPONDENT, CNN (voiceover): Another day, another grilling for James Murdoch, heir apparent to one of the world's most powerful media empires. Shareholders voted to reelect the 38-year-old as chairman of the British pay TV Company, BSkyB. Hardly surprising, some say, given that the Murdochs control nearly 40 percent of the firm via the family crown jewel, Newscorp. Murdoch gleaned just over 81 percent of the vote this year, compared with over 98 percent in 2010.

This time, almost 19 percent of investors voted against him. Independent shareholders were the strongest voice for change, with one in three saying that they wanted a new chairman. Voting on behalf of other investors, two U.K. MPs famous for grilling Murdoch on his handling of the U.K. phone hacking scandal. A scandal which has dogged another Newscorp staple, News International - a company that Murdoch also chairs.

CHRIS BRYANT, U.K. MEMBER OF PARLIAMENT: We in Britain should never have allowed one man or one family to have so much power over both newspapers and broadcasting.

This is a big British company. I believe that it undermines people's understanding of corporate governance in this country if you have somebody with so many questions about them at the helm.

TOM WATSON, U.K. MEMBER OF PARLIAMENT: It sends a signal that the investors are, at least, worried. And that they are on watch. And what I think you might see next year, if he doesn't go by then, is calls for an independent chairman of the company.

SANTOS (voiceover): But what sort of chairman has the younger Murdoch been? Murdoch became chairman of BSkyB back in 2007 after a long stint as Chief Executive. During that time, his supporters say that he boosted subscriptions and brought the company back to profit.

ROBIN ARCULUS, SHAREHOLDER: He's done very well for my shares. I've been a shareholder ever since the company was founded. And it was founded without paying dividends. It is now paying dividends. It hit the targets that it set itself for. And you can't do that if you've got a useless chairman. So, he is good.

SANTOS (voiceover): James Murdoch may have survived this crucial vote and been reelected for another term as chairman of BSkyB - his challenge going forwards, though, will be to provide strong leadership for this company whilst lacking the support of a growing number of shareholders.

Nina dos Santos, CNN, London.

(END VIDEOTAPE)

QUEST: As we continue to look at companies in trouble, a painful new chapter for American Airlines. After the break, we'll hear more from the Chief Executive on its bankruptcy protection and how long American expects to stay in Chapter 11.

"Quest Means Business", good evening.

(COMMERCIAL BREAK)

RICHARD QUEST, HOST: Hello, I'm Richard Quest. More QUEST MEANS BUSINESS in a moment, but this is CNN, and on this network, the news always comes first.

The UK prime minister David Cameron is demanding Iran prosecute the students who assaulted the British embassy in Tehran on Tuesday. The mob breached the gates, they tore down the Union flag and burnt some documents before police cleared them out. Britain's foreign minister says Iran faces serious consequences. The UN Security Council's condemned the attack.

A Los Angeles judge has given Michael Jackson's doctor the maximum jail sentence for his manslaughter conviction, four years for causing the pop star's death. Dr. Conrad Murray looked grim as the judge accused him of engaging in medical madness. The jury convicted Murray three weeks ago for administering the powerful sedative that killed Jackson.

Police in Norway say the man suspected of this past July's bomb and shooting rampage is insane. Anders Breivik will still face trial, but victims -- or families are disappointed since he won't be eligible for a life prison sentence. Instead, he could spend the rest of his life in a mental hospital.

Today is the first step along a painful road for American Airlines, the world's fourth-largest carrier. Its new chief executive says it might be 2013 before it emerges from Chapter 11 protective bankruptcy.

First, it needs to get competitive again. Its rivals have all been through the same process. I asked Tom Horton at American what the carrier must do to catch up.

(BEGIN VIDEOTAPE)

THOMAS HORTON, CEO, AMERICAN AIRLINES: Our labor costs alone are something on the order of $800 million dollars higher than our big competitors on average.

But it's not all about labor costs, of course, because as the other airlines have gone through restructuring, they have addressed their capital structure, their debt, their facilities. There are many other things. The fleet -- many other things to be considered and addressed in this process and reoptimized.

And that's what we're going to go do. And we're going to do it in a way that makes the company much more successful.

QUEST: I know you've been negotiating and trying to get these costs down. But is it an admission either of failure or of the difficulty that only such a blow-it-all-up-and-start-again approach can work in aviation in these difficult times?

HORTON: Well, clearly it was our preference to do this in a consensual fashion. Unfortunately, we were not successful in that regard, Richard.

And you know, we see great opportunity for this company going forward. We have great hubs in the most important markets. We have the best alliance partners around the world.

And as you and I have discussed in the past, we also have this enormous order book of new state-of-the-art airplanes. We have, we think, the best order book in the industry.

So, it was really time for us to go out and capitalize on that and get the company in a position to where it can grow and prosper again. And it was the conclusion of the board that this was really the best way to go about doing that.

QUEST: Do you envisage reopening the deals for those aircraft from Boeing and Airbus? And do you envisage -- any of your bank creditors having to take hair cuts or a hit on bonds or debt?

HORTON: Well, after the new airplanes, that's very much the foundation for our future, so we would intend to fully embrace the new airplane deal, including the financing that came along with that. So, that's very much part of our future.

As to the debt and the capital structure, we'll work through that under the supervision of the courts. But clearly our objective there is to reoptimize the capital structure and make the company sustainable and successful.

QUEST: And finally, Mr. Horton, how long -- how long's a piece of string - but how long do you expect American to be in Chapter 11? If you had to give me some guidance today?

HORTON: Well, if you look at the last couple of big airline Chapter 11s, they were on the order of 15,16 months or so. Our objective would be to move more quickly than that, but as you know, the process takes on its own pace. So, it's probably too early to call.

(END VIDEOTAPE)

QUEST: Tom Horton, the chief executive of American Airlines.

Joining me now from New York is Ray Neidl, the senior airline analyst from the Maxim Group. How -- Mr. Neidl, how big a disadvantage was American and is American at the moment?

RAY NEIDL, SENIOR AIRLINE ANALYST, MAXIM GROUP: Well, my estimates were on the labor cost front, particularly in the pilots' area, they were probably 20 to 25 percent less productive -- in other words, more costly -- than they were with their two giant competitors, Delta and United.

And American really did need relief in the labor cost area before they could address some of their other challenges that they will have to face now going forward.

QUEST: As I look at the 2010 annual report, they seem to have a cost -- a CASM, cost available seat mile -- to the detriment of about one or two cents, which doesn't sound much when you look at it on paper, but when you add it up over the course of an airline, pennies make pounds which makes billions. So, they have been pretty uncompetitive.

NEIDL: On a CASM basis, one or two cents is a lot, and that's what I use to translate into being 20 to 25 percent less productive, particularly with the flight crews.

QUEST: So, in this environment, they're going to obviously deal with pensions, wages, benefits. Would you expect them to shrink the airline?

NEIDL: I think Tom mentioned that they probably will shrink it a bit. You have to be very careful here, though. American does lack the market mass of its two giant competitors, Delta and United. And that's driving away some corporate contracts.

So, they can't afford to cut back too much. I imagine they'll trim some of the less productive fleet and, as a result, lay off some of the employees that operated these aircraft. But the thing is, down the road, they are going to need more market mass. And that's why there's a likelihood that once they get the cost structure in line, they'll have to merge with another airline.

QUEST: Ah, that -- you've anticipated my next question. Is that -- I mean, let's face it, the dancing partners are getting few and far between. If you're talking about the domestic US, you're pretty much talking US Airways.

NEIDL: Right. There's one girl left sitting on the bench, and that's US Airways, so that would be the likely candidate.

Some people suggested British Airways, but because of US law, they wouldn't be allowed to invest more than 49 percent in American, 25 percent voting, and British Airways wouldn't do that without control, nor any other airline would do it. So, US Airways, if there were to be a merger down the road, is the most likely candidate.

QUEST: You and I are old enough to remember British Airways' last foray with that sort of deal with US Airways, which was a dog with fleas.

NEIDL: Yes.

QUEST: The -- the decision to -- I mean, we can sympathize with Tom Horton and the predicament he faced. He had no choice, really, didn't he, to take it into Chapter 11? It was this or nothing.

NEIDL: Yes. Without a pilots' agreement, he had to go into bankruptcy. I thought that the way American has been acting, they drag it on into next year, but finally they decided to go in.

It's better that they go in with a lot of cash than if they continued burning cash into next year. So, they've got a good cash position to reorganize. I think they have the right personnel in Tom in being able to restructure. He'll probably have to bring on some heavy guns to help him with the job, but he's got experience from AT&T and some of the things that he did there.

QUEST: Ray, good to have your analysis and your insight on this program tonight. Many thanks to you, Ray Neidl, joining me from New York.

So, tomorrow and Wednesday in the United Kingdom it is going to be a particularly difficult day as up to two million British public sector workers will walk out on strike. Their message to the UK's coalition government is hands off the pensions.

From London, our Senior International Correspondent Dan Rivers puts the human face on who will be taking to Britain's streets.

(BEGIN VIDEOTAPE)

(CROWD SHOUTING)

DAN RIVERS, CNN SENIOR INTERNATIONAL CORRESPONDENT (voice-over): In Britain, the age of austerity is getting increasingly bitter and acrimonious. First the students fought battles over the rising cost of education. Now, the protests are spreading, this time over pension reform.

From closed schools, where teachers won't turn up, to chaos at airports. Border agency staff are also walking out. Even some non-urgent operations at hospitals are being canceled as staff strike. All in protest at government plans to cut state worker retirement plans. Unions are likening it to a general strike, such is its scope and potential effect.

The phrase "general strike" evokes echos of the 1926 action that crippled Britain. 2011 won't be as bad, but it will still cause major disruption.

DAVID CAMERON, PRIME MINISTER OF GREAT BRITAIN: Everyone should be clear that there is going to be disruption, and the reason for that disruption, the responsibility for that disruption, lies squarely with the trade union leaders who decided on a strike even while negotiations are ongoing.

I think that is irresponsible, I think it is wrong, and people should know who to blame.

RIVERS: The unions blame the bailout of the banks for the current wave of cutbacks. Just a short distance from the glittering financial quarters of Canary Wharf is one school that will close for the day.

Pupils at George Green's may be smiling at the thought of an extra day off lessons, but it will cause headaches for parents. Headteacher Kenny Frederick is going on strike for the first time in her 37-year career.

KENNY FREDERICK, HEADTEACHER: Never been on strike, and I was a teacher through the 80s when every second day seemed to be a strike, but I don't really believe in striking. But I just don't feel there's anything else that we can do.

RIVERS (on camera): Schools have been effected by strikes in the past, but this is the first time that headteachers have also walked out. It's a sign of the depth of feeling on this issue, which has galvanized public sector workers across Britain.

UNIDENTIFIED FEMALE: The school will (inaudible) to pupils on Wednesday due to strike action.

RIVERS (voice-over): Teachers say the changes will mean they'll retire later and on less money.

FAY BENSON, TEACHER: Public sectors work for the public sector because we've kind of made an agreement with the government that we will do these jobs, but that we should be given a fair pension at the end of it.

RIVERS: And if they don't get one, they're prepared to shock the school as they join the 2011 general strike.

Dan Rivers, CNN, London.

(END VIDEOTAPE)

QUEST: And we'll have full coverage, of course, of that strike and especially how it affects those people going through Britain's airports where immigration officials will also be on strike, leading to massive delays, we expect.

In a moment tonight on the program, Paris is insisting DSK is not the victim of a dirty tricks campaign. After the break, the author who says otherwise.

(COMMERCIAL BREAK)

QUEST: The conspiracy theory machine around Dominique Strauss-Khan has moved into high gear. Ever since those charges against the former IMF chief were dropped, his case has sparked questions about a possible plot.

France's ruling party, the UMP, has dismissed allegations it may have been part of a setup to end Strauss-Khan's political career. He was considered to be the front-runner to win France's presidential election next year.

The controversy, the latest, was set in motion by an article in the "New York Review of Books" by Edward Jay Epstein. Mr. Epstein joins me now from our New York bureau.

Substantially, Mr. Epstein, as I read your article and your allegations, you are essentially saying that there are questions that lead one to conclude or could lead one to conclude it was a conspiracy to set him up.

EDWARD JAY EPSTEIN, AUTHOR: There are questions that haven't been answered. Very important questions. Until they're answered, we cannot preclude the possibility that there was more to this than meets the eye. Whether or not it was a setup, I wouldn't say.

QUEST: All right. The first -- the first, of course, you allege, of course, is about his BlackBerry device, which he believed was being bugged. The second is connections and conversations between security officials in New York and perhaps in Paris.

And then, you refer to this strange dance that was done, celebrations and high-fiving between people who might have had a motive against it. But what I need to know is, how much of this is real and how much of it is conspiracy theorists?

EPSTEIN: Well, what is real is that his BlackBerry was missing. What is real is that employees of the Sofitel Hotel took actions to deter or delay the investigation, including not questioning the maid for an hour, including one of the employees lying before a grand jury, concealing the -- her presence in room 2820, which was across the hall. The hotel did not supply the electronic key card records.

What is real is actually what is missing from an investigation.

QUEST: All right. So, if we boil this down to its brass tacks, as we say where I come from, without libeling or slandering anybody, what do you believe happened here?

EPSTEIN: I believe that what happened is that DSK was very concerned that his BlackBerry was hacked. A concept not unknown in England these days. He made arrangements to have that BlackBerry examined, and then that BlackBerry was missing.

And we know from very substantial information from BlackBerry itself that it was pinpointed at the Sofitel Hotel when he was at a restaurant or just approaching a restaurant.

QUEST: So --

EPSTEIN: So, we know someone took it -- the BlackBerry.

QUEST: Sure, but there's a difference, isn't there, between the allegation of BlackBerry bugging and the allegation of sexual harassment that would ultimately doom his career. Do you think that those two are connected?

EPSTEIN: Not necessarily. I think you're absolutely right. These are different things that were going on in -- that day. Sexual harassment is one thing. He was, of course -- charges were dropped against him, but that's one thing.

The surveillance, monitoring, hacking is another thing. They're not necessarily connected, and I never said they were.

QUEST: Right. So, ultimately, do you think -- and I think this is probably -- this is almost the JFK question -- do you think we will ever get to the truth of what really happened? Or is it so deeply buried if something did nefarious take place?

EPSTEIN: I think we will get to the truth because the witnesses to what happened are going to be examined under oath in civil litigation, and I think we will find out what happened, not in the sexual harassment part, which you raised, but we will find out what happened in the activity of other people who happen to be engaged in one way or another with DSK.

I think we'll get information. And that's -- my article didn't concern the sexual harassment. I only mentioned it in passing. I mentioned it at the district attorney's dismissal of it.

QUEST: Right.

EPSTEIN: What I was concerned about was the surveillance.

QUEST: Mr. Epstein, it is a fascinating article, and I thoroughly enjoyed reading it, and I thank you, sir, for joining us from New York to discuss it.

A reminder, of course, DSK's charges were dropped against him, but any chance of him running for presidency has gone.

After the break, I'll be right back.

(COMMERCIAL BREAK)

QUEST: Every little bit helps, and these days, your country needs you. Italy's borrowing costs are stuck firmly in the danger zone. It repaid a rate today of 7.5 percent for 10-year money, close to 8 percent for newly introduced three-year bonds.

Now, those yields are going up, but also Italian and German bonds' yield also rose higher. In Spain and France's case, they fell back somewhat. The UK is now paying less money in some cases than in Germany. You get an idea.

As Italy's bond yields threaten to plunge the country into crisis, one Italian entrepreneur is calling people in Italy to help out as best they can.

The idea is very simple. Giuliano Melani has placed full-page adverts in the "Corriere della Sera," the financial paper in Italy, urging Italians to buy government bonds. It's a campaign that's led by the banks dropping commissions.

The whole idea is very simple. Your country needs you, so please buy the bonds. I spoke to Mr. Melani earlier.

(BEGIN VIDEOTAPE)

GIULIANO MELANI, FINANCIAL ENTREPRENEUR (via telephone): Really, just a little because we have a stronger real economy and the oomph, a large part of our data already.

QUEST: So, do you expect this appeal to make much difference? Will people buy these bonds?

MELANI: I think it can really make a difference. We have enough savings in our banks to buy back our debt eight times.

QUEST: So, what about professional investors who have been cautious to follow. What do you think?

MELANI: This is not true. I have just talked to the person in charge of the big banking institution for central Italy. He has told me they had doubled their requests yesterday.

QUEST: Finally, how many bonds did you buy? Have you bought any?

MELANI: I have bought 20,000 so far.

QUEST: There you are. That's what you call putting your money where your mouth is.

Jenny's at the World Weather Center for us this evening where, frankly, the storms are gathering.

JENNY HARRISON, CNN METEOROLOGIST: Yes, well, it's been a bit stormy here, actually, yes. But I tell you what. You've still seen some very, very unpleasant weather across northern regions of the UK. It's been about the rain, really, the last 24 hours.

For the last few days, we've been talking about those strong winds, all of this massive cloud across the north that have been bringing in those strong winds, but also some very heavy amounts of rain.

Look at this. Nothing much, really, across the west of Europe generally, but a very different story across the UK, in particular Scotland. We've had some torrential rain, all of this falling on some very, very saturated ground.

As you can see in the last few hours, that has been changing over to sleet, and then eventually to snow. And all that rain working its way across central regions as well, so not surprising that a warning's in place across the north through Scotland put in place by the UK Met office.

Look at some of these totals in the last 24 hours. Glasgow, 67 millimeters. Now, that in the last 24 hours is over half of the total monthly average for November, so it gives you an idea of just how much rain has come down in the last several hours.

And so much so that the Underground in Glasgow has been shut or certainly shut for a while because of flooding. And at the same time, into South Lanarkshire, 27 schoolchildren had to be rescued from their school because of a sudden flood from the nearby burn.

Roads have been closed, trains and buses have been canceled, delays at the airports. And it's all because of this. This area of low pressure, this front that's been swinging through. And it will bring some rain across into mainland Europe, but mostly it really is heavy across much of the north.

Now, the winds are not really the talking point that they have been for the last few days, but even so, they're pretty strong right now across the southwest. Plymouth, 45 kilometers an hour -- those are sustained winds, so easily seeing some gusts at around 55, maybe even 60 kilometers an hour.

And generally, these winds will stay blustery across much of northern Europe as we go through the next couple of days. A bit of a brief lull once this low passes by, probably really mostly throughout Wednesday.

And then, I'm afraid there's another system not far away after that. So again, as we go into Wednesday, expect to see some travel delays at all of the major airports, mostly because of those strong winds. And as I say, there is more rain in the forecast.

A little bit cooler, as well, but not too bad. Still temperatures in most areas across Europe in double figures, Richard.

QUEST: Jenny Harrison at the World Weather Center.

Now, when when we come back in a second or three, a Profitable Moment as we consider American Airlines and its decision.

(COMMERCIAL BREAK)

QUEST: Tonight's Profitable Moment. So, American Airlines has succumbed to the inevitable and is reorganizing under Chapter 11. It's ironic, really, since its previous chief exec, Bob Crandall, was always against Chapter 11 being used to gain competitive advantage.

Of course, the problem is all American competitors got there first. United, Delta, even US Airways have lowered costs, even if only a penny or two, and those pennies add up.

American will now have to fight its creditors, its lenders, and its workforce to get concessions. It'll be a bitter fight. American had no choice.

American is not going out of business. It has One World, it has its trans-Atlantic alliance, and it will return a formidable competitor. The law is being used as, perhaps, it was always intended.

And that's QUEST MEANS BUSINESS for tonight. I'm Richard Quest in London. Whatever you're up to in the hours ahead, I hope it's profitable. The news continues on CNN.

END