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QUEST MEANS BUSINESS

Airline Assn CEO Predicts EU's Carbon Reg Will Spark a Global Trade War; Central Bank Concerns; Interview with Jorgen Vig Knudstorp; Interview with Aaron Simpson

Aired December 22, 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, CNN INTERNATIONAL ANCHOR: Tonight it's a program of warnings. IAG's chief exec tells me we're heading into an international trade war.

(BEGIN VIDEO CLIP)

WILLIE WALSH, CEO, IAG: At a time when, you know, grow this absent, and in fact most people talking about recession in the EU, to embark on a war with your trading partners, to me is absolutely the wrong thing to do.

(END VIDEO CLIP)

More warnings: A chief economist says the wheels are coming off the wagon.

And we have a warning to Santa. Your business model is flawed.

I'm Richard Quest. I mean business.

Good evening.

The chief executive of International Airlines Group, Willie Walsh; his company owns British Airways and Iberia, says Europe could be heading for a trade war. Mr. Walsh says anger over the EU's carbon emissions scheme, which starts next year, could cause chaos.

Now, last night we told you how the rest of the world is furious at plans to charge non-EU airlines for their emissions, when the fly into the European Union. The U.S. Secretary of State Hillary Clinton has already threatened appropriate action against the scheme.

Today as his company announced the take over of BMI, I asked Willie Walsh why he was so concerned.

(BEGIN VIDEOTAPE)

WALSH: I'm actually not against EU emissions rating. In fact, I've been a proponent of the inclusion of aviation in emission's rating. What I'm against is the application by the EU of a scheme that should be applied within Europe. They are decision to impose this on the world. I have long said that that is a mistake.

QUEST: But you'd be more angry if it was only imposed on your airlines and they didn't have to pay?

WALSH: No, I think if it was imposed on an intra-EU point of view so it would impact on everybody operating within that environment, that is OK. So there were options that could be applied solely to flights operating within Europe. It could have been applied to flights entering EU airspace. But the decision of Europe to impose this scheme on the rest of the world is one that I have, for a long time now, said was a mistake. Because it was inevitable that it would lead to retaliation. And that is what we have seen.

And it is not just retaliation from one government, one economy. You know, the world has in fact united against this. And I think that is disappointing for two reasons. The first is, I believe that emissions trading is one of the solutions that we need to pursue long-term. And I think the ultimate goal is for a global ETS scheme. So it is disappointing that the viability of the ETS as an option would be undermined by this.

More importantly, I think it is going to lead to a trade war. And at a time of economic uncertainty, particularly in Europe, having the additional uncertainty of a potential trade war-not just, you know, something that will impact on the airlines, but it will impact on trade. It is the last thing we need.

QUEST: You've chosen your words carefully when you say trade war?

WALSH: Yes, I think this goes beyond impacting on airlines. Because if you impact on an airline you are impacting on business. You know, the global economy requires connectivity. Europe needs to be connected to the rest of the world. In fact, Europe is saying the rest of the world is critically important to supporting the EU economy and potentially creating growth in the EU.

Now, at a time when, you know, growth is absent, and in fact, most people talk to me about recession in the EU, to embark on a war with your trading partners to me is absolutely the wrong thing to do. I think the EU need to step back. This is not about the EU showing their determination n climate change issues. Everybody is clear on that. But we need to see now the EU showing its determination on economic issues, which I think is much more important at this time of great uncertainty.

QUEST: Let's talk economics for a second. It has been a good year by and large, everybody has got through, you know, with higher oil prices, and profits are down. But everybody is holding on. Next year, all the forecasts are suggesting the Eurozone in recession, sluggish growth in the U.S. and the U.K. just bordering on recession. How worried are you for next year?

WALSH: In that environment I'm not too worried, because my outlook on the U.S. actually is that there would be growth in the U.S. And growth is a positive. I think part of the problem is we have become conditioned to high levels of growth. And we've got to wean ourselves off that. So, when I look at the world for 2012, I see growth opportunities.

I think Europe is the main area of concern. And that is why I'm really worried about what the EU is doing. I think there is a lack of political leadership in addressing Eurozone crisis. I think there is a lack of political understanding around the risk of the impact on trade if Europe continues with their intention to impose ETS on the world.

Absent the, you know, those issue-actually I think 2012, it will be challenging. But it is not going to be on the same scale as we witnessed in 2008, 2009.

(END VIDEOTAPE)

QUEST: Willie Walsh there on the trade implications for the emissions standards. And we'll hear more from him later in the program.

IAG, of course, sealed its $270-million deal for BMI today. And he'll explain why there will be job cuts and why IAG still has its eye on buying yet another Europe airline.

We carry on in a moment and we are hurtling towards a new year. Apparently, the wheels are coming off the economic wagon. Next, HSBC's chief economist says it is probably too late to turn around 2012.

(DESK BELL CHIMES)

(COMMERCIAL BREAK)

QUEST: The U.S. economy is recovery slower than first thought. The figures show it grew 1.8 percent in the third quarter; less than an earlier estimate of 2 percent, so the U.S. slightly less than expected. In the U.K. it is the other way around. The Office of National Statistics says the U.K. economy grew 0.6 percent. It is just a smidge, 0.01 of 1 percentage point higher. Just a small change it is a positive sign, perhaps, in the right direction.

Now, when I read this report over in the last 24 hours, I was somewhat shocked at what I read. It is the report from HSBC Global Economics. And HSBC is warning that the wheels might be coming off the global economy in 2012. When the wheels fall off is how they describe this-this one.

Now, the forecast: You can forget a happy new year. It is forecasting a full blown recession for the Eurozone. The Eurozone, it is going-it says there will be a major recession. GDP will be down some 1 percentage point. When you go to the United Kingdom it might just skirt- and you'll see the number-the skirting of the number is just 0.3 of a percent. So, they think that, HSBC thinks, it might be a technical recession in the U.K.

And in the United States, their forecast now-and remember, they have downgraded all their forecasts over the course of the last few months. Now they are saying an anemic recovery in the United States. However, when you talk about the emerging markets, and you are down here, and of course you are out-sorry, we can't put Australia as an emerging market. We are down in Latin America, in certain parts of the continent here, and in Southeast Asia.

When you talk about there, you are talking about much faster economic growth than you'll see in the OECD in the developed world. Not surprisingly then, they are basically saying there are three key factors that are threatening to run the wagon off the road.

So, the financial systems black box, they say is-the black box, which is the way in which the investors, the derivatives, the whole panoply of information, they say, is going to cause great problems in the future.

They also worry about global contagion. Risk of Asian credit crunches, banks bring back funds home. And finally the policymaking impotence; the firepower limited in the developed world. Rates are already close to zero, despite regular doses of quantitative easing.

So, as you can see, on all the various different parts of the wagon it is all going to cause some great deal of misery. HSBC's chief economist, Stephen King, is one of the authors of the report. He told me that the opportunities to fix the global economy have already been missed. And that next year is looking pretty bleak.

(BEGIN VIDEOTAPE)

STEPHEN KING, CHIEF ECONOMIST, HSBC: If one was hoping for recovery in 2012, I think the wheels have already fallen off. The risk now is that we are going to have a recession in the Eurozone. A recession, perhaps, also in the U.K. various off growth coming through in the U.S. Although we are quite optimistic about China, China will not be strong enough to bailout the rest of the world.

So, we have had an opportunity to recover over the last couple of years, the opportunity hasn't been taken. We have gone through this terrible Eurozone crisis and the damage has already been done.

QUEST: You're report says you are projecting a full blown recession for the Eurozone. I mean, and you-and you keep ratcheting down your forecasts and we're getting more and more pessimistic.

KING: Yes, in one sense we have repeated what happened back in 2008, 2009. The consensus was very, very slow to spot, the kinds of risks that are going to come through at that time. And there is a danger with seeing the same kind of thing happen today. Specifically that banks are cutting back on their lending, that trade is really falling away quite significantly. World trade probably peaked at the beginning of 2011, been fading ever since. We have had a slowdown, not just in the Eurozone, but also in Latin America, in Asia, and elsewhere.

QUEST: And yet, can we say that this slowdown, or this recession, this double-dip for want of a anything else. Because we still-we never come out properly from the crisis of the last time.

KING: Yes.

QUEST: Can we say that it is largely because the Eurozone did create such a crisis of confidence over the last 18 months?

KING: It certainly hasn't helped. I think it is important to stress that other factors have also been at work. Higher oil prices, earlier in the year, which certainly limited people with incomes. The fact that you had the U.S. and U.K. slowing down consistently through the course of 2011, before the Eurozone crisis really hit home; but there is no doubt that the move from, if you like, from stagnation to recession, is very closely connected to what is going on in the Eurozone.

QUEST: And in countries like the U.K., whatever the reasons may be and whatever, the reasons may be and whatever the chancellor and the bank may say, we actually have stagflation.

KING: Yes, although, of course, one might argue that the higher inflation is a useful thing to have in exchange for lower unemployment, that might otherwise might have been the case, it is a kind of trade off that has come through. But nevertheless, one of the problems the U.K. has, and indeed other European countries have, is that the policy options that were available back in 2008, 2009, interest rate cuts, fiscal stimulus, they are not there anymore.

QUEST: You talk about that the three main dangers, that the system's black box, basically as I understand that is that the thing is now so complicated with derivatives and markets and, it is so interconnected that no one knows what is lurking underneath it.

KING: Well, the primary issue there is that the financial system is very complicated. Economists typically see only one interest rate in an economy, there is an exchange rate, and that is all that really matters. But we learned from the financial crisis back in '08/'09 that there are a series of really quite complicated connections. And there still is today, the fact is that it is much more difficult to see growth and expansion today than was the case a few years back. Banks are suspicious about lending to each other, which again, limits credit expansion.

There is also a lack of demand for credit. A lot of people de- leveraging to pay off debts. It doesn't help either.

QUEST: So, as we come to the end of the year and we have our old friend-we brought them out again because we did feel that pretty much it is time to get some guidance.

KING: Yes.

QUEST: Which one do you think we should light up as we go into 2012?

KING: I think it going to be a red light, isn't it? For danger ahead.

QUEST: You really think?

KING: Yes, I think that is the problem it's a red light.

QUEST: It's that bad?

KING: It's that bad, yes.

QUEST: Thank you very much.

KING: Thank you.

(END VIDEOTAPE)

QUEST: What more can one say? When you see that sort of-it's that bad. And that is the chief economist of HSBC. And there was a similar view from the chief economist at Credit Suisse-or economic advisor to Credit Suisse, on last night's program.

The traffic lights will remain with us now into the new year and will be with us until we start to see at least ambers and some greens.

(DESK BELL CHIMES)

A seesaw week on the stock markets. European markets gained on Tuesday. They fell on Wednesday. Can you guess what they did today? Green arrows across the board. Gains of 1 percent or better everywhere except Zurich. The best numbers were in Paris where banking stocks did particularly well. Soc Gen, BNP Paribas, all among the top performers there.

And to New York, the Dow Jones industrials.

(DESK BELL CHIMES)

That of course, is up just 66 points, at 12,100-it is slow. It is getting there. But it is going up higher. Up 66 points, 12,174.

When we come back, in a moment, what does the president do while waiting to see whether Congress can work out a payroll tax cut deal? Barack Obama, joins the masses for some last-minute Christmas shopping, in a moment.

(COMMERCIAL BREAK)

QUEST: A few days `til Christmas and retailers in the U.S., not surprisingly, are hoping for that last-minute spending stampede. There is a Saturday before Christmas day on the Sunday. After a blockbuster Black Friday in late November there is some concern about how the overall economy and holiday season will react and play out with each other.

Maggie Lake has been with the shoppers in New York City.

We know from previously that Maggie, of course, has already done all her shopping on line. She hasn't got anything left to buy for anyone, except me. So, she is feeling smug as she watches people battle the sales.

MAGGIE LAKE, CNN BUSINESS CORRESPONDENT: That's right, Richard. You know, me. We'll get to that in a moment, but let's talk about the shopping.

There was some concern that people had run out quickly and then sort of dried up. But take a look behind me. We are at this lovely holiday bizarre right across the street in Columbus Circle. And the aisles are absolutely jammed.

So clearly, you are not the only one who left things to the last minute. People are picking up gifts and what-not. In fact, some early estimates say holiday sales this year up about 15 percent. But when we talk to people here about how they are feeling in general, especially as we look into 2012, and they are definitely a little more cautious than those numbers would suggest. Have a listen.

(BEGIN VIDEOTAPE)

UNIDENTIFIED FEMALE: This is an agate line up, of different color agate stones.

The first weekend was gangbusters. It almost doubled the numbers from last year. As of Sunday, actually, things dramatically dropped. Most of my sales have been credit cards rather than cash, which was not the case last year. I think it says that people are dying to spend, but they don't really have the money. That they are spending, but they are going to be hit after the season, I think, with those big credit card bills.

UNIDENTIFIED MALE: Just let it melt in your mouth. No chewing allowed, that's our rule. Would you like to try another piece?

UNIDENTIFIED MALE: Yes, absolutely.

I bought a lot of stuff early. So, to spread the bills out; so that I'm not going to get hit with a giant credit card bill in January. And I bought it when it was on sale and I just put it away and saved it.

It's not knowing whether you are going to have a job in six months. I know-I have friends who just got laid off. I have friends who are worried about getting laid off.

UNIDENTIFIED FEMALE: I don't know how-I mean, in terms of job security, where I'm going to be in six months. And I just think it is the smart thing to do, to not spend as much.

UNIDENTIFIED FEMALE: It just going to continue to be a slow recovery, but we are starting to get used to it, living within our means, but enjoying what we've saved, so that we can spend it in meaningful ways.

UNIDENTIFIED FEMALE: I want a puppy!

(LAUGHTER)

UNIDENTIFIED FEMALE: It's for my husband, because he's the "Daddy of all Daddies". You can't be depressed on Christmas. It is just the spirit, you know, you have to get into it. Yes, you know, times are tough, but you know, we're happy.

UNIDENTIFIED FEMALE: Best seller, far and away, is our Princess. And she definitely has her own personality.

UNIDENTIFIED MALE: The Princess, that is for my niece, Emmy. And, the Pirate, for her brother, Ben.

My spending has been pretty good this year, actually. I'm optimistic. I think things are-

UNIDENTIFIED MALE: Why?

UNIDENTIFIED MALE: Well, I think, what I'm reading, what I'm hearing is pointing in the right direction, as far as the economy is concerned. The political stuff, we can't do much about.

UNIDENTIFIED FEMALE: I'm hopeful that things are going to go up and stay steady.

You're surrounded by smiling faces all day long, how can you not be an optimist, when you work with these things?

UNIDENTIFIED FEMALE: We're happy. Looking forward to Christmas-and Santa. Yes.

(LAUGHTER)

(END VIDEOTAPE)

LAKE: No, I'm with that one fellow. I did a lot of it early so I could stick to my budget. But, Richard, you know me, never too late to pick up a little something extra. I could not resist her. But in your case, yes, I didn't forget about you. We went online. Tanya can help me out.

The perils of online shopping, Richard. I don't know if our viewers realize it, but you carry that bell of yours to New York, every time. I've been watching you do it. I thought we needed to upgrade you. So I got you a gong! But when it came, our executive gong was-

(TINKLE SOUND)

A little too small, so we are going to shelve that. We didn't do too well with that one. But, Tanya, much better with my second choice. We got you-now our viewers all know this about you-aviation buff, love of everything planes. Total plane spotter, geek, some might say. So we got you a propeller letter opener.

QUEST: Yeah!

LAKE: Courtesy of the New York team, here. And we will be putting it in the post to you, Richard. And we expect to see it placed with prominence on that desk next to the bell.

QUEST: It most certainly will. Maggie Lake, with all-

LAKE: Gorgeous, isn't it?

QUEST: It is. And that is the budget spent for next month!

Maggie, one quick question. I'm fascinated by the people-besides your gorgeous present-by the people behind you. Some are wearing coats, and some are wearing T-shirts.

LAKE: Richard, we are having the most bizarre December. It is like 64 degrees here today. Feels more like late March, early April. But I am told by reliable sources that there maybe a white Christmas in the offing. It is supposed to turn dramatically tomorrow. We'll see. A lot of the little ones here, holding out hope for that, I can tell you.

QUEST: All right. Maggie, get that present in the mail to me, at least by the time we get to the New Year. Many thanks to all of your colleagues, or my colleagues, in New York. And send the gong as well, it will make a nice change from the bell.

Now, if you are yet to make the mad dash to the shops, you are in good company. Barack Obama took the family dog, Bo, on a last minute spree. The president picked up a Christmas bone and a chew toy for the first dog. And a dance game for his daughters. Hang on, we're giving away the game here. We're telling his daughters what they're getting.

Obama's payroll tax extension is stuck in Congress. He's doing whatever he can to boost consumer sentiment.

The U.K. retailer, Selfridges, says 80 percent of men will leave their seasonal shopping until Christmas Eve. The shop's launched a couple of services to help out. There is a mobile app and a gift guru. The guru is there to help find a winning gift for mom, dad, and Auntie Connie's second husband's cousin.

So, in our "World @ Work" tonight, we join Barrington Mills-now there's a name-if Barrington Mills can't find you're a present, you're in trouble, because it is his, "World @ Work."

(BEGIN VIDEOTAPE)

BARRINGTON MILLS, GIFT GURU, SELFRIDGES DEPARTMENT STORE: A gift guru is basically an ambassador of Selfridges. We pretty much know Selfridges inside out and find any gift under the sun that you need for Christmas.

UNIDENTIFIED FEMALE: Hello, can I have a guru to reception, please? Guru to reception.

MILLS: Hello.

UNIDENTIFIED MALE: Hi, Barrington.

MILLS: How are you doing?

UNIDENTIFIED MALE: It's for may dad and my sisters, if possible.

MILLS: OK. Let's take a look.

UNIDENTIFIED MALE: Thank you very much.

MILLS: No problem.

This is our gift guru lounge. We have pretty much gift ideas.

Be quite forward with the customer and find out exactly what it is they are after. If they don't know then you try to push as many ideas as you can out of them.

UNIDENTIFIED MALE: Yes, definitely a clutch.

MILLS: What sort of designs does she-?

UNIDENTIFIED MALE: She's very into Mulberry.

MILLS: Mulberry, that's perfect.

UNIDENTIFIED MALE: That always goes well.

MILLS: Do you have a particular budget at all?

UNIDENTIFIED MALE: Probably all together 600 pounds. Maybe the girlfriend, I can stretch a bit more.

MILLS: Majority are the men because I'm guessing they don't know exactly what it is they are looking for when it comes to gifts. So if there is a gift guru there, someone who is able to shop for them, why not? A lot of time people don't even know the size of their wife or husband. So you have to sort of gauge it. We'll walk around and we'll see customers and we're like, is it a bit like that? And she like, yes, tall, broad-uh, it can be challenging at times, but it is fun. It's definitely fun.

Two bags, one is a navy blue long shot, which I've grabbed, and it is a reasonable size as well. Price wise, 43 pounds, so definitely within budget.

A good gift guru will definitely have to be one that is a people person.

You are sort of speechless when you have a customer come up to you and ask you for 15 bags, all the same bags, and they were like 750 pounds, like 1,500, and she pays in cash. It is just amazing when they pull out an envelope full of 50 pound notes.

Since I've been through this store I managed to find a couple of pairs of gloves for his dad, which is needed; two Long Champs (ph) bags, one for his mom and sister. I managed to find a pair of black pumps, Chanel pumps, which is specifically what he asked for, for his girlfriend.

And I don't really want to share every secret of mine, but definitely one of the main, main, ones would be service with a smile.

You give us a call. Obviously, you've only got until the end of the week. Christmas is Sunday.

(LAUGHTER)

UNIDENTIFIED MALE: The pressure's on.

MILLS: Exactly, the pressure is on.

UNIDENTIFIED MALE: Thank you very much.

MILLS: You're very welcome, Luke. Take care.

I definitely feel like a modern-day Father Christmas.

(END VIDEOTAPE)

QUEST: From the modern-day Father Christmas, to the real thing. Last night we talked about Santa's carbon footprint. Now it is the original gift guru and the question every child asks. How does Santa does it-well, on QUEST MEANS BUSINESS we ask the question: Santa-nomics. Is Santa an economically viable business?

The jolly fat man financing and how does this gravy train around the world? We've looked at the balance sheet. Look frankly, Santa, it's not bad but, it's not a business I'd back. Let me show you what I mean.

Let's start with the toys. There are roughly 2.2 billion children. Now if they each get $100 a head, say, averaging between the rich and the poor, that is $220 billion Santa has to spend on toys alone. Maybe Santa was one of those that was at the ECB yesterday, for the half trillion dollars. He's got a serious financing requirement.

Then you have those pesky reindeers. Now they are only $18,000 a year to keep. And you don't have to worry about the commodity prices with these. So the reindeers are not a big problem. But you have to consider the reindeers as engines. They are the motors. At $12,000 a year for insurance. Yep, somebody has actually worked out how much it would cost. It is called a transport Web site Abogo. Aircraft and liability insurance is another $30,000 and although Santa hasn't had any reported accidents, he's still going to have to pay, because there's insurance on the reindeer, the sled, and, of course, on all those gifts. Roughly 15 percent of the value, Santa, cough up -- $33 billion in insurance.

And so, let's move to the elves. When you look at the elves, they're paid in candy, the currency of the North Pole. So they're relatively cheap.

But don't forget health and safety at work. And 30 degrees, close down production.

All in all, Santa doesn't really even have a trademark on his own name. Nope. Because if you'll remember, everybody tries to say, even Coca-Cola, that they own the rights to Santa.

Guess what man in big red coat?

You're economically unviable and unless you've actually got a bit of magic to help you, frankly, I wouldn't invest. Thankfully, children don't have that luxury. They know that the presents will arrive whatever the balance sheet.

We're right back with more after the moment.

(COMMERCIAL BREAK)

QUEST: Hello, I'm Richard Quest.

More QUEST MEANS BUSINESS in a moment.

This is CNN. And on this network, the news always comes first.

More than 60 people are dead and nearly 200 have been wounded after a string of bombings across Baghdad. Police say nine bombs and six roadside bombs exploded over a span of two hours. So far, there have been no claims of responsibility for the attacks.

Thousands of ethnic Turks in France are venting their anger over a new bill passed in the lower house of parliament. It makes it a crime to deny that the mass killings of Armenians in Turkey nearly a century ago was genocide. Turkey is recalling its ambassador and says it's reviewing its relationship with France.

The Russian president, Dmitry Medvedev, has called for specific political reforms on Thursday in his final state of the nation address. He also denounced opposition groups he accused of creating social unrest. His proposals come after tens of thousands of Russians protested against the fairness of the vote that elected the very parliament to which he was speaking.

International Airlines Group has agreed to buy the struggling British carrier, BMI, from its current owners, Lufthansa. The deal is worth $270 million. IAG will get a significant discount if Lufthansa can't separately sell the low cost carrier division, bmibaby, before completion. In all, BMI lost $240 million last year. IAG says the take over is a unique opportunity to expand.

Virgin Atlantic is furious, having hoped to buy BMI itself. It says the deal is anti-competitive and promises to fight the take over.

So, Willie Walsh is making no bones about it. It's all about snapping up the slots at Heathrow Airport.

If you join me at the super screen, you will see what this is about.

Virgin says this is not necessary, it's anti-competitive. BA (INAUDIBLE) -- BA, of course -- and IAG says that when you compare British Airways at Heathrow with all the other major careers at their home hubs, BA is at a disadvantage.

Let me show you what I mean. So, at Heathrow Airport, after this deal goes through, IAG, that's Iberia, BA and British Airways, will have 53 percent of all the slots in the airport. It sounds a lot. Most of them will go to BA.

It sounds a lot, 53 percent. But when you compare that with Amsterdam's Schiphol, where KLM Air France is based, they have 57 percent of the slots.

Add in Paris Charles de Gaulle, the two airlines have 59 percent of the slots.

And when you talk about the headquarters hub for Lufthansa, which is Frankfurt, they have a massive 66 percent of the slots.

So, what they are saying at British Airways is they need to have this because they are at a disadvantage when you compare it to the others. That's the scenario that they argue.

Willie Walsh says he may not be finished with his acquisitions. And for the moment, though, he has to work out what to do with BMI. (BEGIN VIDEOTAPE)

WILLIE WALSH, CEO, IAG: Well, we've got a number of options. You know, the brand works well in the UK. It's got good recognition around Europe. It's not a global brand.

So in terms of our ambition to expand our long haul presence at Heathrow, we will not be using the BMI brand. That will be under British Airways brand.

But we are looking at an option to retain BMI as a brand within the IAG group. Or the alternative is that we'll just, you know, merge, integrate BMI into British Airways. So these are two options that we have and we'll consider which is best in the interests of our shareholders.

QUEST: The -- there will be job losses...

WALSH: Yes.

QUEST: -- inevitably.

WALSH: Yes.

QUEST: And -- and, ironically, they may be at the front of the airline, they may be in the back offices, because that's the bit where you gain the synergies when you put it into IAG.

WALSH: Yes, regrettably, there will. And -- and I felt it was important for me to be up front about that today, because I would be misleading people if I said there wouldn't be job losses.

And you've got to put it into context. Unfortunately, BMI has been losing significant sums of money. And not just in the recent past, over a number of years. So the scale of the restructuring that's necessary is quite significant and, inevitably and regrettably, there will be job losses.

In the longer-term, however, as we use some of the BMI slots for long haul expansion, that's an opportunity to create new jobs.

QUEST: To the cynics who says, what this is really all about is BA buying the slots and unfortunately some planes and other bits come along, too, but, actually, the 8 percent of slots at Heathrow that you're really buying and paying quite a good bit -- not an unreasonable price for, when you look at what the American carriers pay for their Heathrow slots.

WALSH: Well, I don't think it's just the cynics that would say that. I -- I've been quite up front in saying my primary interest in BMI relates to the slot position that it has in Heathrow. I've made no secret of the fact that we want to be able to grow at Heathrow. And we particularly want to expand our long haul network to destinations not currently serviced by British Airways. And in particular, these are the growth economies in Asia, where we don't have the presence today and where I think it's critical not just for our own business, but for the U.K. economy to have connectivity.

QUEST: So, you got BMI.

What's next?

I mean is it -- it's like the old saying, so what have you done for me lately?

WALSH: Well, you know, BMI, I think, is a significant step forward for us. We're -- we're delighted today...

QUEST: It gives you good practice, doesn't it?

I mean this is a good one to practice on for integrating another airline into IAG?

WALSH: Well, we're not doing it for practice, we're doing it for real. And, you know, there are challenges ahead in integrating it. So, you know, 2012 will be very much focused on integrating BMI into the IAG Group. And the only other opportunity that we've said we would look at in 2012 is TAP in Portugal. And that's only if the Portuguese government decides to initiate the privatization process.

Now, I need to be important -- you know, clear here. Saying we'll have a look at TAP does not necessarily translate into we will make a bid for TAP. I think we'd be foolish not to look at it, but, you know, we're delighted with BMI. It gives us plenty of work to do in 2012, you know, particularly in an environment where there will be other challenges.

So for the time being, you know, that's our focus.

QUEST: Congratulations on your purchase and on your new...

(LAUGHTER)

QUEST: -- on your new purchase and all the best for 2012.

WALSH: Thanks very much.

(END VIDEO TAPE)

QUEST: Willie Walsh, chief executive of IAG, the International Airlines Group.

When we come back in a moment, Hungary is under pressure from all sides. Now, the European Central Bank is adding its voice of criticism. Find out, in a moment.

(COMMERCIAL BREAK)

QUEST: The economic heat under EU member, Hungary, has been ratcheted up. The European Central Bank added its criticism and says its proposal to restructure the national bank could undermine its independence. This is what's happened. The central bank is concerned over Hungary's acting to change the rules of its own Hungarian Central Bank. It could make it less independent, merging the two. And so that has given some real cause for concern within that. And the ECB has warned Hungary against actually taking such measures.

Also, Standard & Poor's has now downgraded Hungarian debt. It's downgraded it to BB plus and it says predictability and credibility continues to weaken.

Now, Standard & Poor's is -- follows on from Moody's, which had already downgraded. To put that in perspective, Hungary is now at the same as Latvia. Only Greece is worse within the EU at CC.

And the forint against the dollar, look at that. The furniture has fallen quite dramatically. These are as various economic policies have been introduced, whether it's the pension reform taken for nationalizing the pensions, or, indeed, it's protectionist measures against the forint for those people who have got mortgages and such.

So, as you can see, Hungary is -- is one of those countries now that is suffering and having some serious problems within the union.

And that is QUEST MEANS BUSINESS for tonight.

I'm Richard Quest.

And thank you for your time and your company.

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

The news continues.

(COMMERCIAL BREAK)

QUEST: Hello and welcome to MARKETPLACE EUROPE.

I'm Richard Quest, this week reporting from Frankfurt's famous Christmas market. The buyers are out in force, spending money, no doubt, to help the powerful German economy. And even though in other parts of Europe, things may not be going too well, the signs are this Christmas that at least from the shoppers, it might be OK.

(BEGIN VIDEOTAPE)

QUEST (voice-over): This week, Juliet Mann travels to Denmark, where she visits the makers of one of children's favorite toys, LEGO. And I go on the hunt for some special gifts with the help of one of the world's leading concierge services.

(on camera): We know it's going to be an austerity Christmas. And that's got some chief executives seriously worried. And for good reason.

So why, then, does the CEO of one toy company believe things will be all right?

The CEO of LEGO has been talking to Juliet Mann and says providing that you are prepared, you have nothing to fear.

(BEGIN VIDEOTAPE)

JULIET MANN, CNN CORRESPONDENT: We're here surrounded by all of these fantastic LEGO constructions.

Has it been a good year for LEGO?

JORGEN VIG KNUDSTORP, CEO, LEGO GROUP: It's been another fantastic year for LEGO. This is our fourth year of double digit growth. So we're very happy.

MANN: Haven't you already done your planning, though, for Christmas?

VAN KNUDSTORP: Oh, we are all set for Christmas. That's already history. We started planning it two or three years ago. And yes, it's -- it's gone.

MANN: What about looking at the wider market?

What changes have you had to make because of the current economic climate?

VAN KNUDSTORP: Yes. The current economic climate is definitely a major challenge. I think one of the major impacts it's having in the retail environment is the phenomenal growth of Internet retailing. And I think we just have to realize, we are living in a digital revolution. And it is going to change the market massively, both from a retail perspective, from how we operate your business, the level of data integration, interaction with retailers, our systems, the products we offer.

Video games, for instance, it's a major category for us. And then, of course, how we are able to interact with customers and even within the company.

MANN: But if you were in a room with all of Europe's finance minister and you could give them a piece of advice, what would it be?

VAN KNUDSTORP: Well, my piece of advice would be face the truth. That's what I learned the hard way in our company. We were not facing the realities. The reality for us was also we were over indebted. And Europe is over indebted, as is, unfortunately, many other Western economies. And I think the beginning of solving that crisis is to say, yes, we are over indebted. We -- I'm sorry, we screwed up. We took on too much debt. let's reduce that. I heard in Mesopotamia what they did was when the king died, they wrote off all the debt and started all over again.

I don't think we can do that, but I think we need to make a debt write-down.

We all think we are richer than we are. Our pensions are vested in these companies who have taken on too much debt on behalf of governments and households. And we have to realize we're not as rich as we thought.

But let's get it out. Let's start from a lower base of debt and then we can start being productive economies again.

If we don't do that, we are going to be in a 10 year period of no growth.

MANN: So with all of this debt that we're saddled with, you're saying write it off because there's no hope of ever being able to pay it back?

VAN KNUDSTORP: I am saying not all of it, but what about a 20 percent cut, just telling us -- all of us, because it's you and me, it's not the banks, because we are shareholders in the banks through our pension schemes. So it's about all of us recognizing that we've lost a little bit of our wealth. We have anyway, we're just not facing the music.

MANN: You seem quite relaxed about the economic crisis. But you've thought about it quite a lot.

What are the things, though, that are keeping you up at night, that -- that make you worry about the future for LEGO?

VAN KNUDSTORP: Yes. What really makes me quite worried about the economic crisis, at least in its impact on LEGO, is that I think we are moving from a 30 year period of just borrowing more and more money at the government level, but certainly also at the household level. And I think we have, in some ways, been able to benefit from that level of consumption.

I think we are coming into a phase now where there will be deleveraging, there will be increasing raw materials costs. There will not be so much cheap labor available around the world.

So I think we are coming into a different phase. And that's why we at LEGO have named our ability to scale our business and our ability to be adaptable as a business. That's the major challenge for the future.

So we are stressing ourselves to be even more adaptable than we've been in the past, because I think it's going to be crucial to survival in these kind of times.

MANN: OK. Let's do it.

That's good. That's great.

(END VIDEO TAPE)

QUEST: You can't come to the Frankfurt Christmas market without buying and trying some bethmention (ph). It's a marzipan candy whose history goes back more than 100 years. Apparently, admirers used to send it to the object of their desire. If she kept it, you're in with a chance. If she sent it back, well, you knew to look elsewhere.

Perhaps you should send some to the European Council.

(COMMERCIAL BREAK)

QUEST: Even in bad economic times, the beauty of the Christmas market, you can eat your way around Frankfurt.

Hello.

UNIDENTIFIED MALE: Hello.

QUEST: So much food, the calories could fuel the economy. It would be a boom. Forgive me, I'm about to steal some of your...

UNIDENTIFIED MALE: Dumph noodles.

UNIDENTIFIED FEMALE: Dumph noodles.

QUEST: Dumph noodles.

UNIDENTIFIED FEMALE: With vanilla sauces.

QUEST: Dumph noodles with vanilla sauces.

UNIDENTIFIED FEMALE: They're nice.

QUEST: This is not the time to give up the diet.

Thank you.

UNIDENTIFIED FEMALE: You're very welcome.

QUEST: Thank you.

(CROSSTALK)

QUEST: Well, you were saying this...

UNIDENTIFIED FEMALE: This is much better.

QUEST: What is that?

UNIDENTIFIED FEMALE: This is a waffle.

QUEST: Ooh. Can I try a bit of a...

UNIDENTIFIED FEMALE: Yes.

QUEST: -- a bit of waffles?

UNIDENTIFIED FEMALE: Yes. I gave it to you.

QUEST: Right. There we are. Thank you very much.

UNIDENTIFIED FEMALE: You're welcome.

QUEST: Ooh. Well...

UNIDENTIFIED FEMALE: I told you.

QUEST: Ooh.

UNIDENTIFIED FEMALE: I told you.

QUEST: I'm eating my way around Frankfurt's Christmas market.

UNIDENTIFIED FEMALE: And this is good.

QUEST: The euro still buys something. Oh, look at that, a real feast to behold, even in these austere times.

For some people, they're certainly celebrating aplenty this Christmastime, such as the wealthy clients from the elite concierge service, Quintessentially. For those customers, it seems even the festive season knows no bounds.

(BEGIN VIDEOTAPE)

AARON SIMPSON, CO-FOUNDER, QUINTESSENTIALLY: I think you're -- I'm pretty right in saying that actually there's plenty of people who still have disposable money.

Yes. And -- there are lots of people that have disposable money. It's an increasing audience. As the world gets richer, the richest top 2, 3, 4, 5 percent are getting richer in an exponential fashion. And there is -- it's a growing market.

QUEST: For your business, it's -- how do you best assist those people relieving them of some of that wealth?

SIMPSON: Well, we set up Quintessentially 10 years ago.

QUEST: Which, incidentally, I never thought it was going to succeed.

SIMPSON: You didn't, no. I met you, I think...

QUEST: Yes.

SIMPSON: -- about that time...

QUEST: Yes.

SIMPSON: -- and you said there's absolutely no way that's going to work.

QUEST: Absolutely. It was my fault (ph).

SIMPSON: Thirty cut -- 30 -- 65 countries, 32 different businesses later, Richard, I would love you to invest now and see where we are in the next five to 10.

QUEST: Let's just look at some of the -- the little baubles and trinkets.

Now, where would you like to begin?

SIMPSON: Well, I think you should be opening this while we're waiting. I think it's a little...

QUEST: All right.

SIMPSON: -- a little present.

QUEST: What do you think your company will spend on behalf of clients over Christmas?

Give us an -- give us some idea of the size and scale.

SIMPSON: Yes. It would be around $20 million in the U.K. alone just on luxury items, yes.

QUEST: I see.

SIMPSON: So this, I think, is a Bamford Rolex watch that is customized...

QUEST: It is.

SIMPSON: And I believe it's Ban -- it's actually brand new on the market. This is the first one in the world. Yours, I think, for around 20,000 pounds.

QUEST: And do you expect to get many people wanting this?

SIMPSON: Well, we've got a list, a short list for -- a wait list, sorry, for...

QUEST: No.

SIMPSON: Yes. It's brand new. Brand new to the market.

QUEST: You're going to...

SIMPSON: It know this is 9,000 pounds, I think.

QUEST: Nine thousand?

It's a handbag.

SIMPSON: I know. Don't -- don't get me wrong, I -- I -- I'm with you. I'm with you. But it sells very well.

QUEST: All right, this is what?

This is?

SIMPSON: This is a Damien Hirst sleigh board, is it?

UNIDENTIFIED FEMALE: Skate board.

SIMPSON: Skate board.

QUEST: Right. So this proves the adage that you can put the spots on anything...

SIMPSON: Absolutely.

QUEST: -- and it will sell?

SIMPSON: I'm pretty sure Damien did this himself. It's personalized.

QUEST: Who -- who is he?

SIMPSON: There you go. He signed it. And I think I would probably put it on my wall.

QUEST: And if there's one thing that you would like to find in your Christmas stocking this year?

SIMPSON: It's a carbon fiber, 180,000 pound Austin Martin.

(END VIDEO TAPE)

QUEST: Germany is the strongest economy in Europe, so it's not surprisingly you find gold just about everywhere. Now, Europe by numbers.

(voice-over): For Christmas this year, German consumers will increase spending by 4.3 percent. In France, spending will be up much less, 1.8 percent. It's in hard hit Greece and Portugal that we will see Christmas expenditure actually down, a decrease of a whopping 22 and 7.8 percent.

(END VIDEO TAPE)

And that's our festive edition of MARKETPLACE EUROPE.

I'm Richard Quest at the Christmas fair in Frankfurt.

The carousel goes round and round, just like the business cycle. so whatever market you're in, I hope it's profitable.

I'll see you next week.

END