Business Blog: Hoover’s Business Insight Zone

The Wizard, looking dapper and trim in retirement.

From this morning’s headlines:

Toyota cuts 2008 outlook

[. . .] The weaker sales outlook also means global production at the parent company would fall 1 percent from 2007 to 8.43 million vehicles, marking the first decline in seven years.

Toyota’s revision underscores an ever-toughening environment for global automakers faced with falling demand for cars, especially higher-margin, bigger vehicles amid rising gasoline pump prices. [. . .]

It’s a simple observation, but Toyota is one of those bellwether companies that beats its industry in good times and bad. So if Toyota’s hurting, the causes of the pain go way beyond the incidents and accidents of (mis)management at, say, Ford or Chrysler. The Detroit auto makers are hurting much worse, but at least some of their woes can be chalked up to general conditions.

So why do I have a picture of a baseball Hall of Famer on this post?

Ozzie Smith is widely regarded as the best defensive shortstop ever. I remember a longtime baseball man once saying something to the effect that, “If Ozzie can’t get to a ball, you know nobody could have gotten to that ball.”

That’s how good Toyota has been. And that’s why its current stumble speaks volumes about the state of the world’s car markets.

(And yes, I do tend to see the world through baseball-tinted glasses as we get to the peak days of summer.)

Please tell me:

What are the companies you look to as industry bellwethers?

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Related posts:

• Company of the Day: Toyota.
• Two quick notes on the car business.
• What does the future hold for the Detroit car makers?

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(Photo by themikelee.)

If only the reality had matched the beautiful dream of this 3D rendering.

In April we talked about the spanking-new Terminal 5 at Heathrow Airport, the opening of which turned into a debacle for British Airways. In a spirit of fairness — and to see if BA learned anything from the snafu — I thought I’d return to the issue to see how the airline has handled things since then.

The short verdict: much better.

Terminal 5 was a massive undertaking, costing billions of pounds and taking 20 years from conception to completion. Overruns in the construction schedule cut short the amount of time that BA had to train its baggage handlers and gate agents in the new terminal, which only made things worse when the terminal’s fancy automated baggage-handling systems went through early hiccups.

Terminal 5 irons out the kinks

To its credit, BA took responsibility for the problems, and — despite Heathrow’s generally lousy record for delays — passengers have now been reporting relief and surprise that their Terminal 5 experiences have gone smoothly. The terminal has also withstood the addition of 30 long-haul flights, including key routes from New York JFK and Lagos, Nigeria, as BA phases in traffic previously handled through Terminal 4.

After the initial Terminal 5 foul-up, BA wisely slowed down the phase-in of new flights, so that it is now happening by stages across the summer, instead of all at once. Its prudence seems to be working: a few weeks ago, the airline issued a report claiming that 80 percent of Terminal 5 passengers waited less than five minutes at check-in.

A weak market, but strong long-term appeal

Like the rest of its industry, BA has faced sluggish demand tied to a softer global economy and fares driven higher by fuel prices. Yet current market conditions, like the Terminal 5 problems, shouldn’t mask BA’s larger success over the past few years. As this insightful story from Dan Reed at USA Today explains, BA has turned its fortunes around since the beginning of this decade:

Makeover puts British Airways on top

BA has done better by aiming resolutely at high-end air travelers, who often turn to BA as their carrier of choice on trans-Atlantic routes, even in preference to their normal frequent-flier carriers. To better mine this lucrative customer base, BA has now begun flights for its OpenSkies sub-brand. OpenSkies flights, which currently serve only Paris and JFK but will expand to other European cities soon, are dominated by BA’s popular first class and business class sections, with only a few coach seats.

Last month there was a minor stir when BA revealed that its chief executive, Willie Walsh, would — horror of horrors! — receive a raise in the company’s new fiscal year.

BA boss Willie Walsh gets huge pay rise

Or maybe the Telegraph’s headline writers are just dyspeptic: a £35,000 raise on a £700,000 salary comes to . . . let’s see . . . ah, five percent. Yes, £35,000 is a significant chunk of money (it’s equal to $69,000 and change as I write this), but the fact that it’s a mere five percent increase makes me wonder at the numeracy of the Telegraph’s staff.

No bonuses for Terminal 5 snafu

To his credit, Walsh turned down his annual bonus after the Terminal 5 brouhaha, as the same Telegraph story makes clear:

Last month, Mr Walsh announced it would be “inappropriate” to claim his £700,000 bonus for the last financial year after the fiasco over the opening of Terminal 5 at Heathrow in March.

Fact is, BA has been doing very well under Walsh (and his predecessor, Rod Eddington), and he’s being paid what seems like a modest sum by the standards of modern CEOs. And while I’m sure Walsh would have preferred to avoid all the trouble that accompanied the opening of Terminal 5, he also seems confident — for good reason — about where BA is headed.

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Previously on this topic:

• The Happy Path . . . to Perdition.
• British Airways gets trapped on the baggage carousel.

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(Picture by terminal5insider.)

You may recall that a while back I offered some communications pointers to American Airlines chief Gerard Arpey. He’s a smart guy — at least if this Fortune article is any indicator — and I think that overall he’s doing pretty well for the company, considering the financial struggles created for it by the high price of fuel.

And before I go further in criticizing AA, let me say two positive things:

• I flew American to and from Seattle last week, and everything went off without a hitch. The flight-attendant crew on the way back, particularly, was as good as you’ll ever meet.
• A Hoover’s colleague recently had an American flight cancelled that would have seriously delayed the start of her family’s vacation. But as soon as she called American, the folks there “bent over backwards,” she says, to make things work for her — ultimately going so far as to book her onto another airline’s flight so that her family could start its vacation on time.

Okay, that’s enough for Mr. Nice Guy. Read more

Smooth landing ahead for American?

Since last week, I’ve been mulling what to say about the cuts that American Airlines and Ford Motor each announced. (More details on the restructurings here and here.) While I’m not sure how much good the changes will do for each company, I am pretty sure that both companies are at least thinking along the right track.

Here’s the deal: In the golden age of mass air travel, the airlines could afford to carry your checked bags for free and serve you meals or snacks at a moderate price in no small part because fuel was cheap. This is a fairly straightforward proposition, and regardless of how well or how poorly American has been managed in recent years, its CEO, Gerard Arpey, was right when he said “The U.S. airline industry as it is constituted today was not built for $125- or $130-per-barrel oil.” The system as it currently exists wasn’t built to withstand fuel prices this high.

Ford, similarly, grew to great size in an era when fuel wasn’t a big concern because it was abundant and inexpensive. In fact, Ford was the biggest car maker in the world during the early 20th century, when the United States was also the world’s top producer of crude oil. When cheap fuel is as ubiquitous as clean tap water is for Americans, you tend not to think about it. When the stuff is repriced at two . . . three . . . four times what it was just a couple of years ago, something has to give.

Thus, higher ticket prices. Thus, less pickups and more small cars. Welcome to the new order of things.

Read more

Here, have some rant. My friend Sheila — a travel writer and a former Navy officer — whipped it up for you:

If you have nothing good to say about U.S. travel, come sit by me

I am disgusted.

I am a U.S. traveler with multiple transportation options, and most of them are awful.

. . .

I am not clueless about the current high price of fuel, so I understand why the airlines (except for Southwest, which actually planned for a fuel price increase) think they must nickel and dime passengers for every mangy pillow, blanket, sandwich, suitcase and inch of legroom, but I’d rather just pay for a somewhat higher-priced ticket and not be treated like a fee-ridden pest in coach.

I’m your customer, Mr. Airline.

. . .

Read it all. I thought Sheila’s comments on dubious anti-terrorism measures and on a lack of viable transportation alternatives were particularly apt.

At some point, whether because of lousy service or higher fuel prices (ergo higher ticket prices) or whatever, the airlines will have to change their ways. Or, as I fervently hope, one or two of the most far-sighted airlines will figure out a way to deliver better service — a better experience — to enough passengers that those companies will win outright in the marketplace.

Talk about your untapped market opportunities! Any airline that can offer better service all the way around — service that answers Sheila’s complaints — will be sitting on a gold mine.

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Previously in this vein:

• Runway congestion: the inescapable math.
• Clueless airlines: which verse of this song are we on now?
• Airline inanity follow-up: amen to Jeff Jarvis.
• Massive reality disconnect in the airline industry.
• Air travel is getting worse.

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(Photo by lunchtimemama.)

American has the right idea by posting YouTube videos like this one.*

Direct outreach — especially when used to accept blame — can help the company restore its image after this week’s debacle, when thousands of flights have been canceled because American Airlines planes didn’t meet F.A.A. standards.

But American chief Gerard Arpey and his lieutenants have a chance to make their outreach even better by the low-tech means of clarifying their language.

Hoover’s has always rejected jargon in its profiles. Indeed, you could say it’s our stock in trade. Corporate executives like Arpey would be better off if they did the same thing.

In the YouTube clip of his press conference, Read more

Is this what Terminal 5 looked like
when BA “tested” it?

Last week we talked about British Airways‘ nasty experience opening its new — and theoretically state-of-the-art — Terminal 5 at Heathrow Airport. Well, things haven’t exactly stabilized:

• BBC news: Fresh baggage woes at Terminal 5

All this, even though the airline has sworn up and down that it carried out exhaustive testing of the terminal and all its systems before it opened about ten days ago.

Software tester Abi Sutherland has been studying the fiasco, and she believes that BA has fallen victim to one of the oldest fallacies of testing — following the “happy path” of use:

The very unhappy path to Terminal 5

. . . In software terms, there is something known as the happy path, which is what happens when all goes well. The happy path is nice to code, nice to test, nice to show to management. It is, however, not the only path through the system, and all the wretched, miserable and thorn-strewn paths must also be checked. Read more

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Scenario: You run British Airways. You spend many years and billions of dollars to kit out a state-of-the-art terminal in your busiest hub. And then it all goes kablooey in the most humiliating possible way. What do you do?

British Airways Plc canceled 50 flights at London Heathrow airport’s new Terminal 5 and brought in U.S. courier firm FedEx Corp. to help reunite passengers with about 20,000 delayed bags.

A bit of good news: Calling in FedEx, while no doubt a blow to BA’s pride, at least reflects that BA understands that the top priority for now is to reduce the baggage backlog, almost regardless of cost or considerations of pride. If you want furious — furious — customers, (1) talk up your new high-gloss terminal, (2) lose their bags, and then (3) take your sweet time reuniting bags and customers. BA, at least, is making a public show of trying to mitigate item #3.

Read more

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You may recall this interesting item from October — one I found via James Fallows’s blog — in which an airline pilot explained some of the irreducible realities of commercial air traffic:

Airline flight delays: an expert weighs in.

The pilot, Patrick Smith, pointed out how airports are overloaded with flights by smaller regional jets rather than larger airliners. The smaller planes carry fewer passengers each, so that a given airline needs more planes to carry the same number of passengers. They do this because more planes allows more different flights per day, which suits consumer preferences for (a) more choice in departure time and (b) more direct flights. The trouble is, smaller planes take up a slot of runway time just like larger planes do.

Which leads us to this dynamic:

• Airlines want to offer more flights, and
• Consumers want the choice of more flights, yet
• Runway clearances — the amount of flights per hour — are inflexible, as they should be given the dictates of safety.

The technical and safety aspects of that last point were driven home to me (in terms that this layperson can understand) when I read this great post via another Fallows-supplied link:

Air Traffic Safety vs. Capacity

The post’s author, Don Brown, was an air-traffic controller for many years, and from all I can tell he knows very well whereof he speaks. He comes down hard in favor of pursuing air safety rather than rewarding airlines’ commercial mandates Read more

That the excellent question that Jeff Bailey explores in this New York Times story:

In the Math of Mergers, Airlines Fail

. . . [C]ountless corporate mergers — in manufacturing, media and financial services, among other fields — have made the leap of faith that the sum would be worth more than the parts. But studies generally show that more than half of such combinations fail to create value.

What special magic, then, might occur to make two big airlines worth so much more together?

Essentially two theories are at work, each a chestnut of the merger-and-acquisition game, and neither of them a sure thing.

The first is simply to cut costs of the combined companies and hope to hang on to all the customers and revenue. . . .

The second theory used to justify airline mergers is that combining would increase revenue because a bigger route system would help take market share from competitors. That makes sense, until other carriers also combine.

Bailey’s points are worth keeping in mind as we await the outcome of Delta’s talks with Northwest and UAL. Maybe a Delta merger would work out, but Bailey’s right to point out the risks. The talk about synergies always has a certain appeal (remember the hype around Time Warner’s tie-up with AOL?) but the reality usually pales by comparison (as the Time Warner/AOL deal also shows).