Monday, July 7, 2008

Industries Primed For A Fall

We all know about the auto industry and the mess that they are in right now. I expect that in the near future, GM and Ford may have to merge to stay alive. Given how ‘cheap’ their stocks are right now, the temptation is to jump in and buy. However, in the Practical Risk Manager’s view, the risks still outweigh the reward. Firstly, there is no other automaker desiring to take over the bloated pension deficit, existing high-cost structure, and antiquated assembly plants that GM and Ford have.

The other automakers have their own problems. With increasing cost of raw materials such as steel and plastics, car manufacturers are running on fumes. If there were an investor willing to take over GM or Ford, it would be to extract the value within each firm and sell the auto operations at a steep discount. File this under “there is a valid reason why their stock prices are so low.”

GM has hidden value in its Onstar satellite communication division and its non-North American auto operations. A bold move for GM would be to (1) follow Halliburton’s move and relocate its HQ offshore, (2) sell off or shutter its North American operations (this would put a cap on its retirement fund obligations), (3) Expand the Onstar satellite communication division’s capabilities to compete with Sirius and XM Satellite, and (4) be an importer of ultra-small cars from its international operations into North America.

I wonder if any senior executives from from GM / Ford are reading this…

Another industry that will see more failures is the Airline Industry. While they have taken dramatic steps to cut costs and increase revenue – a position proposed by the Practical Risk Manager several months ago – there are still the issues of ever-increasing fuel costs and continuing trend of reduced demand for air travel. Given that consumers are traveling less and increasing the use of alternative transport means, airlines will have to have to begin offering something that they did away with a long time ago: good customer service.

Airlines need to offer something tangible without tremendous added cost. The bold move would be to raise the profile of the cabin attendants to that of air hosts / hostesses. The international carriers do this very well. In fact, most Asian airlines have one of the most rigorous training for their flight hosts / hostesses. This is clearly evident by the Skytrax’s list of six airlines worldwide that are rated 5-stars, its top rating. All six airlines are Asian: Asiana Airlines, Cathay Pacific Airways, Kingfisher Airlines (India), Malaysia Airlines, Qatar Airways, Singapore Airlines.

Where are the major American carriers? They are clustered together in the mediocre 3-star category. The U.S. airline industry seems to think that good customer service means offering free beverages, food, and onboard entertainment. Good customer service does not mean just what happens on the plane; it starts with the reservation and goes all the way to deplaning.

Currently, the airline industry has so many built-in inefficiencies that actually prevent them from providing good customer service. This is a clear risk factor in the Practical Risk Manger’s view; a clear financial and reputational risk factors.

What more can the airline industry do? Here is a sample of bold moves (I have more) that the industry can take to reverse the traveler’s view of the airline’s poor customer service:

Provide free curbside baggage loaders. The redesigned baggage loaders is capable of holding up to 5 large check-in bags and 3 carry-on bags, is electric driven, lies flat on the ground for easy loading / unloading and rises to move. Customer could use this to load their bags at curbside and guide the electrically driven loader to check-in.

I think that even with bold moves, there are certain airlines that cannot make it if the fuel prices stay high into 2009, which is highly probable. To wit, I stand by my previous assertion that American Airlines will not make it. This is even more probable since they have not taken strategic actions to reduce their reliance on their fleet of MD80s. I would file American Airlines as an investment that I wouldn’t touch with a ten-foot pole.

Ed Kim
Practical Risk Manager

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