A New Start

FT: Starbucks goes skinny as froth withers

Starbucks goes skinny as froth withers

By Jonathan Birchall in New York

Published: July 2 2008 20:05 | Last updated: July 2 2008 20:05

As US consumer demand started to falter last summer, Starbucks was opening new company-owned stores in the US at the rate of three a day.

But on Tuesday the world’s largest coffee retailer decisively put its foot on the brake, with Peter Bocian, chief financial officer, bidding farewell to the era of growth that has made Starbucks’ green and white sign a symbol of urban America.

EDITOR’S CHOICE

Starbucks to close 600 US stores - Jul-02

Kuwait business takes Starbucks to Russia - Jun-11

Starbucks curtails its musical ambitions - Apr-25

Starbucks blames slowing economy for fall in sales - Apr-24

Starbucks in drive to improve ‘experience’ - Mar-19

Starbucks plans revamp amid falling US sales - Jan-30

“We believe with the stores we have today, and incrementally [adding] a couple of hundred more per year, we will have the right answer for Starbucks in the United States,” he said.

In its coming 2009 fiscal year, which starts in October, it plans to open fewer than 200 new US company-operated locations, down from this year’s reduced target of 650, and the more than 1,000 US company-operated stores that opened in both 2006 and 2007.

Starbucks also plans to close 600 stores, many of them less than two years old, leaving a network of more than 6,600 company-run stores in the US, as well as more than 4,000 licensed outlets in locations such as airports, bookstores and supermarkets.

Mr Bocian argued the decision to close stores and slow growth reflected more than the current economic climate, following a detailed review of local market factors by the company’s real estate team.

“We believe absolutely that we’re seeing a major impact from the economy,” he told investors and analysts. But, he added, the decision to close the 600 stores had been taken because of other factors too. “We didn’t believe it was all economy”.

Those factors include proximity to other stores – reflecting Starbucks original readiness to allow new openings to cannibalise about 30 per cent of the traffic at existing stores as a way of reducing lines and improving customer service.

This aspect of the cutbacks in planned growth mirrors similar decisions by two very different but equally ubiquitous US retailers – Wal-Mart, and Home Depot, the home improvement chain.

Over the past year the two largest US retailers have slowed new store expansion plans and capital investment, with Home Depot saying in May it would close 15 of its underperforming superstores. Like Starbucks, both Wal-Mart and Home Depot are approaching saturation coverage of the available markets, with new stores taking some customer traffic away from existing outlets.

But at the same time, the slowdown in demand is manifesting itself in a string of store closures and trimmed expansion plans from retailers that are more clearly linked to economic conditions.

JC Penney, the mainstream department store, said last week, for instance, that it was planning to open 20, rather than 50 stores in 2009, and was halving capital spending plans.

Other retailers have also announced the closure of underperforming stores, including Ann Taylor, Liz Claiborne and Talbots, the women’s fashion retailers and Zales, the jewellers.

Richard Hastings, consumer strategist at Global Hunter Securities, noted that the current inflationary environment, combined with slowing demand, was making capital expenditure reductions increasingly attractive to retailers. Cutting store costs and expenditure on new stores were “the most logical next steps in this story once you saw demand begin to decline in the summer of 2007”.

Starbucks says it is not actively expecting any further closures, but will be closely monitoring the performance of its remaining US store portfolio. Its international expansion plans also remain unchanged, with a further 950 new licensed and company-owned stores opening this year, including its first store in Argentina.

It also argues that its store development team will be more effective, under a new president of global development, Arthur Rubenfeld, a veteran of its 1990s expansion, who recently rejoined the company.

Mr Bocian also said Starbucks would be looking at further cost-cutting measures under Howard Schultz, its chief executive, that are aimed at restoring the reputation of the brand battered by its expansion.

“We understand we are in a tough economic environment and have to innovate and invest but also work on things we can control.”

Copyright The Financial Times Limited 2008

FT: What drives the race to the top

It could be that potential entrants are put off by the working hours and high-pressure environment as well as the riskiness. It could also be a matter of timing. The really spectacular gains at the top are quite recent; and who knows how long they will last? Luck, too, enters into the picture. A young person starting out 20 years ago would not have been able to guess quite how large the pickings of the investment banker might be relative to that of a country solicitor or college head.

My hunch is that events will sort out many of these features. If electorates can accept the element of luck that goes into the earnings of superstars or the winnings from national lotteries, why cannot they accept this same element in the top professional and financial categories?

= = = =

What drives the race to the top

By Samuel Brittan

Published: July 4 2008 03:00 | Last updated: July 4 2008 03:00

"The rich are getting richer and the poor are getting poorer." Such beliefs fire the indignation of critics of capitalism and provide a guilty thrill for some of the better off. If only it were as simple.

Thank heavens, then, for the Institute for Fiscal Studies, which sheds so much light on the subject, for example in its recent Poverty and Inequality in the UK survey. My only quarrel with it is that it follows the academic herd in using the loaded term "inequality".

Its summary finding is that the so-called Gini coefficient of inequality (which I should prefer to call an index of skewness) rose "dramatically" in the Thatcher period of the 1980s, but remained more or less unchanged in the Major and Blair years, when it remained at historically high levels. In the Blair period, incomes after tax and benefit rose fairly evenly, taking one year with another, over all quintiles - that is, groups covering fifths of all households. Absolute poverty, defined as income below 60 per cent of the 1996-1997 middle-ranking citizen, has fallen from 25 per cent to 13 per cent of all households. But to achieve the target of halving (relative) child poverty by 2010-2011, additional public spending of nearly £3bn per annum would be required.

The most spectacular IFS finding, however, is that incomes of the top 1 per cent increased much faster and of the very top 0.1 per cent faster still. As the incomes of the very rich are highly correlated with the stock market and financial conditions, later estimates may show a partial reversal and hence more "equality" - cold comfort to those who lose their jobs.

An illuminating discussion of the reasons for what has happened is provided by Robert Gordon and Ian Dew-Becker in their survey , Controversies about the Rise in American Inequality (CEPR discussion paper 6817) - British trends are quite similar to those of US, if in less extreme form. The authors distinguish between three types of high-level gainer. First, there are the superstars, for example in sports and entertainment, where technological developments have magnified the reach of top individuals and reduced the demand for the not-quite-so-good. Second, there are the professionals, including lawyers, bankers and hedge-fund managers. Third come the chief executive officers, whose incomes can be enhanced by the back-scratching of their peers.

The sky-high earnings in at least some of these groups seem to fly in the face of one of the most basic teachings of Adam Smith: the tendency to equality of net advantages among non-competing groups. This suggests that the real advantages in different occupations will tend to be the same through the forces of competition, such as the entry of more workers into the highly remunerated fields and their exit, or non-replacement, in the badly remunerated ones. The classic example is that of the civil servant who would earn much less than his equivalent in a commercial concern but would compensate for it by job security, challenging problems and indexed pensions.

Why, then, are the spiralling rewards not competed away by would-be entrants? The superstars do form a non-competing group by virtue of inborn talent, aided of course by determination and ambition. It is the other categories that are more puzzling. When the top ranks of banks and investment institutions were confined to a narrow circle of people in striped pants who had been to a limited number of schools, tacit entry barriers would explain a lot. But a visit to any bar in a major financial centre would confirm that these barriers are largely down.

It could be that potential entrants are put off by the working hours and high-pressure environment as well as the riskiness. It could also be a matter of timing. The really spectacular gains at the top are quite recent; and who knows how long they will last? Luck, too, enters into the picture. A young person starting out 20 years ago would not have been able to guess quite how large the pickings of the investment banker might be relative to that of a country solicitor or college head.

My hunch is that events will sort out many of these features. If electorates can accept the element of luck that goes into the earnings of superstars or the winnings from national lotteries, why cannot they accept this same element in the top professional and financial categories?

The main argument for much higher taxation among top groups would be if it could provide a large sum for redistribution. The IFS estimates that the top 0.1 per cent of UK adults had average pre-tax incomes in 2004-2005 of £780,000 per annum and on average paid 35 per cent in income tax. If their tax contribution were doubled and divided among all 29.5m taxpayers, this would yield about £870 a year or £17 per week. This is not a negligible sum; but it would not take much in the way of disincentive effects, emigration or tax avoidance at the top to wipe it out altogether. A safer but less popular way of helping the least well off would be through modest increases in taxes throughout the income distribution - or selective cuts in public spending. Admittedly this route would not provide the same outlet for jealousy and envy.

Copyright The Financial Times Limited 2008

FT: Steiff teddies head home as outsourcing is too much to bear

Steiff teddies head home as outsourcing is too much to bear

By Gerrit Wiesmann in Frankfurt

Published: July 5 2008 03:00 | Last updated: July 5 2008 03:00

In the 106 years since it was invented, the cuddly teddy bear has become a bellwether of capitalism.

The plush toy was pioneered by Steiff, the German company that claims it made the first bear with moveable arms and legs in 1902.

The mohair and felt invention came just as the citizens of the US were celebrating the humaneness of then president Theodore Roosevelt, who spared a bear on a hunting trip. Steiff was soon able to snag a burgeoning export market.

A hundred years later, the company helped swell the outsourcing wave as it moved about a fifth of production from high-cost Germany to low-cost China. Five years later, it is in the throes of moving it back, having learnt that cost is not everything.

The privately-owned company in southern Germany joins a steady stream of small, specialised western companies that have found the lure of cheap Asian labour outweighed by the added difficulties - many unforeseen - of manufacturing there.

"We have learnt our products are better if we make them ourselves," says Martin Frechen, co-chief executive of the firm in Giengen, Baden-Württemberg.

"The things we wanted to be done were not the things the Chinese were used to doing." He stresses Steiff never had problems with safety standards that some US importers have struggled with. "Things were also fine in terms of quality," he recalls. "But when we looked at whether this was sustainable, big question marks arose."

This was less a symptom of purported Chinese laxity than changing priorities at Steiff. Mr Frechen and co-chief executive Wilfried Blömke-Trox, installed in 2006 and 2007 respectively, decided to bring the brand back to its high-quality roots.

"Steiff had tried to enter the €20-€30 ($31-$47) range - before, some products had sold for €100," Mr Frechen says. "But cheapness meant an end to uniqueness. So we switched from price back to quality" - a Steiff bear now costs €30-€80.

But the high turnover of staff in China made for problems. "It takes eight to 12 months to get a seamstress up to speed," Mr Frechen says. "As sewing is difficult and making microships easier, we worried about keeping enough trained staff."

There were also the disadvantages of distance that Steiff had born stoically up till then. High transport costs and overbooked container ships meant the company had to buy pricey space in advance, sometimes to find out no shipment was ready. Outsourced production is meant to be fully in-sourced again by late 2009 to factories in Germany, Portugal and Tunisia. They employ 800 people. Transport savings and selling more expensive products are expected to cover the rise in the wage bill.

Mr Frechen declines to divulge numbers. But he says repositioning the brand and moving production is helping a bottom line hit when Steiff went down market five years ago.

He clearly feels global trends in manufacturing are a less to blame for Steiff's recent roller-coaster ride than changes in the retail front end. He notes that US department stores once accounted for 30 per cent of toy sales, but today it is just 1 per cent.

"Soft toys in the US are now dominated by the discounters. Wal-Mart, Target and Toys R Us account for over two-thirds of sales," he says. "Retailers and customers think soft toys have to be cheap - it's a trend we're seeing elsewhere as well."

As a result, Mr Frechen says, Chinese toy manufacturers "always think in terms of price and volume." Any one with "complicated" criteria should think about keeping manufacturing in-house. "We say soft toys don't have to be cheap," he says.

"For children, surely only the best is good enough - the best design, the best production, the best safety standards," he continues.

"Soft toys help to comfort children, they're vital for a child's development," he concludes. And maybe for capitalism's, too.

Copyright The Financial Times Limited 2008

FT: In a class of their own

In a class of their own

By Catherine Moye

Published: July 5 2008 03:00 | Last updated: July 5 2008 03:00

Like Oxford's spires, British fee-paying schools evoke notions of educational perfection. For many affluent non-Britons, names such as Eton and Harrow share a pedigree with buildings such as Buckingham Palace and St Paul's cathedral: traditional British institutions that cannot be outsourced to China.

Thus many overseas parents move to the UK, be it as non-domiciled aliens or relocators, as buyers or renters, full or part-time. Their search for British schooling for their children helps fuel demand for housing in prime areas, especially in London.

"Business, tax and education are the main reasons that overseas nationals come to live in London," says Richard Sharples of buying agency Property Vision. "The perception is that the British [education] system is the finest in the world and most people think it's a good idea for their children to learn English. There's also an element of prestige in having your child go to Harrow or wherever."

That might be the case but securing your child a place at Britain's most venerable scholastic institutions can be like obtaining a seat at King Arthur's round table - especially for an overseas national. Pressure on places is tough and growing and only a lucky few are admitted.

"We get hundreds of overseas enquiries. I would say that number has more than doubled in the past three years," says Kirsty Shanahan, communications manager of Harrow school, where fees are approximately £26,500 a year. "The bulk of the increase is from the emerging economies of India, Russia and China."

Yet only about 10 per cent of Harrow's pupils are from outside the UK, according to Shanahan. "That's been fairly consistent throughout. It's not set in stone but we do keep one eye on the quota, otherwise it's not good for the school as a whole."

Historically the overseas clientele were wealthy parents from Asia, the Middle East and commonwealth African countries. They sent their children to British public schools that they had almost invariably attended themselves before going on to the universities of Oxford or Cambridge. (In Britain, in one of those quirks apparently designed to fox foreigners, independently run, fee-charging schools are termed "public" because historically pupils were gathered in public to be taught rather than privately at home by a tutor).

"To a certain extent it's snob value and the fact that children are worked much harder in the English public school system than, say, the American system," says buying agent Robert Bailey, many of whose clients want second homes for education-related reasons. "That is, the American system is more sports-led and a lot less arduous academically. We are very results-orientated."

The attraction of a British boarding school is also perhaps an unconscious backlash against the globalised era of You Tube, the IPod and the other relentless technology assailing children. The public school boarding house is seen as a bastion of discipline and offers the original and unsurpassable version of social websites such as Facebook and Bebo: the old school tie network. Not that all parents are up to speed with the protocol. "I am constantly being asked if I can try and pull a few strings and, you know, offer a school a sizeable 'donation'," says Bailey.

Education consultant Martin Humphrys says he has never been so inundated with requests for schools and has witnessed a marked increase in interest from emerging countries, especially Russia and China.

"The demand for places is very high at the moment," says Humphrys. "We've been in that situation for about the past nine years." But if overseas parents' dreams for their children are somehow bound up with the public school system, Humphrys reckons that 99 per cent of his job is about managing their expectations.

"Places are at a premium in the key schools such as Eton and the entrance exams are incredibly tough for children whose first language isn't English," he explains. "And there are certain schools that, if parents haven't registered their child by the age of 10 and a half they're not going to get them in at 13."

Even if the star names are oversubscribed, Humphrys is firm in his conviction that British public schools offer the best education in the world. "London especially has excellent schools, from nurseries right through to senior schools," he says. "People come here because you will not find schools bettered anywhere."

Although there are no specific statistics on how many overseas nationals relocate to the UK to buy second homes, many parents will want somewhere in the capital for family get-togethers, especially during boarding school holidays. To that extent their housing needs are more prêt-a-porter than couture.

"These buyers are looking for easy maintenance, lock-up-and-leave apartments that are secure, with 24-hour porterage," says Camilla Dell of buying agents Black Brick Property Solutions. "They want them in safe areas such as St John's Wood or Knightsbridge for when the children reach 16 or 17 and stay there by themselves, and that are good for public transport."

But matching the right child to the right school often means looking outside London. "The most important thing is that the school is a genuine boarding school and not dominated by flexi or weekly boarders with just a trickle of overseas children left at the weekends," says Catherine Stoker, director of education and guardianship services at educational consultancy Gabbitas. To that end, schools such as Marlborough and Haileybury in Herfordshire and Uppingham in Rutland are popular choices.

Berkshire schools close to Heathrow airport are also popular choices for overseas parents with children returning home at the end of each term - notably Bradfield College, Wellington College, and St George's at Ascot. And different nationalities have their own reasons for being often drawn to particular parts of the UK.

"In Tokyo they tend to live in apartments the size of postage stamps and so they love going to boarding schools set in large historical buildings," says Stoker. "We just took a Japanese girl to see Gordonstoun [in Scotland] and she loved it."

That blue-chip schools attract great wealth and prestige to the nation is music to the ears of Tony Little, head master of Eton College. "Ours is very much a British school and we are already over-subscribed from our British market. We don't actually have figures for nationality but the figure that springs to mind is about 100 boys [from overseas] out of 1,300," he says.

"UK independent schools have the strongest track record of any sector anywhere," he explains. "When you speak to people in, say, Russia or China, what they admire most is our great tradition of liberal education."

By this Little means that it is holistic and centred upon the person. "The Chinese, for example, are very conscious of the fact that they are strong in theoretical 'Confucian-style' education but the British system has the X-factor of building students' confidence and practical abilities in the wider world."

London also has highly regarded international schools serving the needs of foreign families, especially those relocating for short periods. Notable examples include the French Lycée in Kensington, Marymount in Kingston upon Thames, Woodside Park in Frien Barnet and Egham International in Surrey, all of which operate the International Baccalaureate system.

Those of us who live in the St John's Wood district of north London can be in no doubt as to the knock-on effect that a prestigious school can have on an area. The American School, which has existed in various incarnations since 1969, is one of the principal drivers in the local economy. Its presence is felt in everything from the cost of quality housing to the lengths of the queues at Starbucks.

Americans are the dominant group relocating to London. "[They] represent a large percentage of our sales and lettings," says James Simpson of estate agency Knight Frank's St. John's Wood office. "Most Americans rent but we also get investors looking to buy to rent to American families. Principally they want detached five-bedroom Victorian homes in side streets."

Greek-born Alicia Cornelius and her husband, Alex, a banker, divide their time between New York, Athens and London, where their 14-year old daughter is at boarding school. "We have a two-bedroom flat in a new-build block overlooking the river that just takes care of itself," says Cornelius.

Her own upbringing as much as her regard for the British school system came into play when deciding upon her daughter's education. "My parents were diplomats, so I went to at least a dozen schools around the world," she says. "I meet a lot of people today who went through the same and want nothing more than to settle their children in one place throughout their schooling."

Naomi Heaton of property investors London Central Portfolio, finds that mapping out your child's educational needs is not so different to mapping out an investment plan. "In both cases you are looking at around an eight-year cycle," she observes. "Your child is likely to be here at school or college for eight years and we see that time as the normal doubling of the London (market) cycle. In my experience, buying for the children is just a good rationale for something that people were going to do anyway."

Copyright The Financial Times Limited 2008

FT: Dream machine

Dream machine

By Michael Skapinker

Published: July 5 2008 03:00 | Last updated: July 5 2008 03:00

In 1972, 25-year-old Tony Wheeler and his new wife Maureen bought an old car and decided to drive it as far from London as it would go. They reached Kabul, where they sold it at a profit. From there, they carried on by bus and train over the Khyber Pass and then kept going until they arrived in Sydney with 27 Australian cents left.

Wheeler had just graduated from the London Business School. The couple thought the journey would flush the travel bug from their systems before they settled down. Instead, it never left them. The trip led to their founding Lonely Planet, the travel publishing company - which means they now have more than 27 cents.

Looking back, Wheeler says their trip was part of one of the most important developments of the last decades of the 20th century: the explosive growth and spread of international tourism.

Wheeler and his wife were baby boomers, indulging in the sort of travel that became typical of their generation. They went to places, many then untouched by tourism, that would have seemed extraordinarily adventurous to previous generations, he writes in Trends and Issues in Global Tourism 2008 , a volume of papers by travel chief executives and academics from last year's ITB Berlin, the world's premier international tourism fair.

When Lonely Planet took off in the 1970s, Wheeler recalls, China was closed to the outside world. You could go to Hong Kong and look across the border with binoculars. Today, Lonely Planet not only produces guidebooks to China in several languages; it also publishes guidebooks to other countries in Chinese.

Travel has moved on since Lonely Planet began. Travellers are now more experienced. Some are still happy to trot around in groups. Others are content to return to the same villa each year. But many ask the Monty Python question: "What's the point of going abroad if you're just another tourist?"

These travellers want something further off the beaten track. Yet they also want everything to work. Holidays require an anxious investment of time and money. As one of the contributions to Trends and Issues points out: "Vacations are a scarce resource. The annual number of vacation days is limited; the anticipation of rest and relaxation for this time is nevertheless immense. And, to top it off, vacations are expensive. A family of four has to invest the equivalent of purchasing a used compact car."

These three books sum up the dichotomy. The tourism chiefs represented in Trends and Issues have to provide security and certainty to travellers if their businesses are to survive. But they need to promise adventure and romance too - the sort suggested by National Geographic's Journeys of a Lifetime: 500 of the World's Greatest Trips .

If your idea of a holiday is riding the Darjeeling Toy Train from "the paddy fields of northern Bengal to the misty tea gardens of the Himalayan foothills" or sharing a Bedouin feast ("cardamom coffee and lamb roasted in yoghurt") in a thatched goat-hair tent in Jordan, this is the book for you.

As you would expect from National Geographic, everything is beautifully photographed, but the trips themselves - "wonderful, indelible, life-changing journeys" - sound a little too charmed to be true. These essays, anonymously written in the style of elegant travel brochures, present a world in which all aromas are heady, vineyards are sun-touched, waters are crystal clear and scenes are "biblical in their timelessness".

Journeys of a Lifetime allows that western Scotland is "notoriously wet", but does that really matter when you can "follow in the footsteps of Bonnie Prince Charlie on a journey of high romance among Scotland's mountain-ringed lochs and dreamy glens"? Reality does threaten to break through on a luxury train journey from Rajasthan to New Delhi, where you are warned that all this pampering "can't shield you from the real essence of any trip to India: the hubbub of streets crammed with rickshaws, sacred cows, camels and the ever-present" - what, grinding poverty? No - "aroma of spices".

Given the weight of expectations, holidays are bound to fall short of the Journeys of a Lifetime ideal. Experienced travellers joining this summer's airport queues will discover how far short: flight delays, hotel rooms above noisy streets, non-stop rain, stomach upsets. Travel often doesn't feel like fun. Sometimes, says Peter Greenberg in The Complete Travel Detective Bible , it feels like abuse.

Greenberg is the travel editor of NBC's Today show. His book is too fat to take with you; you are probably meant to read it at home before you pack. It is full of advice about how to avoid travel's disappointments. Take stomach upsets, for example. Always carry your own bottle of water on to the aircraft, Greenberg says. Don't drink from the water bottles on the flight attendant's trolley. Airlines have been known to fill them from aircraft holding tanks, where the US Environmental Protection Agency in 2004 detected nasty bacteria. The EPA also advised against drinking tea or coffee during your flight: the airlines don't heat the water to a temperature sufficient to kill pathogens.

When you get into your hotel room, tear off the bedspread and throw it into the corner (it may harbour goodness knows what) and clean the telephone handset and television remote control with wet wipes. This is so important that Greenberg tells us twice. (This book is a little repetitive but then you are probably not supposed to read it from beginning to end. Given how much Greenberg warns you may go wrong, you might be too scared to leave for the airport if you did.)

Greenberg tells us it is no good clicking on a window seat on the web-based aircraft diagram. It may be cramped: check on seatguru.com to suss out the legroom. You may want to change airlines when you have looked at the photographs of inflight meals that helpful passengers have posted on airlinemeals.net. And don't forget to check your hotel's mattresses on bedbugregistry.com.

There are fascinating details that you probably don't need to know but can always use to enliven conversation with the person in the seat next to you. For example, Singapore Airline's Airbus 340-500 aircraft has a dedicated corpse cupboard. This is to avoid the sort of awkwardness British Airways encountered when cabin crew carried the body of an economy passenger who had died into first class, where there was more room. (A BA flight attendant told the passenger who objected to sitting next to the deceased to "get over it".)

But once he has instructed us on how not to get ripped off or let down, Greenberg is off on the usual tack of avoiding the madding crowd and finding true adventure. Here is modern travel's dual demand for safety and novelty in one book: once you have wiped all those germs off the remote control, why not pretend to risk your life?

Have you, for example, considered a storm-chasing holiday? Tempest Tours arranges for you to follow tornadoes in America's Great Plains. Dallas-based Tornado Research and Defense Development guarantees that if you don't see at least two storms in a week you can have a $200 discount on your next trip.

Adventure travel company Covert Ops allows you to "unleash your inner James Bond" with a three-day programme in Tucson, Arizona of high-speed evasive driving, crashing through barricades, running attack vehicles off the road, mastering espionage techniques and recognising explosives. If that is too tame, Air Combat USA will teach you to fly fighter aircraft and challenge fellow holidaymakers to aerial dogfights.

Behind the faux-danger, the travel bosses at ITB Berlin recognise what's happening here: Tony Wheeler's generation have been travelling for years and, as they reach retirement, they have the money, time and desire to do something different. "Individualisation in society is without doubt a mega-trend for the future," say Hans Rück of the University of Applied Sciences in Worms, Germany, and Marcus Mende, chief executive of Schober Information, a marketing group, in Trends and Issues . Many consumer goods and services industries have segmented their markets, tailoring products for different groups, and tourism is no different.

But that doesn't mean mass travel belongs to the past. While the Lonely Planet crew may have experience sun-etched into their skins, somewhere in the world new travellers are tremulously setting out for the first time, many on all-inclusive packages. The numbers of tourists from Poland, the Czech Republic and Russia are growing fast. In the early 1980s, a little more than 1m Indians travelled abroad. By 2006, the figure was 8m.

The new travellers mean there is little likelihood of tourism slowing down. Apart from holidays, millions now need to travel to see their families. Trends and Issues points out that there are 191m people living outside the countries of their birth. Unlike previous generations of migrants, who often never saw their families again, today's "global clans" can fly back home. They present the industry with new opportunities. No doubt these new travellers will one day, too, want to tack on a weekend of skydiving to their family visits.

Can anything stop the growth of tourism? The business is not immune to downturns. After 9/11, it went though a rare dip but has since grown strongly. Individual countries and regions have had setbacks: Egypt, Turkey and the UK have suffered terrorist attacks. Asian destinations were damaged or destroyed by the 2004 tsunami.

But a few quiet years dampensuch memories. And with the right infrastructure, new destinations can be conjured almost from nothing: look at Dubai, with its skyscrapers, sports tournaments and shopping centres.

The rising price of fuel might slow things for a while too, but the environment is a longer-term consideration. As Trends and Issues says, tourism both contributes to and suffers from climate change. Flights add to carbon emissions; the tourist hordes strain water supplies.

Destinations suffer too. European ski slopes sometimes lack snow. The Mediterranean summers can be unbearably hot. But if the snow melts, ski spots can become mountain resorts. If Spain and Greece become overheated in August, their peak seasons can be moved to to spring and autumn. And although European tourism has traditionally seen people travel from the cool and cloudy north to the sunny south, if global warming makes the north balmier, tourist traffic might flow in the other direction.

Throughout its relatively short history, international tourism has shown immense adaptability, and so have tourists. If their aircraft (along with cars, factories and other climate changers) make their favoured distinations uncomfortable, they will find others. Dissatisfaction and disappointment are travel's inescapable accompaniments. But travellers never stop hoping. Somewhere, they believe, they will find the perfect holiday. These books are testament to their determination to carry on looking.

Michael Skapinker is an FT columnist

Copyright The Financial Times Limited 2008

FT: It's watershed time for rivers

It's watershed time for rivers

By Harry Eyres

Published: July 5 2008 03:00 | Last updated: July 5 2008 03:00

Not long ago, the passing-bell tolled for the Yangtze River dolphin. In August last year, scientists announced that the baiji , or Goddess of the Yangtze, a species venerated for thousands of years in China until Mao's Great Leap Forward turned it into bushmeat, was probably extinct as a result of overfishing and pollution.

It will not be the last Yangtze species to go the way of the Great Auk and the Hawaii O'o. The giant Chinese sturgeon, which migrates from the Pacific to the Yangtze to spawn, may not last out this decade. According to Wei Qiwei of the Yangtze River Fisheries Research Insitute in Jingzhou, "there may be only 1,000 of the creatures left in the river". The valiant Mr Wei has not given up hope: "The Chinese sturgeon is very precious to us," he says: "I don't want it to disappear on my watch." The Yangtze is the fourth or fifth-longest river in the world, perhaps the greatest in terms of its impact on civilisation. But now its reputation is clouded by another statistic: the Great River is reckoned to be the largest single source of pollution entering the Pacific Ocean. Since the construction of the Three Gorges Dam, environmental degradation has increased dramatically: there is a risk of "an environmental catastrophe", according to a Chinese forum of scientists - the same forum, ironically, that recommended building the dam in the first place.

If all this makes me melancholic, that is partly because I have always had a thing about rivers. As quite a young child, I pored over encyclopedias and geography books, gobbling up statistics like jam doughnuts: was the Mississippi-Missouri really the longest river, or was it the Nile or the Amazon? Which was bigger, the Ob or the Yenisei, the Amur or the Lena? Since English rivers are little more than trickles, the first river that really impressed me was the broad and beautiful though shallow Loire. Three hundred yards across was an impressive breadth, a good drive and a pitch.

What had not yet occurred to me was that rivers might be de-rivered. Already in the 1952 edition of the Encyclopedia Britannica (the one I have on my shelves) there is an ominous sign: the article on rivers is entitled "River and River Engineering". Here is an illustration of the point Heidegger makes in his essay "The Question Concerning Technology". "The hydroelectric plant is not built into the Rhine River as was the old wooden bridge that joined bank with bank for hundreds of years. Rather, the river is dammed up into the power plant. What the river is now, namely, a water-power supplier, derives from the essence of the power plant." Heidegger is saying that the river, Father Rhine, central thread of German culture, hymned by the poet Hölderlin, beginning and ending of Wagner's Ring cycle, is no longer a river. Technology has supplanted nature.

Is that the end of the story? Must we sit back and watch while river after river loses its immemorial "riverness" and becomes merely a drain and a water supply, for irrigation or power generation? Or is there another, more hopeful scenario: can rivers be re-rivered?

London is the city which did in its rivers first. Not only was Edmund Spenser's "sweet Thames" declared biologically dead in the 1950s, but nearly all the other London rivers were forgotten, built over or running underground like sewers. Now there is a scheme, proposed by an adviser to the Mayor of London, to revive several of London's lost streams.

"When these rivers are opened up," says Peter Bishop, director of Design for London, "I think Londoners will be absolutely amazed. [The rivers] have been there all the time but you never see them." He is talking about such rivers as the Fleet (which runs under Fleet Street, of journalistic renown); the Bourne, part of which still forms the beautiful lake in Hyde Park called the Serpentine, which includes London's first swimming lido; the Wandle, which runs from Wandsworth to Croydon; and the splendidly named River Quaggy in south-east London.

The scheme is intended not just to beautify the capital city, but to cool it: London, increasingly covered by tarmac and concrete, can get uncomfortably warm in heatwaves. Perhaps these rivers will even be clean enough to swim in, as the Thames now is quite far downstream.

Last month's devastating Mississippi floods remind us that rivers have not lost their power. The St Louis-born poet TS Eliot's lines in "The Dry Salvages" remain relevant: "I think that the river/Is a strong brown god - sullen, untamed and intractable." For all our attempts to control them, rivers have a habit of striking back. Entirely understandable are the Chinese authorities' attempts to tame the Yangtze and the Yellow River, whose floods have cost millions of lives. But it seems we need a new way of living with and not denaturing our rivers, so we can say once again with the great Chinese poet Li Bai, "all I see is the long river flowing to the edge of the sky".

harry.eyres@ft.com

ST; TABLE TALK: WITH FAREED ZAKARIA Political leadership for a new global order

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July 5, 2008
TABLE TALK: WITH FAREED ZAKARIA Political leadership for a new global order
How might Singapore deal with a world in which people are richer than ever before and many players are jostling for supremacy? The editor of Newsweek International, Dr Fareed Zakaria, proffers his thoughts
By Cheong Suk-Wai, Senior Writer
A SINGAPOREAN taxi driver's chance remark set Dr Fareed Zakaria thinking how best he might write about a world in which people are richer than ever before and many players are jostling for supremacy. Meeting The Straits Times in his London hotel suite earlier this week, the editor of Newsweek International recalled how the cabby pointed to the Republic's new ferris wheel, the Singapore Flyer. 'I looked at it and I said - I suppose in a somewhat patronising voice: 'How nice, you have a ferris wheel.' 'And he turns around and says: 'Sir, that's the largest ferris wheel in the world'.' A month later, he was being shown around the South China mall in Dongguan, when his host told him that the 9.6 million-sq ft complex was the world's largest. Dr Zakaria did not buy that at first. He thought The Mall of America in Minnesota still held that title. (Actually it is only the 18th largest these days). Dr Zakaria recalled: 'At that point I decided I had learnt my lesson. I began to realise these anecdotes I had been hearing about this country growing and that country growing were adding up to something quite significant.' So he decided his new book - his second after the best-selling The Future Of Freedom - would examine how the world's new thriving countries will change the character of international economics, politics and culture. Dr Zakaria's big, hawk-sharp eyes, which are very alert indeed, give the lie to his relaxed demeanour. His laptop pings away with news updates on a side table while we talk. Everything about him tells you he is his own man - from his powder purple polo T-shirt, an unusual colour choice, to his Indian-accented English, although he has been a naturalised American citizen for many years now. He was in London for the launch of his new weekly current affairs show on CNN. Called Global Public Square, it premiered on June 1, and the first episode saw him interviewing British Prime Minister Gordon Brown and the Conservative Party leader David Cameron. The son of an Indian politician and a newspaper editor, Dr Zakaria is a Harvard political science alumnus. He had the ear of such luminaries as former US secretary of state Henry Kissinger from early in his career. But he really made his mark with his 2001 essay, Why They Hate Us, which he wrote just after the Sept 11 terror attacks on the US. His weekly column in Newsweek is now required reading for anyone interested in global affairs. The way forward THIRTY years ago, if anyone from Brazil, India or Mexico had predicted his country would soon be revving the world's economic engines, he would have been brushed off as a wishful thinker at best. But today, these countries are charging into the future after having embraced capitalism. As a result, three billion new players are competing for the world's ever-dwindling resources. Indeed, as Dr Zakaria points out in his new book, The Post-American World, the economies of 124 countries, including 30 African states, are now growing at the rate of at least 4 per cent a year. Compare that with the only 35 countries that enjoyed that sort of growth 30 years ago, he says, and what you have is 'the birth of a truly global order'. Singapore, he adds, is handling this brave new order very well. 'What Singapore has done very adroitly is to have moved up the value chain - to have said that 'okay, we can't compete with other countries in cheap labour, and so we're going to do value-added products, we're going to try services, we can compete (in) these areas, we're going to move to the next level'.' He applauds the Republic's 'very clever' forays into such areas as tourism, film-making and software design. And all this, on top of managing good relations with both the United States and China, he notes admiringly. But he adds that Singapore is the only rich country in the world without a fully functioning multi-party democracy. That will hobble its advance in the long run, he believes, because people 'want not only economic rights, but also freedom of association, freedom of speech and freedom of thought'. 'You may get lucky with a particular autocrat, but what happens after him?...If you could guarantee me in advance that you'll get Lee Kuan Yew, that's a whole different thing. But there's no way beforehand to know that you're going to get a leader like Lee Kuan Yew.' He adds wryly, wondering whether this would get into print: 'I think that the political system is rigged in favour of the People's Action Party (PAP). Some of it is formal...Some of it is informal. But all of it is largely unnecessary.' Singapore is already 'a very open society in many ways', he points out. 'I often say this to people because they have an image of Singapore which is essentially incorrect...It is a place where you would certainly feel as if you had many, many freedoms and liberties...It has been lucky in having very wise leadership.' But it has to widen its political outlook much more, he insists. 'Singapore's leaders have succeeded more than they realise. They created a modern society, and in creating that modern society, they must now also trust it more than they do.' He adds: 'That, in some ways, is the genius of democracy. It turns the relationship between governed and governors into a two-way street, and that will make for a much greater degree of sense of loyalty and pride in Singapore for the next generation.' He muses: 'It's funny: Whenever I meet senior Singapore government officials, I will sometimes mention this. And they'll go: 'Oh, no, no, it's not a real problem, don't worry.' And I'll say: 'You know, younger Singaporeans do feel frustrated.' And they'll say: 'Oh, I don't know if you are right about that.' 'And then, as I'm escorted out by one of the young aides to the senior government officials, they will tell me: 'By the way, Dr Zakaria, you are 100 per cent right. We are very frustrated'.' 'And these,' he notes, 'are people in the heart of the political structure.' Dr Zakaria is quite sure that if the PAP held what he calls 'open competitive elections', it would do 'quite well'. And as for Minister Mentor Lee's view that a non-PAP government would act irresponsibly by exhausting Singapore's coffers, Dr Zakaria says: 'You can produce checks and counter-checks. Nobody's talking about giving day-to-day control of Temasek (Holdings) and the Government Investment Corporation to Parliament. You can create institutions that are independent and therefore somewhat sheltered from day-to-day political control.' Tackling global crises AND political control, by the way, is what he feels the new global order needs in a big way. Great global growth brings with it great global worries. And therein lies the rub. The current lone superpower, the US, is not only being outstripped by new players on the economic front, it has also lost its intellectual and moral high ground since it invaded Iraq in 2003. On top of that, though food, fuel and weather woes have spilled over into the international arena, most countries are still thinking of how to solve these problems locally, when what is really needed is greater global consultation, cooperation and compromise. 'We have crises now. The question is whether we have the leadership.' China, he feels, is not ready to fill the vacuum America has left for two reasons. First, there is considerable scepticism about China, particularly in India, Japan and Indonesia. 'It's not as if the world is hungering for Chinese leadership.' Second, if China or any other Asian economic dragon wants to lead the world in the way the US has in the past 60 years, it would first need to present 'a compelling vision for other people to buy into and say, 'You know, we like the way Asians think about the world'.' 'It's not just about money,' Dr Zakaria insists. 'It's about setting an agenda, making people feel that there's a vision that you want to work towards.' For that reason alone, he thinks the US can still play a pivotal role. It can bring the world together to work out solutions to problems like energy and global warming. Asked which US presidential contender is better poised to lead in a post-American world, he plumps firmly for the Democrat, Senator Barack Obama. He finds Mr Obama's willingness to challenge settled wisdom in Washington - like his willingness to talk to US 'enemies' - 'refreshing'. 'And though he was criticised for it, he stuck to his guns,' notes Dr Zakaria. 'I think that was very impressive.' Mr Obama's rival, Senator John McCain, on the other hand, is 'a Cold Warrior', says Dr Zakaria, referring to the Republican's less than friendly references to Russia and China. 'That is just the wrong vision for the future.' Dr Zakaria himself is a long-term optimist about the post-American world. 'At the end of the day, the power of two to three billion people for the first time consuming, investing, producing, dreaming, inventing and problem-solving is very, very powerful,' he proclaims. suk@sph.com.sg

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July 5, 2008
Dr Zakaria on...
FIRM GROUND: PAP supporters pitching in during the 2006 election campaign. OPPOSITES?: US presidential candidates John McCain (left) and Barack Obama. -- PHOTO: THE BUSINESS TIMES PHOTO: AP   View more photos Economic and political rights: People want economic rights but they also want political rights. They want property rights but they also want freedom of association, freedom of speech, freedom of thought. You may get lucky with a particular autocrat, but what happens after him? The great problem with the idea that an autocracy is a good idea is that most people don't end up with Lee Kuan Yew. They end up with Mobuto or Marcos or Mugabe. If you could guarantee me in advance that you'll get Lee Kuan Yew, that's a whole different thing. But there's no way beforehand to know that you're going to get a leader like Lee Kuan Yew. I think that for societies that are not yet at an advanced industrial state, there are considerable questions as to whether introducing multi-party democracy right away produce stability. In places like Iraq we should have had a much greater emphasis on stability and order, rather than holding as we did four or five different elections. But in the long run, for a rich country, there are very few alternatives. Singapore is the only rich country in the world that does not have a fully functioning multi- party democracy. And Singapore is a very unusual case. First of all, it is a very open society. It is also a very small country that has been very lucky in having very wise leadership - and there's no way to guarantee that. One-party rule in Singapore The system needs more checks and balances. You need the prospect of losing power to produce a certain degree of discipline. The Singapore Government They've done a very good job, but younger Singaporeans do feel frustrated. They feel the society, the political system is too closed and it's too much of an insider's club. A sense of belonging What makes somebody a Singaporean in a world in which you are going to need people who have come two years, three years ago? How do you make them think of themselves as Singaporeans? Part of it has to be, I think, that they feel they are full participants in the destiny and political structures of the country. I can tell you that Prime Minister Lee Hsien Loong thinks a lot about this, because he and I have had several conversations about this. China Whenever you talk about the rise of Asia, you're really often talking about the rise of China. But the rise of China produces very complicated feelings in India and Japan. So there might actually be forces within Asia that can act and counteract these things. India I feel very frustrated watching India, because I think it has extraordinary potential. Indian society is so ready for globalisation (but) the Indian state is so scared and backward-looking and corrupt and caught up with its own phobias and ideologies from a different era. The 2008 US presidential race One of the advantages of this (long) process this time around is that the crazies are out of the race. There were a lot of candidates that had very disturbing views about the world, very confrontational, very nasty and would have taken America down a very dark road. And they were all thoroughly rejected by the American public. Mr Barack Obama He's a creature of the world as well as a creature of America...So this world is not a completely alien and slightly menacing thing to him, it's something that's part of him. Mr John McCain He remains a very old-fashioned figure. He has an almost Victorian view of the world.

FT: Airmiles, Credit Cards

Hot airmiles

Published: July 1 2008 09:30 | Last updated: July 1 2008 19:44

Flying might have lost its glamour in the past few years but the business of marketing loyalty schemes has remained as alluring as the designer handbags on offer in duty-free. Now, however, the International Accounting Standards Board’s new rules on such programmes threaten to wipe hundreds of millions of dollars off airline balance sheets.

Qantas’s review of whether to spin off its frequent flyer division – which has 5m members – and sell up to 40 per cent to outside shareholders could be the first in a series of restructurings and sales to result from the IASB’s new rules, which came into force on Tuesday.

Traditionally, the liability of unused flyer miles was recorded on the airlines’ balance sheet at the (relatively low) marginal cost of a delighted regular customer putting their bum on an otherwise empty seat: a meal, some baggage-handling and a few extra gallons of kerosene.

But the IASB, seeking a more rigorous analysis of the opportunity cost of frequent flyer rewards, now wants the liability to be valued at “the amount for which the award credits could be sold separately”. At its most conservative, that means basing the value on the cost of a full price ticket.

The new regulations have their logic, no doubt. But their timing is awful, given that airlines are struggling for survival amid surging oil prices. When Qantas voluntarily adopted the new standards this year, it took a hit of A$508.4m to its retained earnings.

Spinning off its loyalty programme could raise between A$2bn and A$3.5bn. Keeping control would make strategic sense as the Qantas brand is at stake. And acting quickly might produce a better price than waiting for other airlines to crowd the market and depress demand.

Run well, these can be embarrassingly successful standalone businesses. One danger is that the semi-independent reward programme outshines the parent airline. Air Canada spun off its rewards programme, Aeroplan, in 2002. It is now worth four times more than the airline itself.

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Qantas looks at loyalty spin-off

By Elizabeth Fry in Sydney, Raphael Minder in Bangkok and,Justin Baer in New York

Published: July 2 2008 03:00 | Last updated: July 2 2008 03:00

Qantas is considering the partial float of its frequent flyer business later this year, in a move that could raise between A$2bn (US$1.9bn) and A$3.5bn for Australia's biggest airline.

The Qantas announcement comes as some Asian flagship carriers are also studying whether to spin off their passenger loyalty programmes - including Korean Air and Japan Airlines - at a time when their main airline business is facing soaring fuel costs and stiffer competition from low-cost carriers, according to people close to the airlines.

While the carriers would not comment, such a move could allow them to generate additional funding, as well as highlight the value of a business that is less reliant on aviation as it generates sales by selling air miles to credit card companies, hotels and retailers.

Geoff Dixon, chief executive, said Qantas would decide by August whether to sell a 40 per cent stake in the business, with a partial float among the options. Qantas, one of the world's most profitable airlines, is overhauling its loyalty programme into one where points can be redeemed for any seat, at any time.

Qantas shares rose as much as 9 per cent yesterday, before closing up 6.6 per cent at A$3.24. UBS, Citi and Macquarie have been appointed as joint lead managers to manage the potential IPO. Morgan Stanley will continue to provide financial advice ahead of a possible offering.

US airlines that face a potential cash crunch later this year are starting to sell pools of frequent flyer miles to their credit card partners. The downturn has made many conventional capital-raising options more costly or dilutive, leaving carriers to explore alternatives that leverage assets that will retain value even as market conditions continue to deteriorate.

Airlines' ties to the credit card industry have come under greater scrutiny from investors this year as mounting losses cast doubt on carriers' ability to avoid seeking protection from creditors.

Continental Airlines, one of the six legacy US carriers, raised $413m on June 10 from affinity card partner JPMorgan Chase by selling miles and posting some of its routes and airport slots as a security interest. The figure comprised about 12 per cent of Continental's total cash at the end of the quarter.

In a bid to persuade investors that they will stave off bankruptcy, carriers such as American Airlines and United Airlines have noted that they have billions of dollars in miles and other unencumbered assets that could be exploited to raise cash in the coming months.

Additional reporting by Jonathan Soble in Tokyo

Copyright The Financial Times Limited 2008

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US airlines sell off frequent flyer miles

By Justin Baer in New York

Published: July 2 2008 03:00 | Last updated: July 2 2008 03:00

US airlines that face a po-tential cash crunch later this year are starting to sell pools of frequent flyer miles to their credit card partners.

The brutal industry downturn has made many con-ventional capital-raising options more costly or dilutive, leaving carriers to explore alternatives that leverage assets, including frequent flyer miles, that will retain value even as market conditions continue to deteriorate.

Airlines' ties to the credit card industry - both the issuers that co-brand cards and the electronic payments companies that process ticket purchases - have come under greater scrutiny from investors this year as mounting losses cast doubt on carriers' ability to avoid seeking protection from creditors.

Credit card issuers use airline miles to reward account holders for making purchases.

Continental Airlines, one of the six legacy US carriers, raised $413m on June 10 from affinity card partner JPMorgan Chase by selling miles and posting some of its routes and airport slots as a security interest.

The figure comprised about 12 per cent of Continental's total cash at the end of the quarter.

Others may follow. In a bid to persuade investors that they will stave off bankruptcy, carriers such as American Airlines and United Airlines have noted that they have billions of dollars in miles and other unencumbered assets that could be exploited to raise cash in the coming months.

"The wheels are already in motion," JPMorgan analysts Jamie Baker and Mark Streeter wrote in a research note last week.

"Can a similar deal between American and Citibank [its affinity card partner] be that far off? Not in our opinion."

Because carriers often sell miles to card issuers at a discount to persuade them to acquire large blocks in advance, the transactions can be costly.

Nevertheless, airlines can make a persuasive case. Large issuers such as JPMorgan Chase, Citi and American Express value their marketing agreements.

Frequent flyers tend to earn and spend more money, and exhibit more loyalty toward their co-branded airline card than the typical account holder.

"Issuers are always trying to find a way for cards to not be commodities," said Richard Vague, a former credit card executive who ran stand-alone card issuers that are now part JPMorgan and Barclays.

"Airline programmes have always been one of the most successful in terms of having additional value."

Copyright The Financial Times Limited 2008

- - - -

Card companies hold a strong hand

By Justin Baer in New York

Published: July 2 2008 03:00 | Last updated: July 2 2008 03:00

Last autumn, Frontier Airlines selected First Data over its peers as the low-cost carrier's credit card processor. But by April, Frontier held the electronic payments company responsible for its descent into bankruptcy.

Frontier's Chapter 11 filing underscores the crucial role the credit card industry plays in determining which airlines survive the downturn unscathed.

While credit card issuers can be a source of capital for airlines struggling with record fuel costs and slumping demand, card processors like First Data and US Bancorp can have the opposite effect on a carrier's financial flexibility by holding on to some or all of the proceeds from advanced ticket sales.

Processors have the right to "hold back" cash under certain circumstances because they take on the risk that airlines may go out of business before they meet all of their future obligations to passengers.

In short, if a consumer uses his credit card to buy a seat on an August flight to Los Angeles, and the airline fails in July, it is the processor who is left to reimburse the would-be passenger.

"It's really just like an extension of credit, in the sense that you're collecting the cash upon tendering the receipt but not delivering the service until some point in the future," said Ben Hirst, Northwest Airlines' general counsel. "That's typically a credit-based decision and so it varies by carrier, depending upon the relationship of the airline and the processor and the strength of the company."

In some cases, an airline's processor is part of the same financial services conglomerate that owns the company that co-brands credit cards with the same carrier.

Still, the threat of potential processors' hold-backs "may pose an even greater liquidity risk than fuel over the next several months as cash balances come under increasing pressure", JPMorgan analysts Jamie Baker and Mark Streeter wrote in a research note.

"Any material change in hold-back could exact a heavy toll on liquidity."

Concerned that Frontier's financial conditions had wilted materially, First Data put in place a timetable that would have quickly held back 100 per cent of the airline's advanced sales.

In filing for Chapter 11, Frontier was granted a stay on the holdback policy.

"Unfortunately, our principal credit card processor, very recently and unexpectedly informed us that, beginning on April 11, it intended to start withholding significant proceeds received from the sale of Frontier tickets," Sean Menke, the airline's chief executive, said in a statement.

"This change in established practices would have represented a material change in our cash forecasts and business plan."

Brian Mooney, president of First Data's Merchant Services unit, said his company was surprised, too.

"Even they would admit that the high price of oil had caught them in a tough bind," Mr Mooney said. "We had ongoing dialogue with them in the months leading up to the filing. They had not mentioned they were considering bankruptcy."

Under protection from creditors, Frontier reached a processing agreement with First Data that increases the extent of the hold-back more gradually. While troubled by the severity of First Data's actions with Frontier, many US airlines executives see the Denver-based airline's filing as an extreme case. Larger carriers will have more leverage and additional sources of liquidity, they argue.

Copyright The Financial Times Limited 2008

- - - -

 

Australian carrier soars on idea to float customer scheme

By Raphael Minder in Bangkok

Published: July 2 2008 03:00 | Last updated: July 2 2008 03:00

Investors yesterday sent Qantas shares to rally to their biggest one-day gain in a year, after the Australian carrierannounced it could list its loyalty passenger programme.

But beyond investors' euphoria, which resulted in the Qantas share price rising 6.6 per cent to A$3.24, lies a long-debated idea that continues to divide the airline industry.

The benchmark was set in 2001, when Air Canada spun off its Aeroplan frequent-flyer scheme as a separate entity. Aeroplan now trades on a multiple of 18 times 2008 earnings and has a market capitalisation that is four times that of Air Canada.

However, the Canadian success story has not been sufficient to convince European airlines such as Air France to follow suit, while some Asian airlines, including Korean Air, are now showing interest but refuse to disclose their plans.

In fact, even Geoff Dixon, Qantas chief executive, did his best yesterday to damp shareholders' enthusiasm by insisting a partial flotation was only one of the options being considered.

"Under active consideration for the future of the programme is a partial initial public offering, potentially for completion in 2008," he said.

That caution underlines the dilemma faced by airlines that seek to boost the value of their assets without losing control over them. Proponents of the spin-off idea point to Aeroplan as an exemplar of how airlines can extract greater value from a programme by turning it into an independent profit centre, capable of ultimately forging new partnerships with other airlines.

Peter Harbison, executive chairman of the Centre for Asia Pacific Aviation, a Sydney-based consultancy, says that, given Aeroplan's track record, it makes sense that "all airlines who have a well-established frequent-flyer programme are looking at the concept", which amounts to a recognition that the sum of the parts can be worth more than the whole.

"The bad apple is often the airline itself, which tends to contaminate the others," he adds. The worst scenario, however, is an immediate loss of a favourable and secretive contractual arrangement between an airline and its loyalty programme, which could also force the airline to raise its assessment of the liabilities generated by its redemption plan.

In the longer term, there is also the potential for reverse contamination as an independent programme branches out.

"Should the divested unit enter risky ventures and ultimately go bankrupt, the damage to the loyalty that Qantas has built up would be immense," noted Morgan Stanley in a report earlier this year, which forecast that Qantas would therefore settle for a partial sale.

Still, analysts believe that Qantas is among those airlines that have most to gain from floating its programme because, as a flagship carrier, it has built up a long-standing domestic clientele of more than 5m cardholders, a significant attraction for Australian banks and other local partners. That applies even more to Japan Airlines and Korean Air, two carriers that have also been studying a spin-off and which have, respectively, about 20m and 15m programme members.

On the other hand, Cathay Pacific and Singapore Airlines, two of Asia's most profitable air carriers, have successful loyalty programmes but with a relatively small domestic base, which makes an IPO a less attractive option, according to observers.

That they are still determined to extract more value from their programme was, however, demonstrated recently by Cathay, which launched a new venture with American Express after ending a long-standing card deal with Citibank. Listing a loyalty programme also creates additional costs, estimated at A$10m (US$9.5m) a year in the case of Qantas by Morgan Stanley, because of the breakdown in the existing contract between the airline and its programme and the need to hire more staff to set up a fully fledged business operation.

But Qantas, like many other airlines in the region that have committed to an extensive fleet expansion, has already earmarked A$13bn of capital expenditure over five years.

That in itself could be the compelling reason for Qantas and others to seek to raise additional cash from an existing business.

Additional reporting by Elizabeth Fry

Copyright The Financial Times Limited 2008

FT: Qatar's sharpest investor

Qatar's sharpest investor

Published: June 28 2008 03:00 | Last updated: June 28 2008 03:00

W hen Qatar's sovereign wealth fund pulled out of its bid for J. Sainsbury, the UK supermarket group, bankers dismissed the state investment authority's chances of making its mark on the City of London in the foreseeable future. Six months later, Sheikh Hamad bin Jassim Al Thani, the Qatar Investment Authority's chief executive, is back.

Qatar has invested more than £2bn ($4bn, €2.5bn) for a stake of up to 10 per cent in Barclays, the British bank, as part of a plan to put $15bn (€9.6bn, £7.6bn) into financial blue chips. The QIA, which is estimated to control $40bn-$60bn in assets, this week also lured NYSE Euronext to invest in Doha's stock exchange. Qatar is building up its financial centre in fierce competition with the established international hub of Dubai.

Sheikh Hamad will be feted at the top tables of international finance as hundreds of billions of dollars of surplus gas revenues flow into the investment vehicle that aims to keep this tiny Gulf state one of the wealthiest in the world long after its prodigious gas reserves run out.

His marriage of political power and commercial nous has made him one of the richest men in a region of very rich men. He has been foreign minister since 1992 and was also recently promoted to prime minister. The emir of Qatar is said to have quipped of his longstanding ally: "I may run this country, but he owns it."

Long before investments raised him to prominence, Sheikh Hamad's idiosyncratic foreign policy and backing of the free-speaking al-Jazeera satellite channel had already attracted attention. He talks openly of "his friends" in Israel, having forged relations with the Arabs' historical foe in the 1990s. At the same time, the Doha offices of Hamas, the militant Palestinian group, receive Qatari largesse. The deserts south of Doha host the largest US base in the region, yet Sheikh Hamad is more critical of Washington's foreign policy than his neighbours.

In some ways, these positions reflect the split personality of Qatar, which follows the conservative Wahhabi Islam of neighbouring Saudi Arabia but is also banking on tourism.

Last month Sheikh Hamad's pragmatism gave Qatar its greatest diplomatic coup to date when he halted Lebanon's descent into another civil war by brokering a truce. Pro-western Lebanese had perceived him as too favourable to Iran and Hizbollah, the Shia group, but in the end his contacts with Syria helped him to succeed. By the fourth day of the talks at Doha's Sheraton hotel his casual but determined style had won over Lebanese critics.

Born in 1959 in Qatar, Sheikh Hamad's studies took him to Lebanon but he perfected his English in the UK, starting his government career at the office of his uncle before becoming minister of municipal affairs and agriculture in 1989. Three years later he became foreign minister, making him one of the main power brokers in what was then a sleepy, underachieving emirate failing to invest its oil revenues for the future. As the current emir, Sheikh Hamad bin Khalifa, plotted against his father to speed Qatar's reforms, he found a willin