A New Start

FT: China Oilfield buys Awilco Offshore

China Oilfield buys Awilco Offshore

Published: July 7 2008 08:47 | Last updated: July 7 2008 20:00

The rig grab continues. High oil prices and dwindling resources have put a rocket under the price of equipment and services providers and triggered a wave of consolidation. On Monday, the Chinese joined in: China Oilfield Services agreed to pay $2.5bn for the equity of Norway’s Awilco Offshore.

The 19 per cent premium to Friday’s close looks disciplined, but stretches to 42 per cent based on the undisturbed share price on May 29. It is higher still benchmarked against the start of the year, when talks kicked off. COSL is paying an enterprise value of 9.4 times next year’s forecast earnings before interest, tax, depreciation and amortisation, on the rich side compared with some deals in the sector. However, several of the rigs do not come online until 2010, when the forecast EV/ebitda multiple falls back to seven times.

EDITOR’S CHOICE

CPC hopes to revive ties with CNOOC - May-06

Tight supply lets CNOOC shrug off slowdown - Jan-29

Chinese go where western firms fear to tread - Jan-28

Energy: Beijing learns to tread warily - Jan-23

CNOOC looks at Australia deal - Nov-15

Resource nationalism: State groups give majors a run for their money - Nov-09

Picking off assets now appears smart. Further deals are likely as oil service companies, after two decades in the doldrums, reap the benefits of better times. One barometer of the changing dynamics is the rental for deepwater rigs: rates have more than doubled to $500,000 a day over the past three years. Oil majors are increasingly utilising deepwater rigs such as those produced by COSL and Awilco, as the “easy” onshore resources are depleted, forcing them to explore further afield. Yet there are just around 180 such rigs, according to Wood Mackenzie, with a further 90 under construction for delivery by 2012. Long lead times and big price tags act as a natural brake against massive over-capacity. Besides, most rigs being built are already spoken for. The bigger risk is that lease rates will fall as oil majors seek to rein in costs.

The lengthy negotiation period between COSL and Awilco suggests no-one else was prepared to cough up a comparable sum. If so, perhaps the tide is already starting to turn.

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: Banks must learn to trust the word of humans too

Banks must learn to trust the word of humans too

By Gillian Tett

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

A few years ago, Ron den Braber, an outspoken Dutch mathematics geek, was working in the risk department at Royal Bank of Scotland when he became alarmed about the models being used to price collateralised debt obligations.

Most notably, he concluded that the so-called Gaussian Copula approach then in use at RBS (and many other banks) significantly underplayed risks attached to the most senior pieces of debt - creating a danger of future, large losses.

So he duly tried to raise the alarm. But, as he tells the tale, he faced hostility. "I started saying things gently - in banks you don't use the word 'error', but the problem is that in banks . . . people just don't want to listen to bad news," Mr den Braber recalls.

Now, every corporate tale has many sides - and RBS, for its part, vehemently denies that it ever ignores challenges or stifles debate. It says it could not find any record of strong warnings about the Gaussian Copula model, is aware of its shortcomings, and, while it has recently suffered CDO losses, these relate to products acquired after Mr den Braber's time.

However, the story is worth noting since echoes of this saga now seem to be emanating from numerous banks. In particular, many other bankers have also recently told me that they knew that structured finance models were mis-pricing risk at an early date - and yet in many cases the attempts to raise the alarm were crushed.

Or as one senior risk manager writes (anonymously since he remains employed): "[My] institution has now taken multibillion writedowns - job losses result and significant share price erosion - and I wonder how this can have happened? Upfront we did express to senior management that we lacked the analytical skills . . . and highlighted deep concerns about the approach colleagues in the market risk area had taken . . . I feel responsible for not doing more, but I really did push my views, risking my immediate career."

So can anything be done to redress this? (Or prevent it playing out again now in the commodities world, say?)

Perhaps not.

Few bankers want to hear dissent about the models when they are enjoying a profit bonanza. Greed is what drives much of the modern financial world - combined with fear of getting sacked.

But, if nothing else, this saga shows the great blind spot that still haunts many banks. This decade, financiers have invented so many brilliantly clever mathematical tools to repackage risk that the industry has slipped, almost unthinkingly, into an assumption that "credit" is a collection of abstract equations, stripped from any human context.

Thus banks have become so dazzled with their powers that they have ignored how they interact with the rest of society - or how the tribal aspects of their own institutions can create dangerous traps.

Meanwhile, the cult of models has become so extreme that banks have believed them even when this collides with common sense. Yet, as any Latin scholar knows, the word "credit" hails from credere: "to trust". It is, in other words, also a social construct.

And bankers forget this human dimension to their cost - no matter how impressive the abstract numbers might seem. Or as the same risk officer says: "The billions involved were so hard to contemplate that we almost certainly lost sight of the possible consequences [of our credit business] until it was too late."

So, as the banks nurse their credit losses, they certainly do need to review why some of their clever mathematical models failed. That geeky Gaussian Copula stuff, in other words, matters hugely.

But, most important of all, they need to work out why the human processes around the models failed, too. Not just in the eyes of Mr den Braber, but also in the experience of numerous other junior employees who are now hugging their war stories, but are far too nervous to speak out.

* In the coming weeks I will be on sabbatical writing a book (about CDOs, modern banking tribes and much else.) I will return to the column after the summer.

gillian.tett@ft.com

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; Coca-Cola

Coca-Cola

Published: July 1 2008 09:33 | Last updated: July 1 2008 19:31

Muhtar Kent should not take it personally. On his first day behind the desk as Coca-Cola’s new chief executive, shares in the drinks group sank to their lowest point in just over a year. Much like a new president inheriting a disastrous legacy, however, that trough ought to play to Mr Kent’s advantage. Not because he can blame his predecessor – he enjoys a good relationship with Neville Isdell, who remains as chairman. And the transition has been smooth, exceptionally so by Coke’s standards.

Rather, Mr Kent inherits a group that has recovered well but now faces headwinds largely beyond his control. In the US, structural decline in sales of carbonated soft drinks has been reinforced by an economic slowdown forcing Americans to trade down to cheaper brands and eat out less often. Meanwhile, investors are nervous about the impact of rising prices on consumers in faster-growing emerging markets, their concerns heightened by gloomy outlooks from some of Coke’s bottling partners.

Such pessimism, with Coke’s stock now trading at a lower multiple of earnings than during its meltdown of 2004, ignores Coke’s defensive qualities – and the role Mr Kent can play. Only a fifth of Coke’s operating profit is derived from North America, considerably less than for arch-rival PepsiCo. While Coke does not enjoy Pepsi’s exposure to snacks, the flip side is less pain from rising crop costs. Similarly, the warnings from Coke’s bottlers have more to do with their exposure to plastic and aluminium costs than slumping sales.

Mr Kent’s background in bottling provides the first chance to make his mark. Low-margin bottlers are in the business of picking up pennies. Applying that mindset more rigorously to Coke’s marketing-led model should yield efficiencies.

Longer-term, Mr Kent’s strategic challenge is like that faced by Microsoft – what to do when you sell the soft drink equivalent of Windows in a mature market? Fortunately, Coke’s strong balance sheet and free cash flow provide the necessary tools. In the meantime, streamlining the existing operation should give investors a short-term rush.

FT: NOL is weighing up anchorage in Hamburg

NOL is weighing up anchorage in Hamburg

By Robert Wright and John Burton in Singapore

Published: July 1 2008 03:00 | Last updated: July 1 2008 03:00

It was one of the highest compliments a senior executive could pay a rival.

In a private letter to senior staff sent late last year, Eivind Kolding, chief executive of Denmark's Maersk Line, the world's largest container shipping line, exhorted them to improve profitability.

If Maersk Line had the same cost structure as APL - the container line owned by Singapore's Neptune Orient Lines (NOL) - filled its ships as fully and carried the same types of cargo, it would be two-and-a-half times as profitable, he wrote in a letter seen by the Financial Times.

This admiration for NOL is widespread throughout the highly cyclical container shipping industry, where few operators have proved as adept as APL at ensuring ships are consistently full and the rates charged to customers consistently high. NOL made pre-tax profits of $586m on $8.16bn turnover for the year to December 28 last year.

Yet NOL is now the frontrunner to take the risk of acquiring Hamburg-based Hapag-Lloyd from Germany's Tui, Europe's largest travel group, to combine it with APL, according to people involved.

The deal would create the world's third-largest container fleet. Most observers think that NOL's only realistic competitor is a group of businessmen associated with Hamburg, Hapag-Lloyd's base, who would like to buy it to keep it German.

Although NOL is two-thirds owned by Temasek Holdings, the cash-rich Singapore state investment company, analysts warn that NOL may be taking on too much debt if it concludes the deal.

NOL has a market capitalisation of S$4.8bn (US$3.5bn), while Tui is believed to be seeking at least $6bn for Hapag-Lloyd. "This would imply NOL assuming a net debt/equity of 1.9-2.6 times," said Citigroup in a report.

Vincent Fernando, a Citigroup analyst, questions NOL's eagerness for the deal when the shipping industry is weakening. "There is no urgency in NOL buying Hapag-Lloyd. There are not a lot of companies chomping on the bit to buy it," he says.

Other potential buyers, including Mediterranean Shipping Company of Geneva, Taiwan's Evergreen Marine and Hong Kong's Orient Overseas prefer organic growth. Meanwhile, France's CMA CGM says it wants to buy only niche regional lines. Maersk Line is still recovering from its botched integration of P&O Nedlloyd.

Raymond Lim at CIMB-GK Securities in Kuala Lumpursays: "The market will pay more attention to whether NOL can get Hapag-Lloyd at an attractive price rather than the debt level, but Tui is driving a hard bargain."

Analysts say shareholder concerns about NOL's move would be eased if Temasek helped to finance the bid or decided to renew its 2004 effort to take NOL private by buying out minority shareholders as part of the deal.

NOL has not commented on whether it is preparing a bid, but the company is known to have been looking for economies of scale by growing bigger.

A takeover of Hapag-Lloyd would give the Singaporean group access to the important German export business that is vital to Hapag-Lloyd.

Such traffic would provide balance to a business that has been dominated by Asian exports since NOL's founding in 1968, says Mark McVicar, transport analyst at Dresdner Kleinwort.

Hapag-Lloyd has one of the best balances of any container line between the volumes of cargo it carries in each direction on its voyages.

Many other lines carry almost exclusively empty containers or only low-value waste products on their return journeys to Asian exporters.

Mr McVicar says: "If I'm Siemens and I've just sold a whole load of power equipment to Asia, I only make one call about shipping it.

"It's to Hapag-Lloyd and I know they will give me incredible levels of service."

Hapag-Lloyd is far stronger than NOL on routes between Asia and Europe, across the Atlantic and in trade to and from Africa. NOL's main strength is in transpacific trade between Asia and North America.

However, Thomas Held, NOL's German-born chief executive, will have to handle the integration carefully to protect the Singapore group's profitability. As a larger line, NOL would face a greater challenge balancing the need to keep its ships full with the risk of taking too much low-value freight at cheap rates.

Copyright The Financial Times Limited 2008

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.

- - - -

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

- - -

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: Tea-shop boffin who pioneered business computing

Tea-shop boffin who pioneered business computing

By Alan Cane

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

Amore incongruous sight would be hard to imagine, particularly in 1951. There, at the heart of a vast catering empire devoted to tea and cakes, was a pulsing sci-fi monster with endless rows of tubes filled with half a ton of mercury. The monster's name was Leo. It was the world's first business computer and its master, David Caminer, who has died at the age of 93, was one of the great pioneers of commercial computing.

Sixty years ago, nobody would have seen anything like Leo. Official secrecy meant that the public knew nothing of the spectacular progress made by British scientists in developing the code-breaking digital computer, Colossus, which helped win the second world war. Civilian computers did not exist and nor did the software to run commercial applications. Caminer was the intrepid, determined person who invented the first business programmes.

What made his achievements as the world's first commercial systems analyst so extraordi-nary was that he started from scratch. At the time he was the systems manager for J. Lyons and Company, then Britain's biggest caterer. The Lyons board had heard about the development of "electronic brains" in the US but those were all being used for scientific or military purposes. Lyons, which prided itself on its efficiency, took the remarkable decision to develop its own digital computer to automate the running of its catering business.

Caminer was the key member of a team of bright young technologists responsible for bringing to life the vision of the Lyons board. Leo - Lyons Electronic Office - ran a programme for the first time in September 1951. Under Caminer's tutelage, the Lyons team developed systems and ways of working that were groundbreaking for the time and are still relevant today. Indeed, if the rules for systems development laid down by Caminer had been taken to heart by succeeding generations, fewer computing disasters would have tarnished the image of the industry.

Caminer programmed Leo to take over routine office tasks and do them in a fraction of the time taken by clerks. Where it had taken eight minutes to calculate an employee's pay - Lyons had 30,000 workers - Leo could do it in 1.5 seconds. Leo was programmed to handle the daily deliveries from Lyons bakery to 200 retail outlets, to organise restocking, to calculate the overnight production requirements, such as how many miles of Swiss roll had to be made, and even to work out delivery routes for vans. Later, Caminer ran programmes that could detect patterns in the till receipts and pinpoint when the company's restaurants were busiest and which of its chocolate cakes and iced fancies were selling best. Today, businesses analyse such information as a matter of course but in the 1950s this marked a retail revolution.

Soon other major companies such as Dunlop, Ford and Imperial Tobacco were coming to look at Leo and learn from it. Lyons set up a subsidiary to make computers and 80 Leos were sold all over the world.

Caminer, a charming individual with exquisite manners and a delightful sense of humour, had a short fuse where programming standards were concerned. More than one of his colleagues had work literally thrown back for failing to meet his expectations. Yet Caminer himself had had no training in computing - hardly surprising because the subject was so new that everybody involved in Leo learned on the job. What was unusual was that Caminer was not even a mathematician and had no formal academic qualifications.

Born David Tresman in 1915, he was the son of a Lithuanian immigrant. His father died fighting on the Marne when he was three. When his mother married again, he adopted his stepfather's name. Raised initially in London's East End, he later went to the Sloane School in Chelsea but by his own admission he was not a natural student. He was more engaged by unemployment and the rise of rightwing dic-tatorships in mainland Europe. He spent his youth pamphleteering and, as he put it, "generally fostering the revolution". He marched against Oswald Mosley, the anti-Semitic British fascist leader.

Having failed to get into Cambridge - he said later that "university seemed an irrelevance in the days of mass unemployment and hunger marches" - he became a management trainee at Lyons through a contact of his mother's. The catering group, which served millions of meals every year, was known for its tea shops and Corner House restaurants with waitresses known as "nippies".

On the outbreak of the second world war, Caminer joined up and served at El Alamein, where he recalled the "wondrous sight of a desert fox crossing the shimmering sands at first light on the morning of the battle". After being wounded in the western desert and losing a leg, he returned to Lyons, becoming manager of the company's systems research office. It was then that he became involved in its computer project - on a salary of £5.05 a week.

Leo eventually became part of what was then the British computer champion, International Computers - ICL - and Caminer was appointed head of market development. He was asked to take charge of software for ICL's New Range 2900 series, its flagship through the latter part of the last century. He specified the ICL operating system VME/B, a brilliant concept that was in some ways too advanced for the machines on which it was expected to run.

Caminer completed his career by implementing the European Union's computer and communications network in Luxembourg. He was awarded the OBE in 1980.

He always believed that small, close-knit teams of the sort that worked on Leo were the ideal: "These days the spirit has changed," he complained just before his death. "Computer staff have become nine to five workers. Teams are so large I'm surprised they ever get anything done."

He is survived by his wife, Jackie, whom he married in 1945, and by their three sons and two daughters.

Alan Cane

Copyright The Financial Times Limited 2008

FT:Sector catches them young

Sector catches them young

By Richard Milne

Published: June 16 2008 19:47 | Last updated: June 16 2008 19:47

Joachim Belz is looking for engineers. The chief executive of Weidmüller, a German maker of components for the electrical and electronics industries, wants to hire 200 in the next two years but he has a problem: there are not enough of them.

“We have problems filling these posts as quickly as we would like,” he says. “But we have complained long enough about it in Germany. Now we have to find a solution.”

It is a sentiment echoed not just around Germany, the supposed land of engineering, but across large parts of Europe. Manufacturing companies from Spain to Switzerland are finding it hard to recruit high-skilled employees domestically, a trend that could affect growth in the long term.

So how are they tackling the issue? The answer is a series of increasingly far-sighted measures that range from visiting kindergartens to creating companies inside universities.

The steps taken by Weidmüller, which is based between Hanover and Dortmund, are typical. For long-term results, it sends managers into local junior schools to play science-based games with children from eight years old and upwards. “It could take us 10-15 years to reap the fruits from this but we are being deliberately long-term,” Mr Belz says. Older students and teachers are invited to the factories to see how products are made. “We need to get them excited about the wonders of science,” he adds.

Value of education: local universities that can feed a far-flung HQ

European companies based in obscure locations often have a hard time attracting highly skilled employees. Mondragon, the world’s largest cooperative with sales of €15bn ($23bn, £12bn), has opened a university near its headquarters in the Basque Country in north-east Spain. “We needed to stop the brain drain to other countries,” says Jesus Ginto, head of communications.

Companies in Franconia, in central Germany, have grouped together to open an international school in Erlangen. Adidas, the sporting goods group based in nearby Herzogenaurach, is one of the big supporters of the venture alongside Siemens. “We need to attract the best international managers and this is one of the ways to convince their families to come to this small town in Germany,” says Herbert Hainer, chief executive.

Joachim Belz, chief executive of Weidmüller, a components maker based in Detmold in a rural part of northern Germany, says companies need to do more to address “the big challenge of location marketing”.

Weidmüller supports the Institute for Industrial IT at a local technical college and tries to encourage other institutes such as the renowned Fraunhofer to set up in the region.

Weidmüller spends €5m ($7.7m, £3.9m) a year on education programmes, not an inconsiderable sum for a company with a turnover of €500m. That includes paying for students to take a university degree – costing about €60,000 per student – as well as for work placements, visits to colleges abroad and a dual programme in which study is combined with technical training in the company. “We get a good return on investment – we can win all these people for us,” says Mr Belz.

Other companies go even further. Bosch, Siemens and ThyssenKrupp – three of Germany’s largest industrial groups – all work with kindergartens to try to get children interested in science from as early an age as possible. Siemens provides kindergartens with a “discovery box” containing experiments for three- to six-year-olds ranging from electricity, the environment and water. One example sees the children constructing a basic electric circuit with batteries, lights and wires. “We want to get them to learn things in a playful not a pedagogic way and they can learn so much more at that age than they can later,” says the Maria Schumm-Tschauder, the project’s co-ordinator.

It is not just about raising interest among children. Thomas Kaeser, chief executive of Kaeser Kompressoren, a leading provider of compressed air, says it is important to invite teachers from schools and universities into companies to see how a factory operates. “They are normally totally shocked at how different it is from their preconceptions,” he says.

Some companies have even bigger ideas. ThyssenKrupp, the steelmaker, has set up a biannual event called IdeenPark, or Ideas Park. Vast halls are filled with endless hands-on experiments for children – and adults – such as understanding how a bobsleigh works and designing their own electrical circuits. Nearly 300,000 people, many of them young children, visited the last event in Stuttgart. “It was a great success,” says Ekkehard Schulz, ThyssenKrupp’s chief executive.

It is not just companies that are contributing to this long-term focus. In the Basque Country of Spain, the provincial government of Biscay helped set up a large industrial park outside Bilbao. José Luis Bilbao, the head of the government, says: “Our biggest problem here is the lack of human resources so the park helps tackle that.”

But companies are having to act in the short term too. VDI, the German association of engineers, estimates there are 95,000 vacant posts for engineers in the country – up from 18,000 just three years ago. That is due both to a surging demand for engineers and the lack of students in technical universities. Senior executives such as Dieter Zetsche from Daimler say the situation is slowly improving after a period a decade ago when companies stopped hiring engineers. But the recent rise in engineering students is still not sufficient to cover the gap.

Instead companies are seeking to co-operate more with local universities. Lenze, a German maker of mechanical drives, has set up three companies inside technical colleges in an attempt to commercialise innovations and attract engineers to it. “That has helped us keep our lead in filing patents in our sector,” says Erhard Tellbüscher, chief executive.

Ormazabal, a Spanish electrical components company that in spite of its size competes against Siemens and ABB, is taking a more down-to-earth approach and trying to help students at the engineering schools in Bilbao and Madrid with their projects. Guillermo Amann, the chief of staff for the head of the company, says: “We are trying to catch the students before they freeze and lose interest or go elsewhere.” Weidmüller invites 10 students each year to a week-long “summer academy” at its headquarters where they work and socialise together. It also offers more places for apprentices than it needs and the demand is clearly there – for the 55 places on the three-year programme it receives at least 1,200 applicants.

Of course, companies can simply try to look for engineers abroad, and some do. Mr Amann says Ormazabal recently brought four French electrical engineers to Bilbao as well as two Brits in its high-power laboratory and two Germans. Eduardo Giménez, the corporate marketing director of Ingeteam, another electrical components company in Bilbao, says it is bringing in people from its operation in eastern Europe and the Czech Republic in particular. “This is one of the secrets for us in opening up branches around the world – we can bring the people back here,” he says.

ThyssenKrupp has gone further and made acquisitions to gain highly skilled workers, such as the purchase of Uhde Shedden, a Thai company with 340 workers, most of them engineers. It has also built up a subsidiary in Siberia near a technical university to tap its qualified engineers and will soon have 400 workers.

A common refrain among these companies is that, given the skills shortage, they have had little choice but to decentralise research and development facilities that were previously located solely in the home nation. Ormazabal now has R&D centres in China and France, as well as factories outside the Basque Country in Madrid. Weidmüller has a development centre in China and a new one will soon open in the US.

Mr Belz, like other engineering executives in European industry, says the losers from the lack of skilled workers will not be companies but countries. “If you can’t get the engineers for the tasks at your base then you have to bring the tasks to where the engineers are.”

Copyright The Financial Times Limited 2008

FT: Evergreen founder steers a safe channel

Evergreen founder steers a safe channel

By Robert Wright

Published: June 10 2008 03:00 | Last updated: June 10 2008 03:00

Behind Chang Yung-fa, chairman and founder of Taiwan's Evergreen Marine Corporation, as he greets visitors in his Taipei office, are multiple pictures of himself.

Mr Chang, now 80, is seen meeting politicians and receiving honorary degrees and medals. In one, he is between John Prescott, former British Labour deputy prime minister, and Baroness Thatcher, Britain's former Conservative PM.

Yet, when Evergreen came into being on September 1 1968, few outsiders would have expected it to last many months, let alone end up courted by world leaders. Mr Chang's then business partners had thrown him off the board of a company called Central Marine and forced him to buy a vessel - Central Trust - which was at sea suffering mechanical problems and the subject of numerous legal actions.

Evergreen, which spent several years in the 1980s and 1990s as world number one container line, is, along with Hong Kong's Orient Overseas Container Line (OOCL), one of only two large Asia-based container lines controlled by their founding families. The other large container lines in the region - where most world container voyages start or finish - are controlled by listed Japanese conglomerates, Korean chaebols or national governments.

Both lines have pursued distinctively cautious commercial strategies, which have let more aggressive competitors overtake them in world fleet size tables. Evergreen, world number two as recently as 2002, is now number four, while OOCL is number 12, says Paris-based AXS Marine.

However, in a market where most shipowners are buying ships of unprecedented size and price, and multibillion-dollar takeovers regularly go wrong, Mr Chang is stubbornly confident in his own judgment.

"I just go along a neutral course," he insists. "It's not that I'm cautious or conservative. The other shipping lines around me have grown and expanded too fast."

Mr Chang was put off acquisitions by Evergreen's one, troubled takeover - of Italy's Lloyd Triestino in 1998. Evergreen bought the line from the Italian government after an approach from Romano Prodi, then Italian prime minister.

CC Tung, chief executive of Orient Overseas International, OOCL's parent, fears a takeover might harm the highly profitable company's widely-respected information technology systems.

"Consolidation on paper is always very attractive," he says. "But I think managers tend not to appreciate the difficulty and obstacles of amalgamation."

OOCL has been able to sit out another major trend - a rush to order new, larger-than-traditional container ships - because it ordered such ships cheaply in 2002 before other lines. Its biggest ships, which carry more than 8,000 20ft equivalent units (TEUs) of containers, cost about $72m each, but would cost about $145m now.

Mr Chang ordered 12,000 TEU ships last year, but still retains long-standing concerns about whether the ships will remain profitable when cargo supplies dry up during a downturn. He has reduced the risk by chartering the new ships for five to 10 years, rather than buying them directly.

"This way, if a reaction sets in, I'm able to return the vessel to its owner without having to bear the cost," he says.

Yet Evergreen, in particular, has been more aggressive in the past. From his first years as a shipowner, Mr Chang has preferred more expensive, new ships. The stance - at odds with most start-ups' preference for old, cheap tonnage - led to the break with Central Marine, whose other directors were angry that Mr Chang had persuaded them to buy the newly-built but faulty Central Trust.

"If you were to charter a vessel, it's never to your own specification, which I don't like," Mr Chang says. "I always want the kind of specification that will work best for me."

Evergreen also defeated in the 1970s the then-powerful conference system, under which container lines jointly set rates for certain trades. Taiwan's growing industries then used the line for their booming exports.

"Evergreen wanted to join the conferences but we were kept outside," Mr Chang recalls. "Given the situation, I had no choice but to put up a fight."

The key question for both Evergreen and OOCL now is whether their current stances will be proved as right in retrospect as the key past ones - which remains far from certain.

However, many observers still expect two lines with little or no debt and cheap-to-operate ships to survive better in any coming market downturn than rivals.

"OOCL and Evergreen are, to my mind, the yet-to-be-proven winners of this market," one shipbroker says. "They have been conservative where others have been over-eager."

Copyright The Financial Times Limited 2008