Guru; Rewriting the Dictums of Travel and Transportation

Guru: Rewriting the Dictums of Travel and Transportation

CM: We clearly want to speak to you about the challenges faced by the airlines, but you mentioned that another transportation segment facing severe challenges is shipping. And you mentioned that this has to do with not only the economy, but also the number of new ships that have recently been built.

Randall: Yes. The new builds arriving now at a time of weakness is causing the rates in the industry to drop significantly, and this is a problem that will continue through next year. In fact, it may get worse, because there are a significant amount of new builds coming on next year, and unless you're hearing something from economists that I'm not, the economy is going to stay weak through much of that time.

CM: And to what degree will the shipping segment feel the pain?

Randall: The industry is going to be in for a bloodbath in terms of financial returns. The market cap of companies in the industry has dropped a lot. It is likely there will be some additional M&A activity involving the major players within the next year.

But even though you may have lots of consolidation among the carriers — which you think would gradually firm up the supply and demand problem — consolidation by itself will not solve the yield problem in the industry. There are two headlines, it seems: One, that because of lousy financial results in the recent past and foreseeable future, there will be a consolidation of carriers. Two, that this won't fix the yield problem, because there's still going to be enough fragmentation in the industry, and an undifferentiated product, that the yields will continue to be very bad.

CM: Simply put, we're shipping fewer goods around the world, but suddenly have more new ships.

Randall: Right — it's driven by a reduction in world trade. Although I think there's no doubt that world trade, which has grown faster than the GDP for years, will continue to grow rapidly, the problem is that this weakness has been compounded by the untimely addition of a lot of new capacity. Those commitments are made ahead of time — you can't build a ship overnight — and these were made two to five years ago for ships coming out now.

CM: So it's sort of like the housing market?

Randall: Worse, because you don't have a two- to five-year lead time to buy a house. But it is like the other industry for these cycles, the heavy-truck manufacturing business. Class A tractors. The freightliners. The cyclical nature of their business is just awful, and right now those manufacturers are just hemorrhaging because the demand is down in North America and everybody bought a large number of new tractors within the last few years and no one wants to buy new tractors.

CM: There is little question that we should expect to continue to see world trade numbers grow faster than GDP …

Randall: It's a little murky to predict, but as long as globalization is continuing and markets continue to open up, world trade grows faster than national GDP. By two points at least, two to three points each year. If the world GDP grew at three percent, world trade would be growing at six to seven percent. I'm sure that when the numbers are in, world trade will continue to grow faster than economic growth.         

Just a side note: The other trend that is happening, along with world trade growing, is that the stuff that is being shipped internationally is becoming more valuable. China is doing more than just basic manufacturing now. It's putting some content into its products, and as the value of stuff being shipped increases, they tend to move somewhat more of it by air than ocean. So the outlook for the world air cargo business in terms of the long term is good, but the short term is a disaster. There will be a lot of growth in world air cargo over time — particularly in parcels. For UPS and FedEx, the international outlook is very good.

CM: When you say higher-value content, we're speaking of electronics, computers, and so forth?

Randall: Exactly. Yes, and instead of just shipping components, they'll be assembled into a finished product. A lot of it is high tech coming out of Asia.

CM: What, now, should we expect for the airline industry?

Randall: It's not inconceivable that many of the carriers will go through some reorganization proceedings. I think, in fact, that it's inevitable. These carriers have to able to achieve some kind of accommodation with their airport stakeholders or employee stakeholders, which gives them a lower cost structure coming out of reorganization.

One thing, you know: In the airline business, it's extremely difficult to differentiate your product. It is extremely difficult for someone with a higher cost structure than its primary competitors to perform well.

CM: When we say reorganization in regard to the airlines, what types of strategies are we really speaking about?

Randall: When you get into a crisis situation, which is what we have now, a different set of priorities emerges. What is the new business design going to be? How am I going to make my enterprise the going concern, given the new conditions within which I have to operate? Cost reduction is always and still is paramount, but now there's the issue of survivability, and what is a winning business design going forward. When you have a very significant falloff in demand, it also introduces the subject in the passenger business of "win back" strategies. How do I get the types of customers where I make the most money? How do I get them back on my airline? There are some very sophisticated CRM techniques that can be brought into play to help them figure that out. So the needs do change as their business conditions change.

CM: Are airlines making good use of information they already have on their travelers? Are they really leveraging all they have?

Randall: There is differentiation among the airlines, in terms of how effectively they mine — they call it data mining — the data on their customers and what they do with it. It's not just knowing that Joe is a high-frequency traveler, but that he is a high-frequency profitable traveler. Because not all of them are. So once you define the profitable guys or the ones who are grossly unprofitable, it's what kind of an action program do you put in place to help increase profits. Some people, you might even discourage. Airlines are at different stages of development in terms of their effectiveness in executing this initiative.

CM: It seems that there was so much hype about the Web and booking flights on-line. Going forward, how large a component will the Web play in the success of airlines?

Randall: It'll be bigger and bigger for a couple of reasons. One, it's cheaper than a $40,000-a-year ticket agent. To get the passenger to do the things like making a reservation, getting a boarding pass, interacting with the frequent flyer program — there's a whole bunch of things that you can now do over the Web. It's cheaper for the airlines, and easier for the passenger in many instances. Airports are finally taking advantage of automated procedures. You can check in by just going to a machine and getting your boarding pass. They are now on the trail being driven by a need to take costs out of their system.