Consumer Strategies Report September 14 2004/Trade Event

Sometimes I feel like the most ignorant analyst out there. I stroll into a packed and beautiful lunch room on the 18th floor of the opulent St. Regis hotel, of a Merrill Lynch conference from June 15 - 17, that I wasn't even invited to and grabbed a seat at the table right in front of the stage. In the exact same way I got to sit right next to former-President Clinton and the Chairman/CEO of PepsiCo at other conferences, I inadvertedly sat next to the Chairman/CEO of American Airlines, who had the table reserved for his keynote lunch presentation. Sitting amongst analysts who've spent their careers poking, prodding, admiring, or despising this company, I got to hear all of the interesting "inside scoops" in industry-speak. Thank goodness I didn't open my mouth and offend anyone else (1).

Gerard Arpey has two gripes: labor and fuel. Those two topics dominated his speech. But first, he checked off the larcenous prices AMR pays for parts as if to remind us how he's (still) working to cut costs (that should have never been there in the first place). It's ridiculous how they're paying thousands of dollars for parts they could probably find at Home Depot for $1.50; it's easy to see why the airline industry is hurting so bad (or how they've miraculously continued to operate this way, as if Six Sigma hasn't been invented.)

As if this unnecessary waste of money weren't enough to make these CEO-geezers go into cardiac arrest, then there are the unions. If murder were legal…

It's a safe bet from the foam on their mouths that airline CEOs find organized labor a passionate topic. It's not that CEOs hate negotiating with unions. It's just that they hate having to do it more than once. Can't they just accept huge wage and benefits concessions and leave it at that? It's such a challenge for CEOs that they actually have departments just to negotiate. You must be thinking that it's not that bad, right? In fact, Jim Parker, former-CEO of Southwest Airlines presented here just weeks before he was to announce his abrupt resignation from the company he'd worked for the last 18 years. Why did he resign? He found his own union negotiations too draining and exhausting. (I couldn't help feeling intimidated by his girth as he walked by me towards the stage. I imagine that union leaders probably argued tooth and nail with a guy like that.)

David Neeleman, the now legendary founder and CEO of jetBlue also announced his airline's new service to the Dominican Republic in the Caribbean, and of course, rubbed it in one more time that he didn't deal with unions, in case we forgot. Like all other CEOs, he did mention his concerns regarding the increase in oil (Note to reader: this event was just before the dramatic jump in the price of a barrel of oil to $49) but that jetBlue was poised to meet them without raising their ticket prices.

Towards the end of the day, I wanted to learn more about rail. In the early industrial age, they were the most rock-solid stocks you could own. They called the shots. Investors and other bankers coddled them like they were a GE. (Think Commodore Vanderbilt and Grand Central Station.) Then came the automobile in the 1920s and 30s followed by the airlines in the 1950s. Their rapid acceptance obliterated rails' business model of hauling passengers. (This isn't the same as subway trains or light rails that are mostly subsidized by governments [2].) The business of rail had been relegated to a hauling cargo, and only at the most competitive rates, (thanks to the competition brought on by trucking.)

Anyway, rails have had difficulties with costs ever since. Unpredictable weather, poor scheduling, slow adoption of technology, and inability to predict demand have made the remaining rail companies underperformers, with some larger ones even having to turn away paying customers, and current customers experiencing horrible customer service (because of delays, spoilage, and other missed sales opportunities).

Even John Snow, former CEO of industry heavy-weight CSX, and appointed Secretary of the Treasury by W. Bush, couldn't fix the problem. (And this guy is now in charge of our currency.)

Disclaimer: The recommendations, commentary and opinions published herein are based on public information sometimes referenced via hyperlinks. Any similarities or likeness to any ideas or commentary from any other sources not referenced is purely coincidental. al berrios & co. cannot control any results occurring from advice obtained from this publication nor any opinion(s) conveyed by any reader of this publication.

(c) 2004. All Rights Reserved. al berrios & company, inc. Published by al berrios & co. This Report may not be reproduced or redistributed in any form without written permission from al berrios & co., subject to penalty.

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