How did the business world get into such a mess? Hans Lerch, former CEO of Kuoni Travel, shares his views, and talks about its impact on aviation and tourism, in this excerpt from a speech he made at IT&CMA in Bangkok last week.
Travel is a fantastic industry to be in for all the good reasons we all know and because it is the epitome of people's business.
But it's often been a tough business and it has been very tough between 2001 and 2003. We all remember what 9/11 did to it, and SARS.
But I know of another industry where everybody had a lot of fun and where responsible people turned into gamblers, gamblers who couldn't resist the unbeatable odds which were – get filthy rich if it works and don't lose anything if it doesn't! Get paid many, many millions if it works and only a few millions less if it doesn't.
Where, in my book at least, a basic understanding of justice got perverted when indecent profits were pocketed by managers and are, therefore, private and losses are now socialised.
But no party lasts forever and their world too started to change. Fannie and Freddie were nationalised, Lehman Brothers collapsed, Merrill Lynch was taken over, AIG, imagine that, was also nationalised, the worldwide stock markets did what they did and the American Treasury Secretary announced a grand scheme to save the world.
On Thursday before that memorable week, I had dinner at the St James Club in London. Founded some 300 years ago, mediocre food, Gentlemen-only and waiters who all look like founding members. We had an American banker at our table who, strangely enough, was quite upbeat about the future, contrary to that younger British banker who was really very worried.
And you know what the American told the Brit? He said: "Look buddy, just hang in there long enough and you're gonna get overpaid again". He meant it and summarised beautifully what I think lies at the very core of the mess the world is in. It's got five letters and is called: "Greed!"
Greed like in "My Bonny, excuse me, my bonus is over the ocean" and arrogance like in "the only reason why I should bother with a client is for me to get rich".
The Swiss Government recently said they could not afford a fraction of what it would cost to save UBS. Which is true, the bank is simply too big. So if anybody in here intends to open a financial institution and enter the race of implicit government protection, remember these three rules.
Rule 1: Make sure you are based in a country where the government has both the deep pockets and the political will to back you up.
Rule 2: Make sure a significant part of your business is in a sensitive sector, life insurances or retail banking for instance. Then you can always cry "national interest" when you seek help. It also helps to be big so that a collapse would seriously disrupt the markets and upset the voters.
Rule 3: Get into trouble in an election year! Well, in the meantime also the Europeans are forced to bail out banks and there are no elections there right now.
What about that sub-prime and credit crises? We are supposedly witnessing the worst mortgage crises in decades. Why then did I recently read a statistics telling me that the delinquency rate in the US rose to only 6.41%? Which means that 93.59% of all home owners including the so called sub-prime borrowers, still make their mortgage payments regularly. And why are actual foreclosures, ie situations where people lose their home because the bank is not willing or able to wait any longer for payments to resume, why is this figure only at 2.75%?
Both numbers are apparently well within the normal fluctuations over a typical business cycle and, therefore and objectively speaking, the mortgage market is not in trouble as much as people want us to believe. But what is it then that is wrong, if not this? Well, the word here has five letters too and it's called: "Trust!"
Let me tell you the sausage story, an interesting analogy I read a few weeks ago. The article claims that some banks are like sausage factories which process all sorts of debt, not only mortgages but also some quite unsavoury student loans, car loans, credit card debts etc., that they process this stuff into debt products. Derivatives with fancy names like "Structured Products", "Reverse Convertible Bonds", "Collateralized Debt Obligations" etc. etc. which are fostered onto an unsuspecting public.
And like consumers who don't know what is in their sausages, and sausages are nothing else but meat derivatives with fancy names like "Salami" in Italy or "Bock Wurst" in Germany, the unsuspecting purchasers of these financial products have no clue what is in them. They simply trust their banks the same way the housewife trusts the local butcher.
However, very few local butchers today still make their own sausages. And very few banks structure their own products. Both are little more than retailers who supply themselves on the world market and then sell to consumers. And they do not necessarily buy what's best for their customers but what allows them to realise the largest profits.
The sub-prime crisis revealed that some of the packagers had packed some rather toxic bits into their products and investors reacted like consumers react when they find out what their sausages really contain: They stopped buying! They no longer trusted their banker who in turn no longer trusted his supplier.
Demand for such products collapsed leaving many financial institutions stuck with large inventories of financial sausages with dubious content which, in turn, and as there is indeed no market anymore, they had to write down to zero based on the fair value and the mark to market regulations.
No more trust, this is what happened and what is happening! There is so little trust between the banks that they stopped lending to each other which is why the Fed and other central banks have to inject so much money into the system.
Do we in our industry have a problem? I'm not talking about Thailand where business is presently impacted for political reasons but about the future in general. And the answer is "Yes" but the problem is still relatively small and will never become as big as what the finance industry is presently facing, where literally hundreds of thousands of people will lose their jobs. A very lucrative part of our market, richly paid executives of financial institutions, have all of a sudden very different worries than spending money for lavish holidays.
They also have no money anymore for Ferraris and B&O speakers for $12,000 a piece. And the MICE market will be hurt more than the general holiday business because company budgets for MICE arrangements are tightening up or will be cut all together.
Yes, our industry, too will have to fight to overcome the challenges which lie ahead because there are a lot of issues and the media reports are not exaggerating when they talk of the slowing trade everywhere, of almost guaranteed recessions in some of the foremost economies of the world, of inflation which is definitely going to be a big problem in the future, everywhere and especially after Mr. Paulson's bail-out package and of the oil price and a bunch of other things. The oil price is no longer hovering around $145 and will come down further but it is still a huge concern, especially for the airline industry.
Combined with inflationary pressure on everything, especially also on labour costs, the costs are killing them; and because old men die in winter, as the saying goes, airlines die after the summer, when cash flows dry up or become less.
In the course of the year, 14 small and smallest low cost carriers went into bankruptcy or lost their independence in Europe alone. And Alitalia should have stopped flying 25 years ago but that's truly another story!
And what is the airline industry doing? Well, they are running into each other's arms, consolidation this is called, they will streamline their networks, will take out flights, will only run trunk routes with high load factors if they can and they might park large numbers of aircraft in Arizona and Nevada, again.
They will squeeze their suppliers even more and substantial fuel and other surcharges are being and will be added to airfares. Passengers, apart from being treated like criminals at all those security check-points, will have to cough up more money.
The quintessential question is will people really travel substantially less because of all that? Well, I say "yes" but probably not as much less as many of us might now fear. And the impact will be different from continent to continent. Bad in the US, bad in Europe and less pronounced in Asia, probably with the exception of Japan.
True, people need disposable income to go on holidays but they will do what they always did and will postpone the dentist to next year – unless the pain is killing them that is, postpone the purchase of that new car and live a little longer with the old stereo set. They did that in the past and they will do it now.
This article has first appeared in WebinTravel ~
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