Month: October 2011


Airlines Focus Rewards on Those Who Pay More

October 31, 2011

Business

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Airlines have been making changes in their frequent flier programs, increasingly giving their best rewards not just to passengers who fly the most but who also pay the highest fares.

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Peter DaSilva for The New York Times

Henry Harteveldt, a market researcher, says airline loyalty programs are “all about the bottom line.”

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United Airlines, for instance, has downgraded benefits offered to the lowest tier of its elite frequent fliers. Last March, Southwest made an even more fundamental change in its loyalty program, moving from a system that awarded participants credits for flights, regardless of distance flown or fare paid, to one that gives participants points based on the types of fares they purchase. So someone who paid $349 for a Business Select fare on a flight from Chicago to Denver would earn 4,188 points, while a traveler buying a $195 Wanna Get Away fare on the same flight would earn just 1,170 points.

JetBlue and Virgin America, too, reward passengers who spend more.

Loyalty programs today are “all about the airlines’ bottom line,” said Henry Harteveldt, co-founder of the Atmosphere Research Group, a market research company. “Business travelers have to understand that the benefits of the past three decades probably will not be part of the game going forward. Airlines want to make sure the financial benefits they offer elite travelers are commensurate with the revenues and profitability that traveler generates.”

Last month, United Airlines revealed details of its new loyalty program, which goes into effect next year when its system is merged with that of Continental Airlines. The new program will offer four tiers to what it calls “premier,” or elite, participants — 1K (for travelers with 100,000 qualifying miles), platinum (75,000 miles), gold (50,000 miles) and silver (25,000 miles) — rather than the three elite tiers the two airlines’ programs had before. But the silver elite travelers will lose some of their perks.

Silver participants, for instance, will no longer be able to reserve seats with extra legroom, in Economy Plus, when they book their flights. Instead, they will be able to reserve those seats only when they check in 24 hours before departure. United officials said they expected the silver elite fliers would still generally be able to get this upgrade. But the other levels of elite participants will get access to the seats first, because they can still reserve them when they book.

In addition, free baggage checks for the silver participants have been made more restrictive. No longer will they be able to check two free bags, each weighing up to 50 pounds. Under the new system, they can check only one free bag weighing up to 50 pounds. The three higher levels of elite frequent fliers will be able to check three free bags weighing up to 70 pounds each.

Of course, these levels of “premier” fliers leave out the most elite travelers — both United and Continental have invitation-only programs for their very top fliers. That program will continue.

Southwest does not reveal how many participants it has in its Rapid Rewards program, which will absorb AirTran’s program sometime in the future. (AirTran became a wholly owned subsidiary of Southwest in May.) United says it has 58 million members in its MileagePlus program, while Continental says it has 41 million members of its OnePass program. Randy Petersen, publisher of InsideFlyer, a magazine on travel loyalty programs, estimated that there was a 15 percent overlap in the two programs’ memberships.

Mr. Harteveldt said that when American Airlines introduced its AAdvantage frequent-flier program — the industry’s first — in 1981, 26 airlines that flew jets operated in the United States. That number has now shrunk to four network carriers — American, Delta, United and USAirways — which, he said, controlled 56 percent of domestic capacity; four large, low-cost airlines — Frontier, JetBlue, Virgin America and Southwest — which together control another 24 percent; and a handful of niche airlines and regional carriers.

In a report Mr. Harteveldt wrote last month for Forrester Research, when he was still its travel analyst, he said that the business model employed by the airline industry when frequent-flier programs were in their infancy used “a then-relevant approach: The longer the flight, the more expensive the fare.” He added, “But just like with hairstyles, what worked in 1981 isn’t necessarily relevant in 2011.”

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Business news in brief | Philadelphia Inquirer | 2011-10-18

October 29, 2011

Business

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In the Region Samp;P cuts Campbells credit rating

Standard amp; Poors cut Campbell Soup Co.s corporate credit rating by a notch to A- from A, citing the Camden companys continued market share losses in its highly profitable canned soup business. Samp;P called Campbells business risk profile strong, albeit somewhat weaker than before. Campbell, which in July said that the current fiscal year would be a period of transition and investment for growth under a new chief executive, had $3.1 billion in debt outstanding on July 31. Campbell spokesman Anthony Sanzio said the company did not expect the downgrade to result in significantly higher borrowing costs because most of its debt has a fixed interest rate. – Harold Brubaker


Avoiding crisis, Bank of England takes speedy action

October 25, 2011

Monetary

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The Bank of England has begun printing new money as a way of kick-starting Britains near-stagnant economy.

Its a radical move that stunned the markets. The bank acted quicker and more dramatically than anyone had expected. Most economists were bracing for action in November after the Monetary Policy Committee had had time to consider growth figures. But Sir Mervyn King – the governor of the bank – said there was no time to waste as the UK may be facing its most serious financial crisis ever.

Forty per cent of Britains exports go to the Eurozone. For all the Tory Eurosceptic bluster, what happens to those 17 countries sharing the single currency has a direct and potentially catastrophic consequence for the UK.

The monetary policy committee at the central bank has various weapons in its armoury, the most obvious being to cut official interest rates. But since the credit crunch took hold in 2008, the bank has slashed rates six times from 5 per cent to just half a per cent – the lowest in the Bank of Englands 315-year history. With that firepower all but exhausted, The Bank of England pulled the trigger on a much more controversial policy – quantitative easing or, QE for banker easy speak. For the rest of us its simply called printing money.

Last time the strategy was employed in 2009, Mervyn King explained that he was forced to act to improve liquidity in credit markets that were not functioning normally. Far from being worried about runaway inflation, the bank is clutching at anything that will convince banks to start lending and for businesses to invest in growth. No-one holds out any real prospect that people are going to suddenly be hitting the accelerator on spending so much so as to blow the banks 2 per cent inflation target. With the coalition government so intent on its austerity drive, consumers in Britain are too scared to spend. The International Monetary Fund has even questioned the UKs approach – a rich country should be spending not putting the brakes on during such a precarious time in the world of finance.

Official data released last week showed that the UK recession of 2008/2009 was even deeper than previously believed and that the recovery this year has been more anaemic. In the face of all this, Chancellor George Osborne is digging his heals in and departments will suffer average cuts of 25 per cent. Every pound of the $120 billion worth of electronic money being created over the next four months will buy a bank bond and the recipient will deposit that money in a UK bank. Bank funding is therefore automatically boosted by $120 billion. If the institution loans that money to businesses and households, the effect multiplies. Put into some perspective, this boost to the British economy is the equivalent of double the countrys defence budget or the entire stock market value of oil giant, BP.

For central banks in the current crisis, there arent many QE success stories to turn to for inspiration. More recently, the Zimbabwean story shows you why its not as simple as pulling new money out of thin air. The phrase quantitative easing was coined to describe Japans efforts to stave off deflation and recession in the 1990s. Back then, the Japanese strategy was thought to have been too little too late. Central banks have learnt that lesson and are now acting more aggressively. The US Federal Reserve has so far pumped $2.2 trillion of new money into the American economy in two tranches. Governor Ben Bernanke has been more targeted in his spending. Hes leap frogged the banks and gone straight to the mortgage and corporate bond market. When the Bank of England last engaged in quantitative easing in 2009, it pumped $320 billion worth of new money into the economy. At the time, the banks governor said it had had the same effect as a reduction in interest rates of between 1.5 and 3 percentage points. Few ordinary Britons will say they felt uplifted by the experience and theres little if any evidence that people have been more inclined to buy new homes. Applying the same assumptions now, the banks latest move is equivalent to a rate cut of between half a percentage point and 1.1 percentage points. It will be at least six months if not longer before any real effect can be properly gauged. By then Greece may have been forced to default on its ever-growing debts. No-ones really sure how the dominos would then fall across the continent and beyond. Another round of QE is not out of the question.

Emma Alberici is the ABCs Europe correspondent and has been based in London since August 2008.

Topics:
banking,
currency,
world-politics,
international-financial-crisis

First posted

October 10, 2011 12:31:17


Too Big to Fail Not Fixed, Despite Dodd-Frank: Simon Johnson

October 22, 2011

Monetary

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About Simon Johnson

Simon Johnson, who served as chief economist at the International Monetary Fund in 2007 and 2008, is a professor of entrepreneurship at the Massachusetts Institute of Technologys Sloan School of Management.

More about Simon Johnson


IBM Declines as It Misses Sales Estimates on Slow Demand

October 21, 2011

Business

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IBM Declines After Missing Sales Estimates on Slowing Demand
October 18, 2011, 4:41 PM EDT

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By Sarah Frier

(Updates with closing share price in second paragraph.)

Oct. 18 (Bloomberg) — International Business Machines Corp., the biggest computer-services company, fell the most in two months after missing sales estimates for the first time in five quarters.

IBM dropped 4.1 percent to $178.90 at the close in New York, the biggest daily decline since Aug. 18.

Sales for the third quarter climbed 7.8 percent to $26.2 billion, Armonk, New York-based IBM said yesterday. Analysts predicted $26.3 billion, the average of estimates compiled by Bloomberg. Revenue showed slowing growth in IBM’s software, hardware and services businesses.

“Because they didn’t beat, the stock’s going to trade down; the expectation is pretty high for this name,” said Josh Olson, an analyst with Edward Jones & Co. in Des Peres, Missouri, who has a “buy” rating on the stock. A slowdown in hardware revenue growth is occurring “sooner than I expected.”

Chief Executive Officer Sam Palmisano is focusing on areas such as business analytics, emerging markets and cloud computing to boost sales amid sluggish economic expansion. The U.S. economy grew at a 1.3 percent pace in the second quarter following a 0.4 percent gain in the previous three months, the weakest performance in two years.

Slowing Growth

Declines in Japan and the public sector weighed on the performance of IBM’s services business, Chief Financial Officer Mark Loughridge said on a conference call. IBM has more exposure to Japan than competitors, David Grossman, an analyst at Stifel Nicolaus in San Francisco, said in a note to investors.

Sales growth at IBM’s services unit slowed to 8 percent from 10 percent in the second quarter, while revenue expansion at its software unit decelerated to 13 percent from 17 percent. Hardware sales growth slowed to 4 percent from 17 percent.

IBM shares have risen 22 percent this year. The stock reached a record of $190.53 on Oct. 14, and at least three analysts revised their price estimates to $200 a share or higher that week. In September, IBM passed Microsoft Corp. in market value based on closing prices for the first time since 1996 before the companies switched back.

“This is a name that you’re expecting in this environment to perform very strong,” said Brad Zelnick, a Macquarie Capital USA analyst who added coverage of IBM last week. “Any deceleration in signings or any significant drain on backlog is going to send shares down.”

Analysts at BMO Capital Markets and FBN Securities reduced their ratings for IBM shares after the earnings report.

Backlog Shrinking

Contract signings for services, which make up about 60 percent of IBM revenue, were $12.3 billion, compared with $11 billion a year earlier. Analysts on average estimated $12.5 billion, UBS AG said in a note to investors.

Backlog, which measures expected future revenue from contracts, shrank to $137 billion in the quarter from $144 billion in the second quarter, largely because of changes in currency exchange rates, Loughridge said.

Third-quarter net income rose 7 percent to $3.84 billion. Profit on an operating basis rose to $3.28 a share, beating the $3.22 average analyst estimate.

Operating earnings will climb to at least $13.35 a share this year, up from a previous projection of at least $13.25, IBM said. Analysts predicted $13.33 on average.

‘Bellwether’

Revenue from growth markets, such as Brazil, India and China, climbed 19 percent last quarter. Sales from the regions will make up at least 30 percent of revenue by 2015, the company has said, up from 21 percent in 2010.

“Growth-market performance was terrific across all segments,” Loughridge said.

It was the fifth consecutive quarter of double-digit growth in these markets, and it led revenue growth in all business segments, Loughridge said. IBM opened up 80 new branches, he said.

“They’re very ahead of where the big markets will be in a few years, and it’s very important for them to have a footprint there,” Ed Maguire, an analyst at Credit Agricole Securities USA, said in an interview. He has an “outperform” rating on the shares.

Palmisano has said he plans to spend about $20 billion on acquisitions between 2010 and 2015. So far the company has spent about $3 billion in acquisitions related to cloud computing, said Steven Tomasco, an IBM spokesman.

Because of IBM’s global position and broad set of computer services, it is “about as close as you can get to a technology index fund,” Maguire said. “They’re a bellwether for the rest of the market.”

Accenture Plc and Oracle Corp., which compete with IBM in selling services to technology companies, both benefited from increased spending by business clients in their most recent quarters.

–Editors: Ville Heiskanen, Peter Elstrom

To contact the reporter on this story: Sarah Frier in New York at sfrier1@bloomberg.net

To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net

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Do kids learn anything about business in school?

October 20, 2011

Business

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IN INTERVIEWING protesters of Occupy Wall Street, Occupy Philadelphia and, yes, Occupy Doylestown, Ive been struck not only by the inability of the protesters to state what they want done, but also by the conspiracy theories that they lapse into to explain their problems in a tough economy. While Woodstock united young people who were rallying against Americas involvement in the Vietnam War, the Occupy demonstrators seem to be against everything.

Their complaints about the Wall Street bailouts are shared by a lot of my listeners, but the younger people have gone from protesting Wall Street to an assault on capitalism and corporations. I think the ignorance that I hear begs the question: What are these kids learning in school about business and capitalism?


Sanusi May Raise Key Nigeria Rate Amid Pressure to Devalue Peg

October 19, 2011

Monetary

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Nigerian policy makers, who will
probably raise the key lending rate today as inflation pressures
mount, may also consider devaluing the naira as lower oil prices
make it more difficult to maintain the currency peg, economists
said.

Governor Lamido Sanusi, who will chair the unscheduled
policy meeting, will raise the policy rate a percentage point to
10.25 percent, according to the median of 11 estimates in a
Bloomberg survey. All the economists surveyed expect an increase
with the size of the move ranging from half a percentage point
to 2 percentage points.

Inflation, which eased to 9.3 percent in August, may
accelerate after the government last week said it plans to end
fuel subsidies and raise spending next year. At the same time,
the central bank has drawn down foreign currency reserves to
$31.3 billion from $33 billion on Sept. 26 to maintain the naira
peg

“This time they have to become aggressive,” Samir Gadio,
an economist at Standard Bank Group Ltd., Africa’s biggest
lender, said in a phone interview from London. “Our expectation
is for the bank to raise the rate at least 200 basis points to
send a clear signal to the market that they won’t allow a
disorderly depreciation of the currency.”

The central bank has been using foreign-currency reserves
to keep the naira within a 3 percentage-point band above or
below 150 per dollar at its twice-weekly auctions. It broke that
band the third time on Oct. 5, after it failed to meet mounting
dollar demand for the 24th straight auction.

Naira Depreciation

Policy makers responded on Oct. 7 by stopping foreign-
currency purchases by oil-exporting companies at its twice-
weekly auctions. The naira gained the most in two years against
the dollar in interbank trading after the announcement.

Before the new rule was announced, the naira depreciated by
1.7 percent to 164.15 per dollar, the weakest since at least
1994, when Bloomberg started compiling the data. The currency
was down 1.7 percent today to 162.85 per dollar by 11:13 am in
Lagos.

While a devaluation is a “possibility, I think they will
rather raise interest rates,” Stuart Culverhouse, chief
economist of Exotix Ltd. in London, said in a phone interview.
“I don’t think a small increase would make a difference, nor do
I think they will want to do anything more dramatic. They will
try to find a balance.”

The Monetary Policy Committee has increased its benchmark
interest rate at six of the past seven meetings to 9.25 percent.
The bank aims to keep inflation below 10 percent. Sanusi will
announce the decision in the capital, Abuja, at 4:30 pm local
time.

Fuel Subsidy

Nigeria, Africa’s biggest oil producer, imports most of its
fuel products because of a lack of refining capacity. The Budget
Office said in its medium-term fiscal proposals to Parliament
last week that it will remove a subsidy on fuel from next year,
saving the government 1.2 trillion naira ($7.5 billion).

Rising demand for dollars, in part to purchase fuel, is
making it more difficult for the central bank to maintain its
peg. The central bank, which sells foreign currency at twice-
weekly auctions, sold $400 million at the Oct. 6 auction,
compared with $685.4 million demanded by lenders, at 155.40
naira.

“They do not have any particular control over the naira at
this particular time,” Ayodele Akinwunmi, head of research at
FSDH Securities Ltd., said in a phone interview from Lagos
today. “The only option they have at the moment is to devalue
the currency.”

Oil has slumped 17 percent in New York since June 1,
reaching as low as $81.36 a barrel on Oct. 7. Nigeria’s
government earns about 80 percent of its revenue from oil.

“We expect the monetary policy rate will be hiked by 50
basis points,” Gregory Kronsten, chief economist of FBN
Capital, the investment banking and asset management unit of
First Bank of Nigeria Plc, said in a phone interview from Lagos.
“The central bank has a process to manage the exchange rate. It
will move the central rate to 161 to 162 naira.”

To contact the reporters on this story:
Maram Mazen in Khartoum at
mmazen@bloomberg.net;
Nasreen Seria in Johannesburg at
nseria@bloomberg.net

To contact the editor responsible for this story:
Andrew J. Barden at
barden@bloomberg.net

The Best Business Schools for Career Prospects

October 19, 2011

Business

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see photosCouretsy of Stanford Graduate School of Business

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AmeriGas snaps up Energy Transfer’s propane business

October 18, 2011

Business

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n>(Reuters) – AmeriGas Partners LP (APU.N) will buy Energy Transfer Partners LPs (ETP.N) propane business for $2.8 billion, helping the largest US propane retailer nearly double its customers and cash in on a price increase for the heating fuel.

About 5 percent of total US households use propane for heating. The US Energy Information Administration expects propane to be costlier this winter.

AmeriGas, 44 percent owned by gas distributor UGI Corp (UGI.N), will add over one million retail propane customers and over 500 million gallons to its distribution operations.

We can definitely see some positives in terms of quality of their business versus AmeriGas existing territory…propane companies are looking at jacking up margins they are making on every gallon they sell as they have so much pricing power, Morningstar analyst Mark Barnett told Reuters.

By selling off its propane business to AmeriGas, Energy Transfer looks to focus on its pipeline assets, signaling the move among energy companies to concentrate on the increasing value of their pipeline assets.

Earlier on Monday, Enterprise Products (EPD.N) said it will sell some natural gas storage facilities to partly fund the construction of its midstream energy projects.

Energy Transfer Partners general partner – Energy Transfer Equity LP (ETE.N) – is engaged in a takeover battle with Williams Cos (WMB.N) for pipeline operator Southern Union Co (SUG.N).

AmeriGas shares were almost trading flat at $45.72 while Energy Transfer was up 4 percent on the New York Stock Exchange on Monday.

DEBT CONTROL

The value of pipeline assets has shot up sharply with oil majors spending billions of dollars to develop and produce shale gas and crude oil in areas with poor infrastructure.

Energy Transfer has been looking to shed its propane business for a long time, analysts say.

The cash from the sale will help reduce ETPs debt and external capital requirements, which we believe has been weighing on ETP units, RBC Capital Markets analyst Elvira Scotto said.

Energy Transfers long-term debt stood at $7.64 billion as of June 30, according to Thomson Reuters data.

On Sunday, Kinder Morgan Inc (KMI.N) struck a $21 billion deal to buy rival El Paso Corp (EP.N), combining the two largest natural gas pipeline operators in North America.

The Energy Transfer deal, which is expected to close in late 2011 or early 2012, comprises $1.5 billion in cash and about $1.3 billion in AmeriGas units.

AmeriGas expects to declare a one-time distribution increase of 3 percent following deal close.

Energy Transfers propane operations extend over 41 states.

JP Morgan Securities LLC advised AmeriGas on the transaction.

(Reporting by Swetha Gopinath and Vaishnavi Bala in Bangalore; Editing by Sriraj Kalluvila and Don Sebastian)


Monetary policy: State Bank cuts interest rates to 12%

October 16, 2011

Monetary

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While analysts at commercial and investment banks had been expecting a rate cut, nobody had expected it to be quite so dramatic. Prior to Saturday’s announcement, the consensus estimate was of a cut between 0.5% and 1%.

In a departure from the trend set by the last two governors of the State Bank, who used to make their monetary policy announcements in televised press conferences, the current acting governor Yaseen Anwar chose to simply issue a press release, and a comparatively brief one at that.

The discount rate is the interest rate at which commercial banks can borrow money from the SBP. It has a direct impact on the rates banks charge their clients, since a lower rate charged by the central bank allows banks to reduce their rates. Lower borrowing costs translate to expanded economic activity as more companies begin to get loans to expand their businesses.

Market analysts are divided about the impact of such a rate cut, however. Muzammil Aslam, an economist at JS Global Capital, an investment bank, said that the rate cut is likely to spur a rally in the stock market as well as increase the prices of many bonds.

“At the same time this is a gamble. Pakistan has said no to the International Monetary Fund and we have a large fiscal deficit before us. We need to see whether this cut helps stimulate the economy,” he said.

Aslam said that it was unlikely that the rate cut would stimulate investment activity, however, since the broader causes of economic malaise – most notably the power crisis and security conditions – would not at all be affected by the central bank’s move.

The reduction in rates is the second one since the departure of the last State Bank governor, Shahid Kardar, who had steadfastly resisted interest rate cuts and had frequently taken the opportunity to use the monetary policy announcements as a platform to berate the finance ministry for what he viewed as a dangerous fiscal profligacy.

By contrast, the current governor – reputed to be reclusive – did not make a public appearance and even in the press statement muted the criticism of the government’s fiscal policy.

Interest rates have declined 2% since Kardar’s departure, though the State Bank insists this is largely due to a drop in inflation, which clocked in at 10.2% during the month of September, according to the Federal Bureau of Statistics. Inflation was at 13.3% in June, though much of the reduction is largely due to the regularly scheduled decennial recalibration of the consumer price index – the primary measure of inflation in the country.

Some analysts view the rate cut as politically motivated, however. One analyst who wished to remain anonymous said that the government was deliberately reducing rates in order to appease industrialists – who have been demanding such a rate cut – just before election season kicks off in earnest.

The State Bank, while acknowledging the risks of inflation rising again, said that it felt comfortable that inflation would be kept below 12% for the fiscal year ending June 30, 2012.

Published in The Express Tribune, October 9th, 2011.