Followers of Mission:Intangible know the mantra—reputations result from perceptions that stakeholders have about a company’s intangible assets. Superior reputations pay off with (i) stronger pricing power, (ii) lower operating costs, (iii) greater earnings multiples, (iv) lower beta, and (v) lower credit costs. And conversely.

From time to time we chronicle on these pages case studies where executives enhance a company’s lowly reputation through substantive operational changes, and where executives tarnish a company’s lofty reputation through process failure(s). In each issue of IAM magazine, detailed case studies now appear routinely. And a compendium will appear end of 2010 first quarter when the Society publishes its first book, Mission: Intangible. Managing risk and reputation to create enterprise value.

Today for the first time we looked at a company where executives tarnish a company’s already low reputation. The company, UAL Corporation (Nasdaq:UAUA), the parent company of United Airlines, is in the Airlines sector where competition for the bottom rank is keen. We’ve looked at this sector before in the context of flight safety. Safety is something stakeholders clearly consider material. Quality, on the other hand, is something stakeholders embrace with resignation. By quality, we use one of three Mission:Intangible standard definitions for this reputation-linked asset. This is it. Reputation is the extent to which a service meets or exceeds the expectations of customers or clients.

For United Airlines, expectations are low. The Steel City Re Corporate Reputation Index shows a low ranking among the 19 companies tracked. By our measure that ranking was not affected by Dave Carroll’s 6 July YouTube release, United Breaks Guitars (embedded below), a song written in protest because the airline would not compensate him for damaging his Taylor guitar. Nor was it affected by the 4 million view of that video before the end of the month. And we can not support claims by Chris Ayres of The Times Online in the U.K. that the Carroll mishap actually cost United $180 million, or 10 percent of its market cap. None of that.

 

In fact, we are dedicating time and effort to report that nothing happened. The dog didn't bark. The chart below plotting United, the Airlines sector median return, and the S&P 500 shows broad economic slides in July (red V) for all three while the reputation index for United which is volatile for the entire preceding year is remarkably flat. In August, the reputation slides briefly again but there is a broad economic bump upwards. 



Looking at this another way, this chart below shows that the overall reputation standing of the Airlines group (red diamond) rose over the coarse of the year while the variance narrowed. This suggests that the relative flat features of United's reputation are consistent with an industry wide reduction in volatility, if ever so briefly.



What can we learn from this case? First a low ranking reputation may deprive its owner of i) stronger pricing power, (ii) lower operating costs, (iii) greater earnings multiples, (iv) lower beta, and (v) lower credit costs, but there is a silver lining. As the data show, and we write this with all sincerity, a low reputation ranking makes it is easy to meet expectations and deliver quality service.