MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Reputation at AirAsia: Airworthy or hot air?

C. HUYGENS - Wednesday, January 14, 2015
When compliance fails and/or risk manifests, the business world turns to lawyers and communicators. These are the signs of a crisis. So is a stock price drop of 7%. Monday's Risk & Compliance Journal (blog) at Wall Street Journal (paywall link) began its 2015 Crisis of the Week series by asking three experts to opine on the communications effectiveness of AirAsia (OTC:AIABF) following the still mysterious crash of flight QZ8501 in late December. 

Richard Nicolazzo, managing partner of the eponymous Boston-based crisis communications company, raved over AirAsia CEO Tony Fernandes' media performance. "…we have never seen a CEO use social media so effectively in managing a crisis." Alas, being all aTwitter has its downsides when facts are either not at hand, or worst, against you. Nicolazzo calls it bad luck. "..the facts surfacing recently from the transportation ministry [that AirAsia 8501 lacked the required permits from regulators to fly that day] are emerging at exactly the wrong time."

Anthony Johndrow, chief enterprise strategy officer of Reputation.com is not at all bothered by the regulation matter. He sees CEO ownership of the crisis and the assurances that "all will come out at right time" as the deciding actions. Tweeting good words means good outcomes, assures Johndrow, "Mr. Fernandes is still putting himself out there. If he continues down that path–and does not get caught lying while doing so–AirAsia will be seen and talked about favorably across the region for years to come.”

The nay-sayer of the three is Andrea Bonime-Blanc, chief executive and founder of GEC Risk Advisory. Leave it to the lawyer/PhD to be deeply troubled by the lack of permitting and licenses, and the CEO's lack of awareness of same. In an 'emperor's new clothes' moment, she asks, "Is there a disconnect or is there synchronization between the company’s public relations and the company’s risk and compliance culture?" To her, the tweeting admired by Nicolazzo and hailed by Johndrow is another source of risk (think about the Tony of BP). "If…image and PR are mere marketing devices that do not reflect the reality within the company, crisis and reputation management will be less successful or even disastrous depending on the issue, with attendant loss of stakeholder confidence and ultimately value to the company."

To Bonime-Blanc's credit, signs of a reputation crisis were evident at the outset. On the first trading day following the crash, AirAsia shares fell 7.1%, their biggest one-day drop in more than three years according to Seeking Alpha. That's the magic number she cites in her reputation risk handbook as being a marker of a reputation crisis. There are more -- it is a handbook, not a leaflet -- but this is not a book review.

There is one other company on the hook. German insurer Allianz (OTCQX:AZSEY) is the lead re-insurer to the missing plane, and was the main re-insurer to flight MH370 that disappeared in March, as well as flight MH17 which was shot down in Ukraine. Hello Richard Nicolazzo, this trifecta is what bad luck looks like -- unless, of course, it is merely the face of suboptimal underwriting processes. Since underwriting is the core capability expected of Munich Re by its stakeholders, this string of aircraft losses creates reputation risk for Munich Re, too, as shown below.

Ryanair: Lipstick on flying pigs

C. HUYGENS - Thursday, January 23, 2014
Sure service is rotten. But passengers expect that. And free access to toilets is highly over-rated. Passengers expect that too. Moreover, they'll accept those inconveniences a the right price.

Turns out Ryanair may not have found the right balance of awful low cost service and low-fare tickets. The bottom line is flashing warning signs.

Real change involves cost. When the business model focuses on cost, and finding customers equally focused on cost, trying to coax them to higher price tolerances might be a non-starter. Hence, a cosmetic approach to the problem. Ryanair is bringing in a new marketing chief, a "brilliant new website, and a fantastic, easy to use mobile app." Read more.

If the flash meets or exceeds stakeholder expectations, Ryanair's bottom line will be flying again. Else, the marketing "guru" will go down in flames.

Moving from the qualitative to the quantitative, the reputational value profile of Ryanair, according to Consensiv and based on Steel City Re's reputational value metrics, is shown below. It is worth noting that while the Reputation Premium has been sinking for months, its taken an upturn recently as in the 63rd percentile amongst the 47 peers of the Airline sector. The Consensus Trend, CT, has been hovering near the upper end of this peer group, 5.5%, suggesting significant uncertainty by stakeholders over the accuracy of the reputation premium. Currently, the reputation health is mid-level and appears to be independent of market forces. The jury is out and is debating the verdict on the new marketing effort. Stay tuned.



For more background on the Consensiv reputation controls, click here. To view the December 2013 reputational value league table, based on Consensiv's metrics, and available exclusively at CFO.com, click here. Last, to read more about how reputational value is linked to stakeholder expectations and enterprise value, read, Reputation Stock Price and You: Why the market rewards some companies and punishes others (Apress, 2012) (click here).

Chipotle and Jet Blue: What's the message?

C. HUYGENS - Tuesday, September 24, 2013
In this week's issue of Forbes magazine, Mission Intangible Monthly Briefing moderator Jonathan Salem Baskin, Managing Director of Consensiv, asks an existential question about the meaning of the branding campaigns currently being run by Jet Blue and Chipotle. Both companies initially established reputations for doing things differently. Jet Blue provided a level of service and amenities through an energetic and committed staff that in combination comprised a superior offering; Chipotle offered an innovative approach to fast-food with a service level, production process, and quality level of fresh ingredients that couldn't be beat.

The companies were darlings of all stakeholders. But have they lost their way? Looking at the Steel City Re reputational value metrics, the two companies have strikingly different reputational value profiles. Jet Blue's Reputation Premium is below average ranking at the 38th percentile relative to its peers - it's leaving significant value on the table; even equity investors are placing the company in only the 59th percentile in terms of its trailing twelve month return on equity. Trying to squeeze a price premium or better worker concessions, better supplier terms, or better credit terms from a vague campaign doesn't seem like the best use of promotional dollars.



Chipotle is wrestling with other issues. In the past two months, its reputation premium dropped from near the top of its peer group to the 73rd percentile. Its return on equity dropped precipitously, too, to the 33rd percentile, and its Consensus Trend -- an indicator of movement in stakeholder perceptions -- for Chipotle is down to the 73rd percentile having spiked near 11%, a critical level. All these measures indicate the company's stakeholders are confused by what the firm stands for.



As Jonathan describes the campaign, it doesn't sound like there is a clear effort to address what is a clear reputational value problem. Notwithstanding recent issues, among its large market cap peers, Chipotle is relatively rich in Reputation Premium and has been a constituent of the Consensiv 50 for the past two months. Seeing a time line of the campaign against these measures would help answer the question of whether the campaign is helping or hurting. More generally, it would be refreshing to review a marketing case study where the action line between promotional content and value-creating stakeholder behavior could be tracked.

Southwest Airlines: Reputation matters

C. HUYGENS - Tuesday, July 09, 2013
In the movie, Crazy People, a bitter ad executive who has reached his breaking point, finds himself in a mental institution. There, his career actually begins to thrive with the help of the hospital's patients who produce such memorable campaigns such as the one for United Airlines which went: "Your fear of flying may be valid. There are always plenty of plane crashes and people die like crazy. But you should also know that more people arrive at their destinations alive on our flights than on many others. So, if you have to fly, fly us. UNITED. Most of our passengers get there alive".

Gallows humor? Perhaps, in the context of Asiana Airlines Flight 214, a 777 jet carrying passengers from Seoul, South Korea, that crashed at San Francisco's SFO airport on Saturday. The aircraft has had a great reputation for safety; the carrier less so. The Wall Street Journal says, "While the causes of the crash remain under investigation, Asiana's reputation has likely taken a hit in China, its second-biggest market in the region outside of Korea, say analysts."

Reputation for what? In Forbes magazine today, Jonathan Salem Baskin, Mission Intangible Monthly Briefing moderator, makes it clear that affinity is not the basis of reputation. Rather, it is the willingness of stakeholders to take actions that at the end create significant value for the company. The Economist made the same point last year, "Everybody bashes Ryanair for its dismal service and the Daily Mail for its mean-spirited journalism. But both firms are highly successful. ... the best strategy may be to think less about managing your reputation and concentrate more on producing the best products and services you can.”

It should therefore not come as a surprise that Ryanair is still near the top of the airline league table as reflected by the Steel City Re reputation metrics and the firms' reputation premium. Asiana, because it is not traded on a major Western exchange, is not rated.

Across the pond, what does a well-regarded American airline look like? Southwest Airlines, ranked #8, is a large carrier that distinguishes itself through a quirky service platform and dedicated employees. Customers who fly the carrier look forward to the experience.

Turning from the subjective to more detailed objective (algorithmic) metrics from Steel City Re, as of July 3, a few days before Asiana's crash, Southwest's ranking at the 84th percentile (reputation premium) is backed by a very low current RVM volatility (Consensus Trend) indicating near unanimity about the firm's reputation. Economically, the firm has been trailing the median of its peers ranking only in the 27th percentile. And with regards to safety, it has a fabulous record. Most of its passengers, indeed, get there alive. In light of its rising reputation ranking, the metrics suggest the firm is undervalued.


US Airways: Soaring

C. HUYGENS - Thursday, February 07, 2013
There is good news in the airlines industry. Notwithstanding safety issues on the hardware side of the business at Boeing, the service side is getting some recognition for improved quality. As Huygens points out from time to time, its great to have a superior reputation and capture the economic premium. But if equity investors have already factored all that into the stock price, there is little upside potential. The big returns come from companies with poor reputations and little reputational value premium who surprise everyone with better (fill in the blank.) In the airline business, there is only one variable measure: service quality.

Compare USAirways (NYSE:LCC) and Delta (NYSE:DAL) as reflected in the Steel City Re reputational value metrics. Over the past year, USAir's CRR, its relative rank or reputation premium, grew; equity prices grew to match - with a 70% ROE. Going forward, and based on both the CRR velocity and RVM volatility, it looks like Delta will make the next hop upward. Soon.

United: Reputation breeds indifference

Nir Kossovsky - Wednesday, December 09, 2009
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.

Flight safety

Nir Kossovsky - Tuesday, May 19, 2009
Recent news of Colgan Air, Inc., an operating company owned by Pinnacle Airlines Corporation (NASDAQ:PNCL) prompted us to consider the intangible asset of safety and the financial consequences of the reputation arising.

On 12 February, flight 3407 from Newark to Buffalo crashed while on an approach to Runway 23. A total of 50 people were killed. This loss of lives in Colgan Air Flight 3407 the greatest loss of lives on a domestic American flight due to an accident since 2001. Then on 12 May, flight 3260 from Newark to Buffalo lost a wheel after landing on Runway 23. There were no injuries and the passengers deplaned normally. The next day, the NTSB began its hearings on the 12 February crash.

Colgan Air operates under the brand of three iconic companies: Continental Connection, United Express and US Airways Express. It has been involved in two well publicized safety incidents. From an intangible asset perspective, what are the reputations of Pinnacle, Continental, United, and US Airways and is there any evidence that the two events had an impact?

We turned to the Steel City Re Intangible Asset (corporate reputation) Index for insight into stakeholder’s perceptions. As shown in the chart below, the relative rise in Pinnacle’s index ranking ends abruptly twice in a temporal association with the safety events described above. Also of note is that Pinnacle’s index shows a progressive drop -- ongoing reputation erosion – for the 8 months prior to the February crash. Financially, over this period, Pinnacle has underperformed the median of its 20 peers by 22%. Index EWMA volatility is very high at 5 log orders.
 


Among the 21 companies tracked and ranked in this index, all four companies -- Pinnacle, US Airways (NYSE:LCC), United Airlines (NASDAQ:UAUA), and Continental Airlines (NYSE:CAL) -- rank in the bottom quartile as of 15 May 2009. In the period following the 12 February crash, and measuring rank on a percentile scale, Pinnacle’s rank dropped 20%, US Airways dropped 15%, Continental dropped 10%, and United was unchanged. Other members of the bottom quartile are Jet Blue (NASDAQ:JBLU) and American Airlines (NYSE:AMR).

The membership of the top quartile among 21 publicly traded airlines as of 15 May comprises Copa Holdings (NYSE:CPA), Allegiant Travel (NASDAQ:ALGT), LAN Airlines (NYSE:LAN), Ryanair Holdings (NASDAQ:RYAAY), and Southwest Airlines (NYSE:LUV).

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