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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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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