Archive for February, 2012

Gary Kelly took his first plane trip as a teenager, flying from his native San Antonio to Houston on a college recruiting trip. The airline was Southwest; the plane, a Boeing 737; and his fellow passengers—well, there were only two. His assessment? “This company is toast.”

Then again, it depends how you define toast. Forty years later, Kelly, 56, is chairman and chief executive of Southwest Airlines, the most consistently profitable carrier in the country, and the toast of an industry that has reduced dozens of competitors to crumbs. You’d need your fingers and toes, and your neighbor’s, too, to count all the casualties, from New York Airways in 1979 all the way to American Airlines, which filed for bankruptcy protection last November.

Southwest, in contrast, has turned a profit for 39 consecutive years, including the period from 2001 to 2009, in which the domestic airline industry, buffeted by fuel-price spikes, labor unrest and the Great Recession, lost nearly $60 billion. “Gary responded very quickly and ably to all of that,” says Herb Kelleher, the legendary founder of Southwest, who remains close to Kelly, one of his protégés.

There is a saying on Wall Street that investors never own airline stocks but rent them, and it rings true even at Southwest. Despite the company’s enviable success, its shares (ticker: LUV) have tumbled 41%, to $8.71, since Kelly took the top job in 2004. But the turbulence of the past decade doesn’t appear to have ruffled the affable, low-key executive, who exudes a quiet confidence and displays a keen grasp of airline-industry dynamics.

BARRON’S

MET WITH KELLY last month at the company’s modest headquarters on the edge of Love Field in Dallas. Rumbling jets could be heard but not seen from his second-floor office.

Ironically, Kelly called 2009, when net income plunged 51%, to $143 million, “the most satisfying year ever” in his 26-year Southwest career. “I was proud that we were able to avoid losses for the year,” he says. “There aren’t many airlines that can say that. We furloughed no one. We asked no one for a pay cut. We didn’t take away any benefits, and that’s what I worried about most that year—that, to survive, we were finally going to have to succumb to those kinds of really tough things.”

Unlike many competitors, Southwest also opted not to charge passengers to check bags or change planes. “We thought that would be a better business decision and reflect more what we stand for at Southwest,” Kelly says.

Founded in 1967, Southwest began flying in 1971, shuttling three 737s to and from San Antonio, Houston and Dallas. The carrier gradually added other cities, and now operates coast to coast, carrying more passengers per year than any other U.S. airline.

Unlike legacy carriers such as United and Delta, which operate hub-and-spoke networks, Southwest has a point-to-point route system covering 73 cities in 38 states. When a Southwest plane flies into Baltimore-Washington International Airport, for example, it doesn’t wait around for an hour or two for a connecting flight to land. This structure allows planes to be used more efficiently.

Kelleher believed not only in low costs but humor, which he used to get his message across, especially as an actor in Southwest’s quirky television ads. Kelly doesn’t appear in too many ads, but the company still values the offbeat, as evidenced by a first-floor sign at headquarters that identifies the People Department, known elsewhere as Human Resources. Then there was the Southwest flight attendant who announced on the intercom during a recent flight from Baltimore-Washington to New York’s LaGuardia, “I will be spilling your drinks up front.”

Kelleher still maintains an office at Southwest, and Kelly relies on his advice, sounding him out “if we’re contemplating something significant.” At first glance they are an odd pair—the chain-smoking lawyer from Camden, N.J., and the lifelong Texan. But Kelly describes his former boss as a friend and mentor, and says: “We can have meaningful conversations about airplanes, markets, the economy and people inside and outside of Southwest Airlines. There are very few people I can talk to like that.”

MUCH LIKE SOUTHWEST, Kelly is a proud product of the Lone Star State. On his office wall hangs a copy of the Texas Declaration of Independence, penned in 1836. Elsewhere in the room, he displays a football helmet signed by Mack Brown, head coach at the University of Texas, Kelly’s alma mater. Kelly’s family has owned a small ranch on the south side of the Guadalupe River near San Antonio since the 1890s, on which he now is attempting to restore native grasses. The last book he read? “Empire of the Summer Moon, by Sam Gwynne, which is a treatise on the Comanche nation, a fascinating aspect of Texas history.”

“Buff” doesn’t quite do justice to Kelly’s passion for history, in particular books about presidents. But his interests hardly stop there. “I am interested in everything,” he says. “There isn’t much I don’t like.”

The list of “likes” includes the outdoors, hunting, golfing, talking physics with Kelleher, and playing rock and country music on his electric guitar. Then there is his 1964 356c Porsche, an affection that harks back to his father’s career as an office manager for several early Volkswagen, Porsche and Audi dealerships in Texas in the 1950s.

KELLY FOLLOWED HIS FATHER into accounting when he got to UT/El Paso. “It was a casual thought,” he says. “You got in line and declared a major. My dad was an accountant, and I said, ‘I’ll get in the business-school line and focus on accounting.’ “

A year later, he transferred to UT/Austin and took his first accounting course, discovering something else he liked. “The interesting thing about accounting is that it is not really numbers,” says he says. “It is really more theory and understanding business and transactions, and then translating that into some kind of financial representation.”

After graduation, Kelly went to Dallas to work for Arthur Young, then one of the “big eight” accounting firms. He earned his CPA certification, and married his high-school sweetheart, Carol, with whom he has two daughters, now grown. Six years later, he joined a software firm in the Dallas area, and worked for three years as chief financial officer. Kelly jumped to Southwest in 1986 as controller, a job that put him in charge of the airline’s accounting and financial reporting—a big responsibility for a 31-year-old. At that time, Southwest had about 70 planes, compared with about 700 today.

Kelly became chief financial officer of Southwest in 1989, a position he held for 15 years. He took on broader responsibilities in 2001, the year Kelleher stepped down. Three years later, when CEO Jim Parker departed unexpectedly, Kelleher approached him about running the airline. “Gary has an excellent analytical mind, and he has a capacity for getting to the heart of the problem very quickly,” Kelleher says.

Unlike many leaders, who are loath to admit publicly to doubts, Kelly says he felt anxious about becoming CEO. “I thought, ‘It’s a great company, and you don’t want to fail it, and if you don’t believe in yourself, you shouldn’t do it,’ ” he says. “I had to work my way through that, which I did quickly, and I’m glad I did.”

One of Kelly’s current goals as CEO is to “restore our earnings and drive our stock price.” Southwest netted just $330 million, or 43 cents a share last year, on revenue of $15.7 billion. Wall Street analysts expect earnings to rise to 81 cents this year, and to $1.06 in 2013. The company pays a dividend of only two cents a share, for a current yield of 0.2%.

SINCE ITS FOUNDING, SOUTHWEST has built its fleet around the Boeing 737, a short-to-medium-range narrow-body jet. Among other things, the singular focus has helped keep a lid on maintenance and training costs. Kelly is a big admirer of Boeing (BA) CEO James McNerney, and calls the aerospace giant “one of the great companies in the world.”

With last year’s $1.4 billion acquisition of AirTran, a smaller, Orlando, Fla.-based low-cost carrier, Southwest’s fleet is being upgraded to include larger 737-700s and -800s, capable of holding 175 passengers, versus the current fleet’s typical 137. The crown jewel in AirTran’s U.S. network was Atlanta, previously a gaping hole in Southwest’s route system. AirTran also flew to Mexico and the Caribbean, service that could serve as the springboard for Southwest’s eventual international expansion. “We were hard-wired to offer domestic service with the 737,” Kelly says. “We need to upgrade pieces of our reservation system to be able to offer international routes. This seemingly is a basic thing, but actually is quite complicated.”

While Kelly minds his own fleet, he is also attuned to trends throughout the airline industry. It continues to struggle, especially with fuel prices climbing, but is “healthier than it has been in a while,” he says. American Airlines, for one, could emerge from the bankruptcy process as a stronger carrier, with lower costs and a pared-down route network. It operates a huge hub at the Dallas-Ft. Worth International Airport, nearby.

EVEN THOUGH SOUTHWEST remains profitable, with a strong balance sheet, its cost advantage over competitors has narrowed in the past decade, as many other carriers have cut expenses through bankruptcy restructurings. The company’s labor costs, including salaries, wages and benefits, were about average for the industry in the early 2000s. But by the end of the decade, it was the industry leader. “It wasn’t that our costs went up so much,” says Kelly. “[Competitors'] costs fell radically.”

Regulation is helping to drive up costs, he says, not to mention hobbling the economy and killing jobs. The tarmac-delay rule, which limits the amount of time an airplane can sit on a runway before returning to the terminal to release passengers, is a particular irritant. Anyone who has ever been stranded inside a plane might applaud such rules, but they have led airlines to cancel more flights for fear of incurring fines. “We pride ourselves on customer service, and feel we know our customers,” Kelly says. “We don’t feel we need the federal government telling us how to serve them. There is a cost associated with regulation, and in many cases the benefits are dubious.”

As Barron’s interview concluded, the talk turned again to two popular Texas subjects—football and music. Kelly’s favorite music is blues, but he allowed that playing them on his electric guitar is a challenging skill he has yet to master. It’s just as well, really, since there is little reason to think anyone will be singing the blues at Southwest with Kelly in the cockpit.

E-mail:
editors@barrons.com

Por JONATHAN CHENG

Uma das pernas do mercado acionário está ficando bamba.

Apesar de as bolsas americanas terem registrado recordes de alta, alguns investidores estão questionando se o bom momento vai continuar em face das incertezas na economia mundial. Uma das principais preocupações é que os lucros das empresas, que sustentaram as recentes altas das ações, estão dando sinais de fraqueza.

Desde que chegou ao fundo do poço em março de 2009, durante a crise financeira, a Média Industrial Dow Jones subiu mais de 95%, graças em parte a uma disparada nos lucros das companhias que está agora entrando no seu quarto ano. Na sexta-feira, o índice alcançou o seu nível mais alto desde 2008, depois da divulgação da taxa de desemprego, que apontou para uma recuperação econômica mais rápida do que o esperado.

Lucros crescentes beneficiam acionistas tanto por aumentar dividendos quanto por fazerem as ações parecerem mais baratas, empurrando o preço delas para cima.

Desde o começo de 2009, em plena crise financeira, as empresas americanas vêm conseguindo aumentar seus lucros apesar da debilidade da economia, graças em grande parte a agressivos cortes de custos: reduzindo investimentos, fechando fábricas e demitindo funcionários.

Tais iniciativas permitiram às empresas alavancar os lucros mais do que as receitas. Estas cresceram cerca de 20% desde o quarto trimestre de 2008, para as companhias que compõem o índice de ações Standard & Poor’s 500. Mas o lucro por ação quintuplicou no mesmo período.

Depois de atingir um mínimo de US$ 4,42 por ação no quarto trimestre de 2008, o lucro das empresas do S&P 500 deve bater na marca de US$ 24,20 por ação no quarto trimestre de 2011, de acordo com o Brown Brothers Harriman, um banco de investimento e administração de fortunas sediado em Nova York. Os dados enfatizam o alto crescimento nos lucros que as companhias lograram obter numa modesta recuperação econômica.

“A América Corporativa vem operando extremamente enxuta”, disse Maulin Thaker, um analista de lucros da firma.

Mas, nos últimos meses, alguns investidores vêm se tornando cada vez mais receosos de que as empresas podem ter extraído a última gota de lucro dos seus cortes de custo.

“Não há muito mais gordura para cortar”, diz Nicholas Bohnsack, estrategista e sócio da firma Strategas Research Partners.

Um indicador importante está piscando a luz vermelha. As margens de lucro levaram um tombo nos últimos três trimestres de 2011, sofrendo a sua maior queda entre trimestres consecutivos desde a crise. Margens de lucro — que medem quanto do faturamento vira lucro depois que os custos são subtraídos — são uma medida da eficiência com que a empresa opera.

No segundo trimestre de 2011, a margem de lucro das empresas do S&P 500, excluindo as do setor financeiro e as de serviços públicos, chegou a 8,95%, a maior desde 2006, e depois de cair para 5,77% no começo de 2009.

Mas, desde então, a margem de lucro no S&P 500 caiu para 8,23%, considerando as 277 empresas do índice que já divulgaram os seus resultados financeiros, segundo o Brown Brothers, que esperava pelo menos 8,6%.

“As margens atingiram claramente um ponto de inflexão”, disse Barry Knapp, diretor estrategista de capital do Barclays Capital. Ele disse que sete dos dez setores do S&P 500 devem apresentar margens menores neste semestre. Isso é um mau sinal “porque as margens geralmente atingem seu máximo dois ou três semestres antes de uma recessão”.

A gigante dos produtos de consumo Procter & Gamble Co. viu sua margem operacional central, que exclui fatores pontuais, perder 1,6 ponto porcentual no trimestre encerrado em dezembro, comparado com um ano antes, à medida que preços de commodities mais altos se somaram aos custos, afetando os lucros.

As petrolíferas Exxon Mobil Corp. e Chevron Corp. divulgaram quedas significativas na margem de lucro do seu setor de refino no último trimestre, devido ao aumento no preço do petróleo e à diminuição na demanda por produtos combustíveis.

Se as margens tiverem de fato atingido o seu máximo, as companhias terão que aumentar receitas se quiserem ver o lucro crescer, tarefa difícil num momento em que o cenário da economia global permanece incerto. Muitos investidores acreditam que a Europa passará a maior parte de 2012 mergulhada numa recessão, e temem uma forte queda no crescimento da China. Nos Estados Unidos, o crescimento econômico continua frágil.

Se as empresas não forem capazes de manter o ritmo de crescimento dos lucros, o mercado de ações perderá uma base de apoio fundamental. Até agora, nas demonstrações de lucro do último trimestre de 2011, as empresas do S&P 500 vêm penando para alcançar até as já bastante reduzidas expectativas de Wall Street. Menos de 60% das companhias excederam as estimativas de Wall Street, abaixo da média de 70% dos primeiros três trimestres de 2011.

Além disso, o nebuloso cenário econômico e macroeconômico colocou os líderes corporativos em estado de alerta. De fato, o número de empresas que divulgou previsões negativas de lucros futuros atingiu o máximo nos últimos seis meses, segundo o banco Morgan Stanley.

Bohnsack, da Strategas, diz: “Nós já passamos a parte do ciclo em que aumentos de receita estão acontecendo a uma taxa crescente, e agora eles estão acontecendo a uma taxa decrescente”. Ele acredita que as margens de lucro continuarão sob constante pressão pelos próximos dois anos.

By JOEL WEICKGENANT

Amsterdam: Great figures in history always leave in their wake a changed world and a legacy mixed of myth and reality. And perhaps no figure in classical history left a bigger stamp than Alexander the Great. His 11-year, 23,480-kilometer military campaign in the fourth century B.C. established Hellenistic values and aesthetics across a huge swath of the known world. In the centuries following, kings and generals sought to emulate Alexander, and his legend grew apace.

© State Hermitage Museum, St. Petersburg

Cuirass breastplate, Italy (late 16th century).

The latest exhibition at the year-old Hermitage Amsterdam sifts through the legend and tries to reach the real man. “The Immortal Alexander the Great” mirrors an exhibition held at the Hermitage in St. Petersburg in 2007, and takes advantage of the building’s sheer size to illustrate the myth, the legend and the cultural influence of Alexander.

The show is a lot to take in, so curators have broken the exhibition space into a number of sections. The first section is built around the “myth” surrounding Alexander, so the pieces on display are of relatively recent vintage. A wall-sized painting by Pietro Antonio Rotari from 1756 depicts “Alexander the Great and Roxanne,” while a series of boxwood reliefs by Antoine Marie Melotte, dated 1777-80, shows the traits ascribed to Alexander—military prowess, political shrewdness and the ability to inspire armies and conquered peoples alike—that the rulers of the courts of Europe sought to emulate, centuries after Alexander’s time.

The remaining sections—”reality,” “journey” and “heritage”—are most compelling, as they include relics, drawn from the collections of the Hermitage, that hail both from the time of Alexander’s upbringing in the court of his father, King Philip II of Macedonia, and a treasure trove of ancient coins, columns, sculptures and ceremonial items, from as far away as India, that demonstrate Alexander’s successful export of Hellenism.

The “reality” section is of particular note for its juxtaposition of relics from Macedonia—at the time largely a culture of hunters and peasants—with the physical and intellectual heritage of the Greeks that Alexander was raised to appreciate.

Printed in The Wall Street Journal, page W10

Less than a year after launching Little Big Farm Foods in September 2010, Fern Phillips received an order five times larger than any she’d gotten previously for her private-label dry-baking mixes.

But joy quickly turned into panic as Ms. Phillips, 57 years old, realized she didn’t have enough start-up capital to pay for the ingredients and packaging she needed to fill it. She says her credit cards were maxed out and she’d already spent a loan and line of credit from her bank on other business expenses.

Ms. Phillips shared her plight with a friend, who told her about Pawntique.com, an online pawn shop that offers short-term cash loans in exchange for collateral. She decided to give the alternative lender a try and offered up a James Robinson sterling flatware set—a family heirloom dating back three generations that she valued at about $30,000. Less than 48 hours later, she received a $20,000 loan valid for three months at a service fee of 3% per month, or roughly $1,800 total. She managed to pay it off in slightly less than two months for a reduced service fee of $1,100.

“It certainly saved us,” says Ms. Phillips, a former independent consultant whose business is located in Portsmouth, N.H.

If you need a quick cash infusion for your start-up, a pawn shop may be able to help—and for less than you might expect. Pawn shops provide immediate short-term loans in exchange for collateral and a service fee, which is usually a percentage of the amount borrowed. While that fee has historically been substantially higher than what most traditional lenders require, a more affordable type of pawn shop has emerged in recent years on the Internet.

New Web-based pawn shops, including Pawntique.com, Pawngo.com and Pawnup.com, demand less capital to operate than their bricks-and-mortar counterparts because they lack retail storefronts. As a result, they can charge monthly service fees as low as 3%—far less than the industry’s overall average of 10% to 20%, according to a September report from market-research firm IBISWorld.

In general, borrowers complete an online form describing the items they wish to offer as collateral. In some cases, they can upload photos. Next, the online pawn shop makes an assessment, which is ideally followed by an offer.

If a loan agreement is reached, the borrower is shipped packaging materials, often at no cost and with insurance included. The borrower then mails the items that he or she wants to pawn. Once the shop receives those goods, it will wire the loan amount to the borrower, usually within 48 hours, providing the collateral received meets the shop’s expectations.

A benefit to pawn loans, whether conducted online or in a store, is that no credit check is required. And if the loan can’t be repaid, the collateral is relinquished and the transaction is complete, unless an extension is requested and granted. In most cases, borrowers aren’t penalized for repaying pawn loans early.

Pawn loans typically run for one to three months. Commonly pawned items include jewelry, precious metals, fine art and collectibles, according to shop owners. But they say they’re also accepting more business assets, such as computers, printers and construction equipment.

Of course, small-business experts say entrepreneurs should carefully consider all their borrowing options before taking out a pawn loan, given pawn shops’ high fees and the potential for losing the collateral.

If bank financing isn’t possible—often the case for first-time entrepreneurs—ask relatives or friends for a loan, or try selling unwanted items outright for cash, says John K. Paglia, a finance professor at Pepperdine University in Malibu, Calif. Other alternative lenders, such as peer-to-peer services like Prosper.com and LendingClub.com, may offer better rates than pawn shops or even banks.

“Put the pencil to the paper,” Mr. Paglia says, adding that if an entrepreneur feels he or she has no choice but to risk losing personal assets to keep a business afloat, it’s possible the venture is better off being put to bed.

Jennifer Diederich of Norwalk, Conn., determined that a pawn loan was essential and affordable for her start-up, Advanced Facial 3D Imaging, a provider of medical and dental imaging services. The 55-year-old says she needed the money to buy two pieces of equipment and had been denied a loan from her local bank. She also unsuccessfully tried to borrow money from family before deciding in October to pawn 70 gold and silver coins and six diamonds.

Ms. Diederich says she launched her business because she has struggled in recent years to find steady full-time work in her field—dentistry. The equipment she needed cost roughly $70,000 and she got a three-month loan for about half that amount from Pawngo.com, for a service fee of 4%. She paid for the difference with her savings.

“I never thought about pawning anything,” says Ms. Diederich, adding that her start-up is now up and running.

Write to Sarah E. Needleman at sarah.needleman@wsj.com