A Spill Perspective

http://www.nytimes.com/2010/05/26/opinion/26dowd.html?emc=eta1

http://www.nytimes.com/2010/05/25/opinion/25herbert.html?emc=eta1

While we hope that BP's latest effort (scheduled today) to try to stop the oil tragedy in the Gulf works, T. Boone Pickens, in remarks published today, suggests that the spill might take 3 months before it is stopped.

Federal funding for oil spill research was cut in half between 1993 and 2008, falling to $7.7 million.

Geoffrey Orsak (Dean of the Lyle School of Engineering at SMU) sits on the National Petroleum Council (NPC) which advises the U.S. Secretary of Energy on oil and gas issues. The NPC produced what Ray Hunt (CEO of Hunt Consolidated) calls the definitive report (Hard Truths About Energy) on where we stand on the future of energy supplies in the world (oil, gas, renewables, etc.). Orsak's perspective is that most of the industry's research investment has been on extracting value, not on the unlikely but catastrophic problems that come about from poor maintenance, human error and random acts.

Twenty one days into the catastrophe, BP said it was contemplating shooting rubber tire shards, golf balls and other debris to clog the hole and stem the flow. This is when Orsak realized that "... these people were seriously out of their realm. If golf balls are your contingency plan, you have not thought this through at all."

Borrowing from Bob Herbert's 5/24 article attached: "On October 25, 2007, the U.S. Department of Justice issued the following announcement: British Petroleum and several of its subsidiaries have agreed to pay $373 million in fines and restitution for environmental violations stemming from a fatal explosion at a Texas refinery in March, 2005, leaks of crude oil from pipelines in Alaska, and fraud for conspiring to corner the market and manipulate the price of propane carried through Texas pipelines." Does this look like a well managed company?

Maureen Dowd (5/25 article attached), just having fought her way thru all of the "acronyms" of the worldwide financial crisis, now finds herself doing the same for this situation. She points out that the Interior Department's Minerals Management Service (MMS) is charged with collecting royalties from Big Oil even as it regulates it - an "... absurd conflict right there." She recounts a Washington Post report on Tuesday that there is a growing suspicion that the money concerns of the companies involved with the well created "an atmosphere of haste" that may have spurred the spill." We would point out that anyone watching a "60 Minutes" interview two weekends ago with one of the survivors of the BP explosion and fire on that platform could not help but agree with that perspective.

Dowd goes on to point out that Mary Kendall, acting Inspector General of the Department of the Interior, described in a report released this week an agency that followed Dick Chaney's lead in letting the oil industry write the rules.

Quoting Dowd: "Just like those SEC employees who were watching porn and ignoring warning signs while Wall Street punks created financial Frankensteins, some MMS employees were watching porn, using coke and crystal meth and accepting gifts like trips to the Peach Bowl game from oil and gas companies, the report said." Again from Dowd: "As we watch a self-inflicted contamination that has no end in sight, consider this chilling arithmetic: one oil industry reporter reckoned that the 5,000 barrels a day (a conservative estimate) spewing 5,000 feet down in the gulf counts for only 2 minutes of oil consumption in the state of Texas."

We wish everyone involved in trying to stop the spill well and we hope a way is found to end it soon.

What's In A Moratorium?

http://www.nytimes.com/2010/05/24/us/24moratorium.html?emc=eta1

We were surprised to find this morning that we did not understand the meaning of "moratorium" as it relates to regulatory agencies. We are joined by members of Congress who appear to be equally confused.

In the days since President Obama announced a moratorium on permits for drilling new offshore oil wells and a halt to a controversial type of environmental waiver that was given to the Deepwater Horizon rig, at least 7 new permits for various types of drilling and 5 environmental waivers have been granted.

Department of the Interior officials said in a statement that the "moratorium" was meant only to halt permits for the drilling of new wells. It was not meant to stop permits for new work on existing drilling projects like the Deepwater Horizon. SERIOUSLY!

So, our interpretation of this latest incompetence is: if you have a rig currently being run as incompetently as Deepwater was, you're fine to get new drilling permits or environmental waivers. What a concept! Here's a thought: if BP is applying don't grant it. While we might be off on the name and the size, we believe that the largest deepwater platform in the Gulf of Mexico is BP's "Thunder Horse". Do we think it's possible that the same process safety issues that occurred on Deepwater could be present there? It's the same management!

Since the explosion, federal regulators have been harshly criticized for giving BP's Deepwater and hundreds of other drilling projects waivers from full environmental review and for failing to provide rigorous oversight to these projects. In testifying before Congress on May 18th, Interior Secretary Salazar and officials from his agency said they recognize the problems with the waivers and they intended to rein them in. Salazar also said that he was limited by a statutory requirement that he said obligated his agency to process drilling requests within 30 days after they have been submitted. So what.

At least six of the drilling projects that have been given waivers in the past four weeks are for waters that are deeper - and therefore more difficult and dangerous - than where Deepwater was operating. While that rig, which was drilling at a depth just shy of 5,000 feet, was classified as a deep-water operation, many of the wells in the six projects are classified as "ultra deep" water, including four new wells at over 9,100 feet.

Under the well known government bureaucratic category of "one hand not knowing what the other is doing", the Occupational Health and Safety Administration (OSHA) has classified some of the types of drilling that have been allowed to continue as being hazardous as new well drilling.

Given all of this, we would suggest that BP's operations in the Gulf of Mexico be taken over by the US Government and that no new drilling of any kind be done at any BP site unless deemed necessary for process safety reasons. Now that the oil is reaching the shores of Louisiana, perhaps BP can finance an all out effort to build sand berms and whatever else the governor of that state thinks he needs. BP needs to concentrate on something simple enough to help people and leave the complexities of management and process safety to people who know what they are doing. Oh, and while the US Government has experts, it would be helpful if they talked to each other, prioritized and came to Congress with a sophisticated evaluation of the situation and an action plan.

Here's an example: you don't get to continue drilling in the Gulf of Mexico until you install an "acoustic switch" at every well site. This is simple and hard to misinterpret. The acoustic switch is required in Brazil and Norway and the Norwegian government has indicated that it works.

In the meantime, we will continue to struggle with what "moratorium" means.

Shiller's Double Dip

http://www.nytimes.com/2010/05/16/business/16view.html?emc=eta1

Nouriel Roubini mentioned recently that, as he sees things (thru his own personal dark cloud), there's still a 20% chance of a double dip recession. Of course, this was just an aside to a Financial Times editor when he was on his way to "Cannes" to see "himself" in two movies.

Now comes Robert Shiller - he of the Case-Shiller Home Price Index he co-created - to say that, just because Europe has done a trillion dollar bailout in response to the Greek (and other weak countries) debt crisis, isn't to say that there won't be a double dip recession worldwide: "World markets soared initially on the announcement of the rescue plan, and then declined. But, as the economist John Maynard Keynes cautioned long ago, such market reactions are basically a "beauty contest" - with the investors trying to predict the short-term reaction that other investors think still other investors will have."

"In other words, don't view these beauty contests as a heartfelt response to a fundamental change in the economy."

Shiller has in the back of his mind the large housing overhang here in the U.S. that we've seen no major improvement in thus far. To quote the Texas A&M Real Estate Center, "Everyone should be cautious in declaring the housing market to have bottomed. So much of the data just don't support it - foreclosures, the shadow inventory, new home sales running at half the long-term norm, expected sales declines after the tax credit expires."

Shiller's "real risk" (of a double dip recession) perspective comes from something that he feels cannot be quantified by statistical models. His perspective leans toward a "vulnerability of confidence" where a decline could bring markets down, cause cuts in consumption, investment, and local government expenditures. Ultimately, the risk resides largely in "Social Psychology", the old Roosevelt "fear of fear itself."

Our first thought here is that 3 consecutive quarters of real GDP growth argues pretty strongly against a fall back into recession. Shiller addresses that: his definition of a double-dip recession doesn't emphasize the short term. His "recession" begins with unemployment rising to a high level and then falling at a disappointingly slow rate. Before employment returns to normal, there is a second recession. Shiller again: "As long as economic recovery isn't complete, that's a double-dip recession, even if there are years between the declines." By that definition, there was a recession between 1929 and 1933 which was followed by a recession in 1937-38. Between those two declines, the unemployment rate never moved below 12.2%. Those two recessions, four years apart, are now typically lumped together as one event: The Great Depression.

Shiller's whole point is that the May 6 drop of 1,000 points in the Dow could be the first of many "aftershocks" similar to the 20.5% drop in the S&P 500 on 10/19/87. While we may think Shiller is "reaching," he's right about the unemployment rate - always a lagging indicator, it's not coming down at a very rapid rate (give it time? OK, how much?).

We should all be heartened that the great U.S. job creation machine gave us 290,000 jobs in the most recent data. But, we should also be asking ourselves whether the economy looks like it can produce 300,000 jobs per month for the next 5 years, which is about where, as we've said before, Krugman says we need to be to get back to where we were. We should also be asking where small businesses are with short term borrowing and their banks. Why, because most of the jobs in this economy come from small businesses.

Shiller and Roubini: we probably didn't have them together on our dance card, but they appear to have similar concerns.

We're Not Greece

http://www.nytimes.com/2010/05/14/opinion/14krugman.html?emc=eta1

We enjoyed a very nice pre-graduation dinner last night for one of our student groups and one of the brightest students we've seen asked about why the stock market dropped 1,000 points recently. My immediate response was "Greece". The student's response was what about those technical/computer/super nova/high powered trading issues? My response to that was: we've heard nothing in a week to prove anything having to do with high speed trading causing the drop.

Then, why Greece? It's a conversation we wish we could have finished with the student involved but the evening took another turn so we'll move on here to the "Greece" subject. Greece, in and of itself, is not the answer either, but Europe is. First, the stock market: who knows? Maybe George Soros? The stock market usually builds in anticipated events early. So, the assumption that, worst case, Greece could weaken the EU and the "Euro" by tanking, would create lessened demand for major America-based firms that now do a substantial portion of their business in overseas markets. That fits. Most of the big technology companies do more then 50% of their sales overseas (hence, the recent 9 month wait by Oracle to see if the European Union would approve its purchase of Sun). But, again, we'll leave the stock market, and theories about it, to George Soros, Warren Buffet, etc.

On Greece. Greece is Michigan. The size of the economies is comparable. But, the difference is in the macroeconomic positioning. The weakness of the EU and the "Euro" from the beginning was that their equivalent of our Federal Reserve was dealing with "countries" who consider themselves to have autonomy. Our Fed is dealing with "states" who can do something stupid but do not have the latitude to override certain key monetary policies.

So, Greece was (or is still) a threat to Europe because of what it represents (a potential domino effect - for those of us who remember Viet Nam - with Spain, Portugal, etc.). But, as Krugman says attached: "... we have a clear path to economic recovery, while Greece doesn't ... We may be running deficits of comparable size, but our economic position - and, as a result, our fiscal outlook - is vastly better."

We note with interest that Britain, which is in worse fiscal shape than the U.S., but did not adopt the "Euro" (and was criticized by the European Union for that lack of support), remains able to borrow at fairly low interest rates. Again Krugman: "Having your own currency, it seems, makes a big difference."

Europe has stepped up to "infuse" a trillion dollar stimulus into the situation. This may ultimately work. But, the Germans do not appear to be amused and the situation has yet to come to any closure.

What is clear is that those who want to compare Greece to the U.S. because of the debt to GDP ratios of both countries and then turn that into attacks on health care spending are just looking for excuses to cry wolf. We're not Greece. And, Michigan is not Greece.

But, sometimes, any little thing (especially if it's financial), is a trigger for the stock market to sell off.

Breakfast With Roubini

http://www.ft.com/cms/s/2/2cb543cc-595b-11df-99ba-00144feab49a.html

It's good to know that Gillian Tett (Financial Times' US managing editor) is keeping up with "Dr. Doom" doing a breakfast interview at the trendy Soho Grand Hotel in Tribeca, New York. Surrounded by beautiful people in the expensive and expansive lobby, one can get a double espresso for $8, a granola for 9$ and a "frittata" for $16.

But Tett reminds us that Nouriel Roubini is not your average egg head. He was practically alone in 2006 when he gave a big speech to the IMF warning that the "United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and ultimately a deep recession", along with "homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system grinding to a halt." As Tett puts it, "It was a bold call; so much so that many policymakers and economists thought Roubini was slightly mad."

But, in 2007, when the financial crisis exploded, the world realized that Roubini had called it. Again Tett: "Today policymakers around the world hang on his words, journalists flock to his speeches to hear his latest predictions and clients pay big money to receive analysis from his consultancy company, Roubini Global Economics." His influence has stretched far beyond the business world to Hollywood where he appears briefly as himself in the new Oliver Stone movie "Wall Street: Money Never Sleeps" which is the sequel to the original "Wall Street."

Even at the start of 2007, when Roubini attended the World Economic Forum in Davos to make the same prophesies he had espoused in the fall of 2006, his views were widely dismissed (again!). Of course, there are many of us who wonder what gets done at Davos (aside from "being seen") anyway. At that time, Roubini recalls, Micheal Lewis (whose current book, "The Big Short", is now the #1 non-fiction best seller), wrote an article which labeled "... Cassandras such as Roubini as 'wimps' and 'ninnies'." Now, Lewis has written a book which chronicles what Roubini had predicted.

For Roubini, the summer of 2006 was critical: the housing market had peaked and that was his idea of the immediate trigger for impending "doom."

His perspective today is that Greece reflects a bigger problem facing the western world: governments appear to lack the stomach to tackle spiraling government debt. Today, he sees himself as a "centrist" on economic issues since he believes that governments need to spend money in a crisis to support the system, in line with Keynesian economic ideals - but he believes that when a crisis is over, they should revert to free-market approaches, reflecting the so-called "Austrian School" of economics. He thus sees himself as "pragmatic and eclectic."

With all of this, Roubini is hoping to evolve from"Dr. Doom" to "Dr. Realist." He's tired of the one title and feels deserving of the other. We agree.

With her article, Tett goes on to do the reader a service by connecting, as many of us have, Roubini to Nassim Nicholas Taleb, who, in 2007, published an attention grabbing book, "The Black Swan", in which he urged investors to prepare for events so rare that they were unimaginable in advance. These so-called "black swans" could, he predicted, take markets completely by surprise.

For Nouriel Roubini, however, the concept of a "black swan" is not helpful in looking at the current credit crunch. Instead, he prefers to describe the dramas of the past few years as a set of "white swans", in the sense that they are following a pattern that is not that rare, since it has already been played out numerous times across the world recently. Roubini feels that emerging market countries have had these kinds of economic shocks recently and that they were just precursors of the big worldwide one: "... western governments have become so debt-laden that their fiscal fundamentals look worse than many non-western nations." He adds that the debt to GDP ratios of the BRIC countries are substantially similar to, or even less than what countries like the UK and US are evolving to: roughly 100%, or more (Brazil 57%, Russia 6%, India 85%, China 22%). Western countries are now "piling on" debt amid sluggish growth.

Overall, Tett presents the new "Rock Star Roubini" as more balanced in his views than many in his profession had heretofore seen. In that sense, as well as in an economic sense, her article is an "education".

The Oil Ticker

http://www.pbs.org/newshour/rundown/2010/05/how-much-oil-has-spilled-in-the-gulf-of-mexico.html

PBS has created the "Oil Ticker" to track precisely how much oil is being spilled, real time, into the Gulf of Mexico from the BP oil leak.

Check it out.

290,000 Jobs

http://www.nytimes.com/2010/05/08/business/economy/08jobs.html?ref=business

Today's Department of Labor report put the most important lagging indicator of any recovery in the spotlight. Employers added 290,000 jobs in April. The median forecast from 20 respected economists was 188,000. The Labor Department also revised its figures from February and March to add 121,000 more jobs to the total for those two months.

The unemployment rate went back up from 9.7 to 9.9% but that reflects "discouraged workers" starting to look for work again. Temporary employment, which is always a precursor to full time job growth, continued its trend of the last several months: up again 26,000 jobs.

That 290,000 figure is very close to the figure Paul Krugman used last fall (300,000) as the rate the economy needed to create jobs, per month, to even begin to make up for the jobs lost during the Great Recession. Krugman's estimate was that a pace of 300,000 per month would have to be kept up for a period of 5 years!

An interesting report from the people at Indeed.com surfaced two weeks ago and it proved to be a sign of this good jobs news. Indeed.com reported that "job postings" had begun to surge. Indeed.com collects job postings from thousands of sources and had reported a 19% increase in March. The number of postings rose in 10 of 12 industry categories (the only category that "declined" was health care, which was one of the few bright spots during the recession). The industries that showed the biggest uptick in March openings were retail, up 42%; hospitality, 33%; and media and newspapers, 30%.

The recession masked a long-term trend that we have emphasized over recent years: a worker shortage caused by the continuing retirement of baby boomers. Combined studies by McKinsey Global, the BLS and other agencies have addressed this issue and the data is unassailable. The smartest employers are beginning to realize that they don't have, or won't have, people with the skills that they need. The thing about demographics is that it is not susceptible to quick change or adjustment: as China has found out, it may be their major problem.

Demographics could be behind a quick comeback on the job front. Sometimes major trends are the hardest to see. We'd guess that, over the next 5 years, shortages will get more obvious and jobs will get more available. The most vulnerable companies may well be the ones that maintain recession-era staffing while taking on recovery-era work.

We continue to hope for the best and agree with many economists and work-force consultants that demographics will hold sway in the not to distant future.

Random Economic Thoughts

http://www.nytimes.com/2010/05/02/business/02buffett.html?emc=etaa>1

Now that the first four months of the year have passed, some of the economic activity that was hoped for has come to pass. The 3.2% improvement in GDP for the 1st quarter isn't the 5.6% pace that ended 2009 but it is a continued movement upward. To some economists, the underlying dynamic is actually "healthier" and better balanced (at the 3.2% number vs the 5.6% number): more of the rise in GDP came from domestic demand and less from inventory correction.

At this point, the prospect of a double-dip recession can be taken off the table (unless, of course you are Nouriel Roubini, who predicts the worst every year - and, every 25 years, he's right!). The underlying pace of core growth due to another strong quarter of capital expenditures is there.

That all important 70% of domestic economic activity (the consumer) expanded expenditures by 3.6% in the first quarter. One of the most important points of reference here is the double digit improvement in durable goods consumption. Thru mid-2009, consumer interest in durable goods was limited by credit availability. With credit now more accessible, consumers aren't using it to spend on durables because they're using "cash", and they're spending at a rate not seen since the first quarter of 2007.

The job market reports should be out over the next few days, and "jobs" are the lagging indicator of whether the economy can continue to come back. We began the last decade with a "jobless recovery" because businesses were reluctant to hire and because new productivity improving processes were available to at least partially substitute for "labor." Attitudinally, the Great Recession probably caused an even more severe reaction in the business community to hiring back employees if it can be avoided. That may mean that the "labor" part of the equation may take longer to come back.

But, the "cyclical" components of the GDP that one would hope to see rebounding at this stage of any recovery (consumer spending, equipment and software investment and inventory accumulation) are doing so. That said, the drag from other areas like state and local government spending, could temper the gains.

We've attached one of the summaries of what was said at Warren Buffet's annual meeting. He sees the economy coming back (which should help the railroad he bought). Interestingly, he defended Goldman Sachs and Loyd Blankfein for their actions in the SEC lawsuit. Basically, his position is that all sides were sophisticated in the transaction so what's the problem? Now, Buffet invested $5 billion in Goldman during the crisis so one could say that he has a routing interest, but he doesn't leave that impression. Plus, his investment in Goldman returns a nifty 10% per year in interest ($500 million).

Speaking of "financial regulation", it would appear that Congress will be passing something in the coming weeks and there is quite a bit of activity going on behind the scenes to see what kinds of "amendments" can be added to the final legislation. One that is gaining traction is the Brown/Kaufman amendment which would impose "caps" on the largest banks for the deposits they can hold. The "Volcker Rule" (barring banks from proprietary trading) continues to have bipartisan support.

If we can get reasonable financial regulation (and it appears we will) and continued GDP growth (three quarters in a row is a good start), then all those lagging indicators that we worry about will start to come around. A very good lagging indicator gauge will be the actual unemployment rate by year end 2010. If it's still in the 10% range, there are still problems.

Profits and Customer Service: Available In the Airline Business?

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2479

There are lots of people who don't want to fly anymore commercially. That's understandable.

Things were so bad that there is now a "Passenger Bill of Rights" that went into effect April 29, 2010 and will be administered by the Department of Transportation: any airline that has a plane waiting (with passengers on board) to take off longer than 3 hours will pay a fine of $27,500 per passenger. That's roughly a $3 million fine for a 737 size passenger load. This, of course, comes from the horrendous situations that occurred in 2006 and 2007 (in Dallas, San Francisco and New York) where passengers sat on the ground and were not allowed to deplane for 10 to 12 hours (think of the food, water, and bathroom situations on those planes). Worse, knowledgeable people report that, in some of those situations, the gates of another airline could have accommodated those passengers but the airlines involved did not want to pay a "fee" for use of the competitor carrier gate to deplane!

How did we get here? Well, we can thank "deregulation". Back in 1978, Congress decided to deregulate the airline industry as a way to encourage lower airline ticket prices. Up until then, prices for routes were dictated by government regulators as a way to guarantee profit margins because the industry was considered to be much like a public utility.

Transportation Economics (if there is such a thing) is a discipline fraught with the pitfalls of regulatory macroeconomics, microeconomics, and transportation optimization. None of this represents how modern airlines are run. Over the past ten years, the airlines have lost $60 billion. That is because we have too many airlines (too much capacity) chasing too few passengers.

This being true, there should be "natural" merger/acquisition activity. But this activity is prevented by an ever vigilant Justice Department which, when United tried to buy US Airways in 2001, blocked the deal ("conspiracies in restraint of trade"). But United, ever vigilant as well, put a move on the Justice Department in 2010 (just this past month) when they began talks with US Airways again only because they wanted to "attract" Continental Airlines into talks to merge UAL and Continental. Nobody ever merges: United is acquiring Continental but the math is pretty close to "equal" in the sense that United is using its own shares to buy Continental for what looks like a premium of $1.02 per share - if we can call that a premium. This time, it would appear that the ever vigilant Justice Department (except when they need to be) will not attack this deal because the route systems of both airlines are complimentary. Experts on the economics of the airline industry indicate that the implications of this specific deal are that the two carriers would cut their combined domestic flying by close to 10%. That would translate into about a 2% reduction in industry capacity.

The merged Continental Airlines and United Airlines would have the highest operating revenue and largest number of employees among U.S. airlines. Based on 2009 results, the 5 largest airlines would look like this:

Operating Revenue Net Income Employees

UAL/Continental $28.9 billion -$1.4 billion 82,340

Delta $28.1 billion -$1.2 billion 81,106

AMR $20 billion -$1.5 billion 78,900

US Airways $10.5 billion -$205 million 31,333

Southwest $10.4 billion $99 million 34,726


With AMR's slip to third on the list above, it could be problematic for them, according to industry consultants, because the U.S. airline industry can only support 3 major network carriers. Unless something changes, one of those carriers will always be Southwest. According to the experts at Wharton, consolidation of carriers would only become worrisome to regulators now if the number of major carriers fell to three (or two). We'll see.

Assuming American sees the handwriting on the wall, where are the candidates for them to buy? According to Terry Maxon at the Dallas Morning News there are:

US Airways: its domestic network would add little to American's system, and its cost advantage would disappear after American absorbed it.

Alaska Airlines: it focuses its routes on the West Coast, and American hasn't done well with West Coast mergers.

AirTran Airways: an AirTran merger would put American competing against Delta at Delta's Atlanta stronghold, and a variety of cities where AirTran comes up against Southwest.

JetBlue Airways: JetBlue could offer American a valuable feed of passengers at New York Kennedy for international flights. But American will be getting that through a partnership without the need to merge.

Southwest Airlines: it would be like mating a moose and a giraffe - the ultimate in high-cost hub-and-spoke carriers pairing up with the airline that is the model for low-cost, low-fare carriers.

While we may have many reasons to be critical of American Airlines relative to how they have handled union concessions, management pay and customer service, we must side with Robert Crandall, their retired CEO, who points out that American is the only domestic carrier left that repairs 90% of its fleet domestically and performs work for other airlines. The rest "outsource" most of their maintenance abroad to stations like El Salvador where most of their mechanics are not FAA certified. Mr. Crandall supports an effort by the Business Travel Coalition and the Teamsters Union to crack down on sending jets abroad for maintenance. Crandall has gone further to support legislation that would require (for safety and quality reasons) that all U.S. airline maintenance be done domestically.

Given the above, American makes less of a profit per ticket than the other airlines because it is committed to its own mechanics and its own maintenance standards. According to John Goglia, a National Transportation Safety Board member from 1995 to 2004, FAA oversight of foreign repair stations is "weak at best" and more than 90% of the "people turning wrenches" are not certified mechanics.

Overall, where this leaves the flying public (until the airline industry has reduced capacity enough to raise prices) is that it becomes victimized by the kind of "cost saving customer service" that charges per checked bag and an airline management that entertains proposals like American's 2005 classic where removing "pillows" as an option for passengers would save $365,000 per year.

Two years ago, Southwest CEO Gary Kelly drew a competitive line in the sand when he decided not to charge passengers for their bags. He didn't want employees to face customer wrath for an issue that would have gone against the essence of Southwest. He shored up morale by giving raises. He let attrition trim the workforce. And, he wasn't going to "nickel and dime" the customers (what a concept!). He thought he could pick up market share and galvanize the airline's popularity.

Today Southwest has gained nearly $1 billion in annual market share thanks in large part to people avoiding bag fees. According to Kelly, "We have fewer seats offered every day, and we're carrying more passengers. We're defying gravity."

Carriers in bankruptcy or close to bankruptcy are just trying to cut corners. Ultimately, consumers end up suffering. If this slow moving downsizing of an industry thru consolidation reduces "seats available" and raises prices, perhaps there's a chance for the airlines to save themselves. But, as Gary Kelly would point out, customer service has something to do with it too.

Gordon Bethune, shortly after he retired as Chairman and CEO of Continental Airlines put it best: "Our problem is that we're a stupid industry run by stupid people."

Perhaps American will solve its problem of who to "merge" with as the "musical chairs" situation continues within its industry. But, things don't look hopeful.

BP Explosion and Oil Leak

http://online.wsj.com/article_email/SB10001424052748704302304575213791958270682-lMyQjAxMTAwMDIwOTEyNDkyWj.html

http://www.texascityexplosion.com/timeline_update

As it begins to occur to those who are paying close attention to the tragedy that is unfolding in the Gulf of Mexico, two things are clear: it is another BP safety mistake, and the extent of the leak will far surpass the Exxon Valdez disaster. For the Valdez, the potential amount of the spill was limited to the size of the ship. In the BP case, the potential amount of the spill is open ended.

We now know that the oil well spewing crude into the Gulf of Mexico didn't have a remote-control shut-off switch used in two other major oil-producing nations as last resort protection against underwater spills. The lack of the device, called an "acoustic switch," could amplify concerns over the environmental impact of offshore drilling.

The most important thing is that 11 people are missing and presumed dead. A company either has a culture that values safety, or it does not. Reading the BP time line below allows one to gain a perspective on the value that safety has in one business culture. This accident was tragic and preventable. We don't know the details but, when they ultimately come out, a breach in process safety management will have been the cause and that is preventable.

Returning to the "acoustic switch," both Norway and Brazil require one on every offshore well. Norway has required them since 1993. The switch, which costs $500,000, has had a good track record according to Norwegian authorities. The U.S. Interior Department's Minerals Management Service has said the remote device wasn't needed because rigs had other "back-up plans" to cut off a well. For this particular rig, that would refer to the two unmanned submarines that have thus far been useless in stemming the flow of oil from the well.

Wait, there's more: in 2003, a report commissioned by the Minerals Management Service said, "acoustic systems are not recommended because they tend to be very costly." Costly in comparison to what?

On March 11, 2010, BP announced that had bought into a diverse and broad deepwater exploration portfolio that includes assets off the shores of Brazil. The value of the deal was $7 billion. Those Brazilian wells will include acoustic switches. That deal also includes 240 leases in the Gulf of Mexico. We wonder what the Minerals Management Service will have to say about that now.

There has been so much discussion about lax government regulation as it relates to the U.S. banks/financial institutions relative to the Great Recession. We are dealing here with another example of it here in another industry.

For a management culture that doesn't value safety, it is defined by a series of "incidents." Incidents prove the case. We will outline below a partial list of incidents and actions that define such a culture. When safety works well, it links to productivity and profitability because employees feel "SAFE" and are highly motivated to give effort in the workplace (and give improvement suggestions that they know will be listened to). DuPont's safety record is one example: they are, and have always been, the best at keeping their employees safe.

The BP Texas City refinery is the second largest in the state of Texas and the third largest in the U.S. It makes 2.5% of all the gasoline sold in the U.S. As one reviews the events that surround the 2005 BP Texas City tragedy, and more recent BP incidents, there have been several conclusions: the U.S. government, as well as safety experts, concluded that there were numerous failings in equipment, risk management, staff management, working culture at the site, maintenance, and general health and safety ...

Partial Timeline - BP Texas City Refinery/Gulf Oil & Other BP Oil Production Issues

5/25/04: a worker falls to his death inside a tank (Texas City)

9/2/04: two workers are killed, one severely injured during a steam release (Texas City)

11/04: Texas City management is informed that someone has been killed at that plant every 16 mos. for the past 30 years.

3/23/05: an explosion at the Texas City refinery kills 15 workers

5/12/05: a BP interim fatality report blames the explosion on hourly workers

9/22/05: OSHA (Occupational Health and Safety Administration) negotiates a "settlement agreement" - BP pays $21 million in fines

3/23/06: a leaky BP oil pipeline in Alaska shuts down one of America's largest oil fields - BP is fined $20 million in criminal penalties

7/21/06: a worker at Texas City is crushed by a pipe while working on a hydraulic lift

1/16/07: Baker Report (James F. Baker III, former Secretary of State) released - BP was required to do a major study of safety problems at all U.S. refineries. Overall conclusion: BP failed to emphasize Process Safety Management (PSM)

3/22/07: The U.S. Chemical Board releases its final report on the 3/23/05 Texas City explosion finding that "costs" played a major role in the conditions that led up to it

4/17/07: over 100 workers were sent to local hospitals as a result of a chemical release at Texas City

5/1/07: Lord John Brown (BP CEO) resigns

5/3/07: Bonse Report - BP is ordered by the court to release an internal investigation assigning responsibility for the 3/23/05 explosion to several members of management from Texas City to London

5/30/07: John Manzoni (BP Head of Refining and Marketing) announces his resignation

6/5/07: a BP Texas City worker is electrocuted while working on a light circuit in a process area

10/24/07: the U.S. Department of Justice accepts BP's agreement to plead guilty to felony violations of the Clean Air Act and pay a fine of $50 million

1/14/08: a BP Texas City worker dies in a refinery accident - BP is issued four citations related to PSM

10/9/08: a contract employee was fatally injured at BP Texas City after being struck by a front end loader

8/3/09: OSHA sends notice to BP that they are still not in compliance with the 2005 settlement agreement

10/29/09: OSHA issues Notification of Failure to Abate and willful citations with proposed penalties of $87,430,000 for 2005 settlement non-compliance

3/23/10: 5 Year Anniversary of Texas City explosion

3/30/10: The Obama Administration announces a plan to open offshore oil exploration in areas (including the Gulf of Mexico) previously closed

4/20/10: An explosion and fire on a BP drilling rig 50 miles off the Louisiana coast in the Gulf of Mexico kills 11 workers and causes a substantial oil leak

4/30/10: The Obama Administration reverses its position on opening up offshore oil exploration until further notice

4/30/10: Despite the 4/20/10 explosion and fire, BP announces that it remains committed to its
Gulf drilling program which contributes 11% of its worldwide production

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It would appear that there is a continuing pattern of cultural disregard for safety within BP and that lax regulation by the U.S. government has contributed to that. Since Gulf drilling supplies 11% of BP's worldwide production, perhaps a fine that is large enough to amount to a percentage of the dollar value of that production would get their attention. Additionally, we would recommend that their leases for Gulf oil production be re-examined.

We, and others, supported expanded offshore oil production for the U.S. If it is possible for one incident to completely change our position, this one has. When optimizing decision making, we have to account for the worst case scenarios. BP is the worst case scenario. This incident clearly indicates that the worst company is not good enough to have fail safe devises for this type of exploration. The best case scenario has to be that the worst (and least safety committed) company must still have optimal fail safe devices. Clearly, that is not currently so.

Memo to the "regulators": you have to do better.