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Industry Leaders Identify Trends for 2005

Dec 21, 2004 (AP Online via COMTEX)


AIRLINES: W. Douglas Parker, Chairman and CEO, America West Holdings Corp.

With any luck, the industry has finally hit rock bottom, Parker says, and after four very painful years the nation's biggest carriers may finally rebound in 2005.

That doesn't mean all U.S. carriers will be profitable year-round, and even some of the most efficient carriers could lose money in seasonally slow quarters - as they did in 2004 - if jet fuel prices remain high.

But things could be looking up longer-term after several years of belt-tightening, particularly if oil prices, which peaked above $55 a barrel in late October, continue to fall.

With several carriers planning to shrink their flying capacity in 2005 the industry may regain some pricing power even if fares remain low by historical standards, Parker said.

Additional capacity may come out of the market, as bankrupt carriers such as UAL Corp.'s United Airlines, US Airways Group Inc. and ATA Holdings Corp. restructure. At the same time, demand for air travel should increase again in 2005 as the global economy grows, albeit at a slower pace than in 2004.

"It does feel as though the industry has hit bottom and is starting a gradual recovery," Parker said.

One thing carriers must become extra careful about as they cut costs, particularly as they reduce employees' pay and benefits, is not totally ignoring customer service.

"It's hard to come up with a product that's so good where people will pay more for it, but it's pretty easy to come up with one where people will avoid you," he said, acknowledging the commoditization of air travel in recent years.

Another way airlines might improve their operating efficiency in 2005 is through consolidation, either in the form of outright mergers or through strategic asset sales and purchases, Parker said.

- AP Business Writer Brad Foss


BANKING: Harris H. Simmons, chairman, president and chief executive officer of Zions Bancorporation in Salt Lake City

With the U.S. economy expected to continue strengthening, 2005 should be a "pretty good year" for retail banks, says Simmons, whose bank operates more than 400 branches in eight Western states.

That's due in large part to an increase in commercial and industrial lending, which is offsetting the drop off in mortgage lending to consumers as interest rates rise.

"I don't think next year will be a barnburner year, but we expect better growth in commercial loans ... and we're seeing good demand in small business borrowing," Simmons said. "Overall, we expect to see a pretty good year."

Simmons, who has been Zions' CEO for the past 14 years, said that the main reason the outlook is so positive is that banks did well in managing the fallout from the recent recession, coming through the downturn with manageable loan delinquencies and losses.

"Having come through a difficult four-year period, where we've had the terrorist attacks and an economy which saw a lot of job losses and slumping activity, for all that the banking industry is amazingly healthy," Simmons said. "Credit-quality statistics at our bank and at other banks are amazing, given that we've come through such a rough patch."

On the regulatory front, he said, banks that are publicly traded like Zions are having to spend a lot more time and money trying to comply with the Sarbanes-Oxley Act, the corporate reform law passed two years ago by Congress amid business scandals, as well as anti-money laundering and privacy regulations.

"You're seeing a lot more focus on compliance today by regulators," he said. "On our side, it not only costs a lot of money but requires increasingly time-consuming documentation."

On the consumer side, Simmons expects business to be "rather soft" in 2005.

"For one thing, consumers are reasonably maxed out and there's no likely prospect of another (mortgage) refinance boom in our near future," Simmons said. And home prices do not appear to be rising as fast as they did in recent years, he added.

Simmons also said he expects deposit growth to slow as rising interest rates make alternative investments such as money market mutual funds more attractive to consumers.

"Banks have been more competitive with money market mutual funds over the past couple of years, but as rates rise, mutual funds will become increasingly competitive," Simmons said.

-AP Business Writer Eileen Alt Powell


RETAIL: Paul R. Charron, chairman and CEO of Liz Claiborne Inc.

The year 2004 ended with the one of the biggest retailing consolidations in history - the $11 billion acquisition by Kmart Holding Corp. of Sears, Roebuck and Co. And consumers can expect to see more mergers next year, though probably not on the same scale.

Charron's company, with about $4.2 billion in revenue last year, has been on an acquisition kick for the past several years and now has about 60 apparel and accessories labels in its portfolio. He said it will continue to hunt for new companies next year.

"The bigger are just going to get bigger and more sophisticated," he said.

Charron expects department store retailers to open even more stores in freestanding locations, rather than in enclosed malls. The strategy is particularly being embraced by Sears, which will be transforming several hundred Kmart locations into its own stores.

Liz Claiborne, which operates 500 stores under various brands, will also be hunting for off-mall locations, where consumers seem to be doing more of their shopping.

"The mall is still a viable place, but the best malls are very pricey," he added.

Charron anticipates that merchants will continue to differentiate themselves from the competition next year by expanding their own store labels and by developing exclusive partnerships with brands. At the same time, he doesn't expect to see a huge influx of new labels hitting department stores, as occurred this past year, when new affordable fashion collections from the likes of Tommy Hilfiger, Michael Kors, and Oscar de la Renta bombarded stores. Results have been mixed.

"Next year, people are going to fix what went wrong," Charron said.

At the same time, shoppers will find better quality apparel merchandise for the same price, thanks to the elimination of tariffs on apparel, which will occur Dec. 31. Charron expects to see a drop of up to 15 percent in production costs next year as nearly all countries will be allowed to deliver any quantities they want to the United States without the restraint of quota limitations.

"Consumers will not see the impact in the form of price decreases, but in the form of better quality goods," he said.

About one-third of the savings from the reduced production costs will be enjoyed by the consumer, with the remaining savings expected to be divided between the supplier and retailer to boost their bottom lines.

--AP Business Writer Anne D'Innocenzio


WALL STREET: Joe Moglia, chief executive officer of Ameritrade Holding Corp.

The performance of brokerage and other Wall Street firms is firmly linked to the economy as a whole, as seen in the third quarter of 2004, when most company earnings fell along with transaction volumes.

Moglia says he sees reasonable growth prospects ahead for the economy, and thus for Wall Street. However, with the possibility of overall investment returns in the single digits to low double digits for 2005, there will be increased efforts to get investors to trade - and stiffer competition for commission dollars.

Nonetheless, Moglia says the industry can still post strong profits, especially in the first two quarters of the year, when investor sentiment should still be high.

"The retail investor tends to be a lagging indicator," Moglia says. "If the markets are positive, they are going to be more involved until there's a definite trend to the downside."

On the regulatory front, Moglia says Wall Street will see a number of changes. The U.S. Securities and Exchange Commission is focusing on the overall national market structure, which he says should allow for more transparent competition.

"Anything that gets the clients a good price, or better price competition, is a good thing," he says.

However, the SEC, the National Association of Securities Dealers and the New York Stock Exchange are all ramping up their enforcement efforts and looking at questionable business practices.

"There will be big issues that they're going tackle this year, and there will be some ramifications through the entire industry," Moglia said.

-AP Business Writer Michael J. Martinez


HEALTH CARE: William McGuire, chairman and chief executive of UnitedHealth Group Inc.

NEW YORK - The moderation in health care cost increases will continue in 2005, according to Dr. McGuire, who leads the country's second largest health plan provider.

McGuire said his firm was predicting an increase in the 8.5 percent range. Not long ago, double-digit increases were the yearly norm.

Slower growth in pharmaceutical spending, which is being curbed by plans that push consumers to choose more generic medicines, is a key factor in moderating the jump in overall health care costs.

McGuire also expects that more companies will move employers to consumer-driven health plans, which provide employees with a set amount of money to pay for health needs. Once the fund is exhausted, a deductible sets in. When the deductible is passed, a traditional plan goes into effect.

UnitedHealth is moving all of its employees to such plans next year and McGuire expects other to follow suit because giving employees more financial responsibility for their care will save money as they become more careful consumers. However, he added, the trend toward providing patients with useful information about choosing appropriate care must continue for consumer-driven plans to be effective.

McGuire suspects there might be more mergers in the industry this year, as some companies continue to view size as a way to get bigger discounts from drug companies and hospitals. UnitedHealth purchased two companies in 2004, and the merger of Anthem Inc. and WellPoint Health Networks Inc. was completed, creating the nation's largest health plan provider.

Health plan providers will keep examining last year's Medicare law, which calls for more participation from the private sector in treating beneficiaries, to see if it represents a good business opportunity, McGuire said. Previously, the government cut funding to private plans providing care for Medicare beneficiaries, driving many from the business. That experience has made some plans wary of jumping in again right away, he said.

-AP Business Writer Theresa Agovino


ENERGY: Mark Papa, CEO of EOG Resources Inc.

Even though energy prices may drop in 2005, a tighter-than-usual supply cushion and strong global demand should keep the cost of oil, gasoline and heating oil high by recent historical standards, says Papa. His company is an independent oil and gas producer.

Unusually warm weather and a sharper-than-anticipated slowdown in economic growth would alter his opinion.

Still, Papa believes rising demand for fuel in China and the United States will continue to keep the worldwide oil supply stretched thin, even as consumption tapers off and OPEC maintains a high level of production and increases its available excess output capacity.

Assuming normal weather patterns and slightly lower economic growth, Papa predicted that oil futures would average more than $40 a barrel in the United States in 2005.

"I believe that will be the surprise of '05, that oil prices remain robust, driven not so much by political issues but by burgeoning demand in the Far East," he said.

Another important factor to watch will be Iraqi production, which some believe could grow significantly in the year ahead if the security situation stabilizes.

The natural gas market will also be tight in 2005, Papa said, even though the United States entered this winter with high levels of storage. The infrastructure needed to attract additional imports of natural gas will not be built until 2008, Papa said, and until then domestic producers will struggle to keep up with rising demand, particularly from the power sector. He puts average natural gas futures above $6 per 1,000 cubic feet for the year.

With President Bush beginning a second term in January, Papa said the entire energy industry should benefit from his "supply-side" orientation, with the opening of federal lands and the Alaska National Wildlife Refuge on the top of the agenda.

"He'll also attempt to put some more research and development toward clean coal," Papa said, referring to modern techniques for burning coal that reduce the output of pollutants linked to acid rain and smog.

- AP Business Writer Brad Foss


TELECOMMUNICATIONS: Stephen Carter, former chief executive of Cingular Wireless and now CEO of Superior Essex Inc.

Major regulatory victories freed the Bells to begin rewiring their telephone networks for television without fear of being forced to lease the new lines to rivals at government-set rates.

Now, with AT&T Corp. and MCI Corp. weakened by the rulings, predictions persists that 2005 will produce the mergers that failed to materialize in 2004. But since it will cost the Bells billions to replace copper lines with speedy fiber-optic cables, it's not clear they'll have an appetite for buyouts.

Instead, Carter says, 2005 may bring answers on the Bells' varying strategies to rewire their networks: SBC Communications Inc. and BellSouth Corp. are stringing fiber closer to most homes, while Verizon Communciations Inc. is going for a bigger capacity gain, bringing it right to every building.

"It costs about five times as much to take fiber to the premises," said Carter, whose company is a top supplier of copper and fiber-optic cable to the regional Bell telephone companies. "When you add that up and think about how many homes the (Bells) have, the fiber to the premises solution just doesn't hold water. If you can get the performance out of copper, and it appears you can, it appears a surer bet."

To sign up TV subscribers, the Bells need to be creative, Carter says.

"What usually works against (new market entrants) is consumer apathy - is that people do the same thing year after year because it's familiar," said Carter. "So they need a disruptive enough marketing plan to shake people out of their lethargy, but not so disruptive that they give it at a price where there's no (profit) to be made."

On the wireless front, rather than more mergers like the takeover of AT&T Wireless by Cingular Wireless, Carter expects the market to crowd with new, specialized brands.

"We're going to see more application-centric companies wanting to offer a 'virtual' service through the main carriers," Carter said, noting ESPN's plan for a sports-oriented service over Sprint Corp.'s wireless network.

-AP Business Writer Bruce Meyerson.


MEDIA: Bob Wright, chairman and CEO of NBC Universal Inc., a unit of General Electric Co.

Wright sees important challenges ahead for the media industry in 2005 - mainly, avoiding the fate of the music industry.

Wright, whose company is a big player in both TV and movies, says media companies are increasingly concerned about protecting their copyrights from the same kind of file-swapping technology and piracy that hurt music companies.

Wright sees a need for greater lobbying efforts in Congress, where he says media companies need to convince lawmakers to take a tougher stance on protecting copyrights for movies and TV. "We're going to do the best we can to educate people inside and outside of Congress that these are real assets," Wright said.

As digital video recording devices like TiVos and PVRs become more popular, media companies are negotiating with manufacturers to make sure that products don't come out making it easier to edit video programs and then sell them for a profit.

At the same time, the media industry needs to determine how to embrace the new ways of storing and viewing media while figuring out a way to make money from it.

"Making digital our friend and not our enemy is our objective," Wright said. But he added that it had to be in a way that was "business-smart and enhances the consumer experience without destroying the value of our programming. That's the challenge."

-AP Business Writer Seth Sutel.


SEMICONDUCTORS: Hector Ruiz, CEO of Advanced Micro Devices Inc.

The semiconductor industry recovered in 2004 from the steepest downturn in its history. Now, Ruiz says, the makers of the silicon chips that power the digital world are facing new challenges as it becomes increasingly difficult to shrink transistors - and build them reliably and cost-effectively.

Transistors - the building blocks memory chips and microprocessors - switch on and off billions of times per second, storing and processing data. For decades, the number squeezed onto chips has doubled about every 18 months and overall performance has grown, too.

New technologies are expected to keep the rate of miniaturization continuing through at least a decade, but it leads to an important nontechnical question. "How do semiconductor companies make sure that all of these millions of transistors are actually being put into products that deliver what customers need and want?" Ruiz asks.

AMD is answering the question with server and PC processors that can handle vastly bigger chunks of memory than previous chips without abandoning the microarchitecture of the past. As a result, the No. 2 maker of microprocessors found itself in front of the industry with a technology that its larger rival, Intel Corp., finally adopted in 2004.

In 2005, the world's leading processor makers will start shipping processors with two or more processing engines, or cores - a technology well suited for the multitasking world.

The industry's growth and continuing ability to improve the performance of its chips bodes well for the world economy, Ruiz said.

"Semiconductors and software continue to be the steel and plastic of the modern world - they help drive our current global productivity gains and economic growth," he said.

- AP Technology Writer Matthew Fordahl


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