The Tricky Business of Catering to PRC Tourists

Since I am currently writing up some tourism-related research, two recent articles about the global industry catering to Chinese travelers caught my eye. While there is some debate going on as to whether tourism is the world's largest industry, we can safely conclude that it is a very large one. Combine that fact with China becoming the second-largest economy in the world and the embrace of Chinese tourism is only natural: As early as the mid-Nineties, I remember visiting Parisian luxury boutiques and seeing the effects of the first wave of PRC tourists as most had salesladies who were fluent in Mandarin. However, that is pretty much a baseline expectation nowadays.

(1) To be sure, the cruise ship industry has been hurt by high-profile incidences of American liners alternatively sickening and killing their passengers. Fortunately, its tarnished reputation is not (yet?) global. There are pockets of opportunity alike China. Again, it's only natural that the Chinese would take to the open sea since they have the world's busiest seaports--the infrastructure is already there. What has been lacking, however has been marketing: Chinese with an interest on going on cruise ships cannot be away for too long since they probably are too busy making money (unlike, say, their American counterparts who can go on decade-long cruises if there were some Wall-E style). Hence the popularity of short trips around East/Southeast Asia:

When the Mariner of the Seas arrived in Shanghai in June, it became the largest ocean liner with a home port in China — a 138,000-ton mega-ship that boasts an ice rink, 10 pools, a rock-climbing wall and a mini golf course. But the 3,800 passengers it can carry don’t get long to enjoy the array of amenities. The ocean-going giant, owned by Royal Caribbean International, mostly makes three- and four-night trips to South Korea that start at about the equivalent of $500 per person. 

The preference for such short cruises is one of the major challenges international cruise lines face as they focus more resources on luring Chinese customers, says Zinan Liu, the Shanghai-based managing director for China and Asia for Royal Caribbean, whose parent company is the world’s second-largest operator, with slightly more than 23 percent of all cruise passengers. (Carnival Corp. is the largest, with a little more than 48 percent.) 

If Chinese take to cruising in the same way as North Americans and Europeans, they could provide as many as 40 million cruise guests a year, according to a 2010 market analysis by Royal Caribbean. That is twice the number of passengers expected worldwide this year. But unless they work for international companies, most Chinese take vacations only during the public holidays clustered around traditional festivals like Chinese New Year, usually a week or less at any one time.

(2) However, all is not just moneymaking with PRC tourists. Whereas the rest of the world once had to deal with loud, brash Americans and pack-rattish Japanese, today the accusations of poorly-mannered tourists are aimed at the Chinese:

Now it is China’s turn to face the brunt of complaints. The grievances are familiar — they gawk, they shove, they eschew local cuisine, and last year, 83 million mainland Chinese spent $102 billion abroad — overtaking Americans and Germans — making them the world’s biggest tourism spenders, according to the United Nations World Tourism Organization.

Their numbers have also placed them among the most resented tourists. Mainland Chinese tourists, often laden with cash and unfamiliar with foreign ways, are tumbling out of tour buses with apparently little appetite for hotel breakfast buffets and no concept of lining up [...]

Certainly, more cultured Chinese are ashamed of the poor behavior of some of their compatriots who believe that spending a lot means they do not need to observe manners:

But the greatest opprobrium seems to be coming from fellow Chinese. In May, a mainland Chinese tourist in Luxor, Egypt, discovered that a compatriot had carved his own hieroglyphics on the wall of a 3,500-year-old temple. “Ding Jinhao was here,” it declared. A photo of the offending scrawl spread rapidly on Chinese social media, and outraged citizens tracked down the 15-year-old vandal. The uproar subsided after his parents issued a public apology. 

Embarrassed by the spate of bad press that month, Wang Yang, China’s vice premier, publicly railed against the poor “quality and breeding” of Chinese tourists who tarnish their homeland’s reputation. “They make loud noises in public, scratch graffiti on tourist attractions, ignore red lights when crossing the road and spit everywhere,” he said, according to People’s Daily. 

As the saying goes, you take the good with the bad and try to mitigate the latter through better customer education. There remain instances when the customer is not always right.

UPDATE: This rude Chinese tourists trope is gaining popularity. The South China Morning Post adds to it. 

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Loser's Lament: Delta Air Sues US Ex-Im Bank

The hapless and pathetic US carrier Delta Airlines seems less interested nowadays in running a viable business than in taking on quixotic wild goose chases. A few months ago it made the headlines by buying an oil refinery to help bring its costs under control. Nevermind that it's the cost of crude oil that's particularly high and not that of refining it, but hey, it made for a pretty good 5-minute publicity stunt if it did not neccessarily improve Delta's bottom line.

Now we have another act of desperation with virtually no chance of paying off: Delta has filed a case against the American Export-Import Bank for allegedly providing "subsidies" to foreign carriers it is in competition with by offering export finance to Boeing when it sells jetliners abroad. Aside from the sheer chutzpah of believing that the US government would prioritize the interests of a constant drag on its purse alike the airline industry at the expense of a viable export industry alike commercial jet exports, the term "subsidy" is arguably being abused here.

How does export finance effectively reduce the purchase price of aircraft to foreign carriers? That is the question Delta will have to build a case on. Export finance is exceedingly common especially in countries with sizeable exports. And, of course, the WTO would not entertain a case in which a domestic firm sued its own government--it's always a government taking a case against another country or countries on behalf of a firm domiciled in its boundaries. At any rate, here's to Delta for the comic relief in an otherwise bleak Stateside airline industry:

Delta Air Lines Inc has sued the Export-Import Bank of the United States over loan guarantees given to support purchases of Boeing Co's widebody planes by certain foreign airlines, according to a court filing. Delta said that Ex-Im bank's subsidies to foreign airlines, including Emirates Airlines, Etihad Airways and Korean Air Co Ltd, to help them buy Boeing planes would cause adverse economic effects on airlines and their employees.

Delta said in the filing that the bank did not properly analyze the adverse economic impact and has requested the district court in Washington D.C. block any loan guarantees...In a complaint filed in federal court in Washington D.C. late on Wednesday, Delta said one of the types of exports that Ex-Im Bank subsidizes is the export of aircraft by U.S. manufacturers, especially ones made by Boeing.

"In 2012, the bank's total exposure to outstanding financial commitments was $106.6 billion. About 46 percent of this amount was for air transportation loans and loan guarantees, more than the three next largest industrial sectors combined," Delta said in the filing.

Delta said the Ex-Im Bank loan guarantees help lower the cost of capital for foreign airline companies. "These foreign airlines will recoup their investment in their new aircraft faster or reduce ticket prices on competing routes without adversely impacting their relative rate of return on those investments," Delta said in the filing. Delta argued that unsubsidized U.S. airlines will be forced to respond by "reducing their prices and reducing or altogether eliminating their capacity to serve those routes where they compete with bank-subsidized foreign airlines."

The whole point of trade finance is to make goods alike American-made jetliners available for purchase in LDCs where commercial finance is not sophisticated enough. To brand this kind of activity "illegal" would hurt any number of American exporting industries by precedent.

Why would the US sacrifice substantial exports to satisfy the (protectionist) interests of an utterly substandard airline like Delta? Even in present-day America, rewarding mediocrity has its limits.

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No Steenkin' Tourists Please, We're Saudi Arabia

 To be sure, Saudi Arabia has a unique tourist monopoly insofar as all Muslim men and women who can do so are obliged to visit Mecca during their lifetimes. Pilgrims aside, though, there is not really a Saudi "tourist" industry as we understand the term--especially for leisure travellers. The problem is especially acute for would-be Western tourists interested in the rich cultural heritage of Saudi Arabia. To be sure, Saudi Arabia is a hard sell for your typical freedom-loving Western traveller: No alcohol. Women of all religions are required to be covered nearly from head to toe despite the extreme heat. They cannot drive, either.

Even now, tourist visas to Saudi Arabia are next to non-existent for leisure travellers. Of course, with billions and billions of forex reserves, the kingdom is hardly lacking in cash that the likes of Egypt and Morocco desperately need to make their balance of payments, well, balance. So, it is no real surprise that reform of Saudi Arabian tourism is moving at a glacial pace given its political economy. That is, why upset the ultra-conservative Wahhabists or even tempt societal change by encouraging liberalization of social norms that are assumed to be necessary in attracting more (Western) tourists?

Things move slowly in Saudi Arabia. Prince Sultan launched the tourism commission in 2000. Nine years later he announced that Saudi Arabia would be issuing tourist visas in “the near future.” But, with $288 billion in oil revenues last year, it’s not like Saudi Arabia is desperate for foreign currency. There is much to take into consideration before the country opens its doors: What would the kingdom’s reactive religious conservatives say about an influx of infidels? Would Western women consent to wearing the floor-length black abaya and headscarf that is required of Saudi women? Would those women demand to drive their own rented cars — something Saudi women are not allowed to do? And how could the authorities protect tourists in a country still threatened by domestic terrorism? After all, a militant suspected of having ties to al-Qaeda assassinated four French visitors not far from Mada’in Saleh in 2007. Fears of cultural and political contagion, too, are rife: Western notions of individual freedoms could be intensely destabilizing for a country that has so far weathered the storms of the Arab Spring. While change is happening at an unprecedented rate inside the kingdom — just last month, women started serving on the closest thing the country has to a parliament — a flood of insensitive outsiders could force too much too quickly, provoking a vehement backlash from the country’s conservative core. It’s easier, and less risky, not to let anyone in at all. 

Oddly enough, the thrust of Saudi Arabia's tourist promotion is mainly domestic in keeping Saudi holidaymakers from going abroad as usual but to have a greater number do so at home:

Saudi Arabia may be shutting the door to foreign tourists, but it is still spending hundreds of millions of dollars to burnish the country’s cultural gems, in preparation for a different kind of visitor: Saudis themselves. Just outside of Riyadh, an army of workmen are putting the finishing touches on an ambitious restoration of Saudi Arabia’s first capital, the vast mud-brick city of Addiriyah, founded in 1740 by the first King Saud and the religious reformer Imam Mohammad Abdulwahab, father of the strictly back-to-basics Wahhabi Islam that dominates Saudi theology. Once completed, the site will house five museums, a heritage hotel, a handicraft market and a sound-and-light show. Elsewhere in the country, 25 archaeological teams are unearthing clues to Saudi Arabia’s pre-Islamic past, an undertaking once frowned upon by clerics who saw no need to study the dark days before the arrival of Islam. Prince Sultan has launched a heritage-hotel company in a joint venture with a local hospitality consortium, as well as a loan program for farmers to convert their holdings into rural inns. “Saudi Arabia is literally at the crossroads of the world’s great civilizations,” says Sultan. But it is the country’s vast wealth and oil wells, not its cultural heritage, that dominate the popular imagination. Sultan wants to change that. “Saudis are just starting to realize that with these heritage buildings and traditional villages they are sitting on a different kind of oil well.” 

Things are rather different there, as you would expect.

UPDATE: See the State Department's long list of none-too-subtle no-nos for travellers to Saudi Arabia. Leisure travel? Forget it.

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End of an Outsourcing Era: 787 Nightmareliner

There is a justifiably very well-cited article in the Review of International Political Economy by Gary Gereffi, John Humphrey and Timothy Sturgeon concerning "The Governance of Global Value Chains." (I think it's required reading for anyone with an interest in the field; simple as that.) Here, the authors discuss different sorts of arrangements possible in global value chains which range between the two extremes of hierarchy (you make everything yourself), and market (you exchange for everything and make virtually nothing yourself). Table 1 on p. 87 is very helpful in summarizing these different ideal types:

Again, anyone with a familiarity with the global commodity chain, global value chain or supply chain literatures--they're basically similar IMHO--should know there is no one "best" arrangement for everyone. See, for instance, the so-called "reshoring" movement. As with most things, "it depends" on such things as the need to maintain proprietary information in-house and the transaction costs of dealing with far-flung suppliers. In the latter respect, the 787 set new standards for a modular type of arrangement in the terminology of Gereffi et al. First, aviation contracting is obviously of high complexity unlike, say, garments manufacture. Among other things, you have fly-by-wire avionics systems, fuel-efficient jet engines...and water-efficient toilets [?!] Second, the conceit of Boeing at the time of the 787's conception was that it could do what it thought it did best--design airplanes--and then simply leave subcontractors to fill in the smaller details since the ability to codify transactions in airplane assembly was also high. Third, Boeing obviously thought that the supply base was high enough in skill to outsource the required engineering work.

Earlier on, students of business practice including yours truly were enamoured with what Boeing was going to do. Remember, this was at the height of the outsourcing craze--again different from offshoring since having things made by others does not necessarily mean they were made outside of the US of A (30% of the 787 was supposedly made abroad):

Boeing's new manufacturing template has captured the imagination of the aerospace industry. Recently officials from Airbus told analysts that the company will up its outsourcing to become more competitive. "For any company that wants to be successful in aerospace manufacturing, Boeing's new strategy is the way forward," says Aboulafia. "Which is ultimately good news for small business."

With the benefit of hindsight, more than half a decade later we realize that Boeing's vision was shambolic and that many of us were similarly deluded into thinking this was "the future." Drawing from Gereffi et al. once again, the assumptions were wrong. First, the complexity of the transactions was indeed high--so high that Boeing and its contractors suffered from the "Humpty Dumpty effect" wherein the plane could not be put together as intended despite the best minds in aviation working together since they were only doing so after the fact. Hence the many delays this plane suffered prior to its delivery. Second, Boeing vastly overestimated its ability to state what needed to be done by the others. Once more, the fit of various subcomponents from different suppliers with each other left much to be desired. Third, it is fair to say that Boeing had too much confidence in these suppliers to come up with designs compatible with the 787. Whereas it would once provide detailed blueprints, it assumed with the 787 that the suppliers would have enough engineering expertise to ensure their delivered products would be compatible with everything else.

Of course, Boeing is not without fault. There is probably nothing wrong with attempting to revolutionize passenger jet manufacture. That's part of the innovation process. Instead, the fault lies in simultaneously introducing a radical new production process and a novel airplane design. It may have been more feasible if Boeing either (a) followed the template of previous jets alike the 777 in contracting but moved to more subcontracting as the plane rolled out smoothly or (b) tested much more subcontracting of previous designs alike the 737/747/777 before attempting to do the same with a wholly new design. One step at a time, as they say.

Alas, we now know what's happened. The 900+ subcontractors have caused no small amount of problems for Boeing in delaying the rollout of this plane. Now we also get word that the American aviation regulator is looking into the safety of this design so many years after it first rolled off the assembly line. For an airplane manufacturer, I suppose that's nearly the equivalent of a drug recall due to fatalities in the field in terms of embarrassment short of grounding the fleet. To be sure, the customer list of Boeing for the 787 remains long since it is an outstanding design in terms of fuel efficiency, range and carrying capacity for a model in its class. That said, Boeing may not be able to fulfil its order book given further delays that may occur as various authorities look into its business.

Fearless (but predictable) prediction: Boeing will soon move back to a more relational arrangement based on more processual coordination and iterative testing of fewer subcontracted components. If it worked with the 777 and previous models, I guess why mess with a good thing in the name of specious or probably non-existent savings?

As the saying goes, if you want something done right, you might as well do it yourself.

1/17 UPDATE: Me and my big mouth. Now Japan Airlines and ANA have grounded their fleet of Boeing 787s. Sometimes you hate being prescient.

1/18 UPDATE: Now almost all 787s in commercial operation are grounded. It's getting even worse for Boeing...

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M Carey, J Bieber & Barack the Enviro-Fraud

I was shopping at a discount store when I caught sight of an LED TV playing what I thought was a  music video of Mariah Carey's 1994 seasonal hit "All I Want for Christmas is You." I smiled as I recalled fond memories of a more innocent age. To my eyes at least, the young Mariah Carey was up there in the running for the most beautiful woman I ever saw'd. Imagine my surprise, then, when Justin Frickin' Bieber appeared in the video. As it turns out, this clip was Beiber's remake featuring the aforementioned Mariah Carey...made in 2011. What threw me off was the image of her all slinky alike in her youth. But alas, contrasting her mannequin-like image standing up with her true-to-life figure circa 2011 evident in the shots where she sits on the couch and frolics with the teen nuisance reveals the lie in the video. Nowadays she is rather...big. It was all just computer-generated trickery to make us think we were seeing the young Mariah Carey. How sad.

Like computer-generated imagery (CGI), American policy involves a lot of of fraud and fakery. Easily impressionable conservatives--among the world's b--chiest people--cast Obama as some sort of enviro-nut keen on destroying American free enterprise to save the world from (supposedly non-existent) climate change [1, 2, 3]. Nothing could be further from the truth as US environmental policy is not significantly improved from the unenlightened years of Bush the Younger.

I'd like these folks to explain this: say what you will about the pathetic US airline industry--and I've had much to say [1, 2, 3] about it from government bailouts to bouncer-sized cabin crew--but its ability to gain rents from the government is unprecedented. Never has so much been lost by so few who continue to inflict so much inconvenience and expense on the American people. A few months ago, I talked about how non-European carriers were infuriated by an EU law which was supposed to come into effect at the start of 2012 mandating that airlines pay a carbon tax based on the distance travelled by a jetliner landing at an EU airport. For instance, a flight from Atlanta to Frankfurt would be taxed over the entire distance of the trip and not just that over EU airspace. As it so happens, outrage by other nations was so great that the EU has punted on the issue, leaving implementation for a later date.Yet, Barack Obama, the so-called environmentally aware president, has (surprise!) safeguarded US airline interests ahead of schedule anyway:

The carbon fee bill was the first piece of legislation debated on the House floor after Congress returned from recess on November 13, and had been cleared by the Senate in September in a rare unanimous vote. President Barack Obama signed a bill on Tuesday shielding U.S. airlines from paying for each ton of carbon their planes emit flying into and out of Europe, despite a recent move by Europe to suspend its proposed measure for one year.

It directs the U.S. transportation secretary to shield U.S. airlines from Europe's carbon emissions trading scheme (ETS) if he or she deems it necessary. Lawyers have said the bill is unusual because it would prevent U.S. companies from complying with the laws of another country.

The argument that the United States and the airlines in question would prefer a global emissions scheme is a red herring. First, a global regime would be much harder to come by when you throw in traditional opponents of multilateral environmental schemes into the mix alike China. In other words, adding more veto players makes it more likely that no carbon scheme will come into effect. Second, even the United States' experience shows that it takes a leading state to raise national environmental standards. I am of course taking about California. It has traditionally had the highest standards in America concerning automobile emissions and mileage. Rather than sell California-only models, most automakers have instead made all cars sold in the USA conform to CA emissions regulations--improving nationwide standards in the process.

Or so the logic of EU flight taxes would go. It would have put pressure on manufacturers to lessen the emissions of jets. And, given that Europe is still a very major global market, there would have been pressure for other regions to adapt. But alas, it appears even the EU is conflicted on the matter. However, this much is clear: Barack the purported Enviro-Hero is nothing more than an Enviro-Fraud in the same way that Mariah Carey tries to pass herself off as her considerably slimmer former self. How sad.

Those Americans sure do like fraud and fakery. In fact, it's an industry called "Hollywood" that just so happens to love Obama partly for his dubious environmental poses.

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Unionization, Or Why American Carriers Stink

[NOTE: This post won't win me any points with the Barack Obama / Dean Baker / union apologist crowd, but this blog couldn't care less about parochial US concerns. This is the international political economy zone, buddy.] Everyone knows that American carriers are among the worst in the world, and are certainly the worst in the developed world. Given that Americans came up with the concept of services marketing, it is galling that the most visible services those of us in the rest of the world experience firsthand when voyaging there are their el crappo airlines. The planes are ancient. The food is bad (if there's any at all). And, worst of all for an industry that used to capitalize on the glamor of flight--sorry for being politically incorrect once again--the flight attendants are geezerized, surly and big enough to be beat you into a pulp. Before you accuse me of all sorts of things, here is WSJ travel correspondent Jennifer Chen illustrating that this is not mere male bias at work with her characteristic in-flight horror story:

Less than an hour into the [domestic] flight, I was regretting my choice. Flying coach, I expected uncomfortable seats, lackluster food and surly service, but what I hadn’t counted on was being turned away from the toilet. As I reached out to open the door, a flight attendant preparing a drinks cart two feet away barked, “You can’t go in there. I’m busy. Go to the one in the front.” When the other toilets turned out to be occupied, I turned back to discover the occupied sign was on. “I’m not letting you in,” the flight attendant insisted.

The reason for American airborne mediocrity, of course, has much to do with unionization:

Why are Asian airlines generally so much better? And why have the standards on U.S. airlines fallen so low? The differences lie in history. Since airline deregulation in the late 1970’s, America’s big three have struggled with “legacy issues”—an industry term for older workforces, higher salaries, pensions and union contracts that all add up to higher costs.

Not only are Asian airlines relatively unhampered by these issues, but they’re also blessed by the fact that their region is seeing phenomenal growth in passenger traffic. Asian airlines in recent years have accounted for half of total industry profits. And those earnings are wisely reinvested into newer planes, cutting-edge seats and innovative entertainment systems. Even Chinese airlines are noticeably improving, leading a regional buying spree of planes. “[Asian airlines] are constantly thinking six or seven years ahead, and they have the money to invest,” Brendan Sobie, an analyst with the Centre for Asia Pacific Aviation, told me.

Industry awards tell the tale as US carriers are nowhere to be found while Asian carriers are among six out of ten of the world's best airlines. US carriers routinely fly in and out of bankruptcy, with American Airlines doing so most recently. And yet even more of their workers are planning to--get this--unionize? Board AA on the flight to unionized financial hell. Last I heard, US Airways was also headed there.

To be perfectly honest, Asian flight crews are often chosen and trained to be easy on the eyes and courteous to boot. Being a member of flight crew should be a young person's trade. In this day and age of sky-high fares, those are small but significant rewards for flying on Asian carriers. To be gender-neutral, I obviously have no objection to hunky male attendants for female passengers, either. At any rate, you won't find them on American carriers since they are about as superannuated as the female flight crew--fat, balding, and the rest of it.

So American carriers are uncompetitive, habitual money losers awash with decrepit capital goods and geezerized Anglo fatties with attitude problems. In short, the US airline industry is a microcosm of America itself; they expect you to fork over good money for the privilege of being abused. If you want a poster child for the problems of organized labour Stateside, you don't have to look far. The rest of us see the folly of America and prefer to do without.

And no, you cannot have another bag of peanuts.

DISCLAIMER: My old boss used to be chairman of Malaysia Airlines (2012 winner for "Best Cabin Staff")

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Pricing Luxury: LVMH in 'Old' Europe, 'New' China

Having several friends and relatives working in the industry--female and male, mind you--I've taken a keen interest in luxury goods as an exemplar of globalization's dynamics. Not only do leading luxury firms have global reach and name recognition, but they also have to deal with variations in culture, custom and differences in various nations' economic performance (among other things). Thus I found Dana Thomas' book-long rant about the commodification of luxury products fascinating even if it was more a lament concerning how most luxury goods were no longer handcrafted in traditional fashion hotbeds alike France and Italy but mass-produced in plebeian places such as China. While I normally couldn't care less about where something is made provided the quality is the same, these considerations do matter when snob appeal forms part of your product's unique selling proposition.

Anyway, the geographical concern we have today is not where these luxury products are made but where they are sold. Specifically, we are talking about the world's biggest luxury goods group Louis Vuitton Moet Hennessy (LVMH) whose name derives from the combination of legendary leather goods maker Louis Vuitton, champagne house Moet & Chandon and cognac house Hennessy.

In the past, LVMH has priced similar goods significantly higher in Asia than in Europe. Aside from encouraging luxury buyers in the Asia-Pacific to come and visit France to buy their luxury goods, doing so also acknowledged that European buyers were--how should I put it--less able to buy costly trinkets and baublets. Especially now that Europe is under strain due to the existential crisis of the EU, buyers in France have been few and far between even after accounting for tourists from abroad. (As an aside, when I visited these shops in the 90s, they had a lot of Nihonggo-fluent salespersons to attend to Japanese buyers. On more recent visits though there seem to be more Mandarin-speaking salespersons.)

The conundrum here is a variation on the paradox of thrift. While raising prices elsewhere may boost LVMH revenues, they may depress the French economy as a whole given that shopping is one of the primary reasons Asian tourists come to France. That is, LVMH pricing not only has effects on the firm's bottom line but on tourism to France in general. From Bloomberg:

Chinese tourists traveling to Europe to take advantage of savings as much as 50 percent on designer clothes and accessories are finding fewer bargains. LVMH Moet Hennessy Louis Vuitton and its peers are raising prices to make up for lost business in China and lower profitability outside the country, even if it puts items like 2,270-euro ($3,000) Lockit handbags further out of reach for Europeans whose disposable incomes are shrinking amid austerity.

“You cannot continue to sustain the existing price gaps that have been a mainstay of the luxury goods industry for the past 20 or 25 years,” said Luca Solca, global head of European equities at CA Cheuvreux, in an interview. “What we expect luxury-goods companies to have to do is progressively close the pricing gap and, more likely than not, this is going to come from stepping up prices outside of Asia.”

With China expected to account for a third of luxury sector expansion this year, weakening revenue growth there is a risk to earnings even as the value of sales in yuan rises with currency moves. Earnings before interest and tax as a percentage of luxury sales is 40 percent in China compared to 25 percent in Europe, largely because of lower rents, Solca estimates.

Tourists, mainly from Asia, account for between 35 percent and 60 percent of luxury sales in Europe, according to HSBC analyst Antoine Belge. At Paris-based Louis Vuitton, currency shifts widened the price differential between mainland China and France to as much as 47 percent in the first quarter [via a strengthening yuan and a weakening euro], spurring more Chinese to shop abroad, according to LVMH Finance Director Jean-Jacques Guiony.

While the premium propped up flagging local demand in Europe, it came at the expense of sales in the world’s second-largest economy, he said on a conference call last month. “This will continue to be a feature of the industry this year unless the group rebalances pricing to discourage parallel imports,” said Barclays Capital analyst Julian Easthope... 

Given that other luxury brands are following LVMH's lead by jacking up prices elsewhere, PRC buyers who used to go abroad to take advantage of "arbitrage" opportunities may find it becoming less and less attractive to do so:

Lower prices are the main reason wealthy repeat Chinese travelers buy abroad, Sfez said. That doesn’t mean they scrimp. Chinese visitors reported spending an average of 11,000 euros on shopping per trip to Europe, Hong Kong or Singapore, according to a recent Global Blue survey. “Shopping is their preferred activity at destination,” Sfez said in response to e-mailed questions.

Sales to Asian tourists will rise by a mid-teens percentage this year in the region compared to a mid-single digit decline for local customers [penny-pinched Europeans, mon ami], Belge estimates. Sales of high-end goods may climb 10 percent in 2012, half last year’s rate, and 9 percent in 2013, he said. Vuitton, which raised prices 2.5 percent to 3 percent in Europe in the first quarter, hasn’t decided how it will adjust its pricing structure further, Guiony said. He doesn’t expect the shift in business from China to Europe to be permanent.

Luxury companies risk hurting local European demand or damping other tourist spending in the region if they raise prices too much, said Armando Branchini, founder of Milan-based luxury consultant Intercorporate. Still, a progressive increase is needed and austerity measures are likely to be main obstacle to consumption in the region, Solca said. 

In case you're wondering, while luxury brands do milk the Chinese market or what it' worth, you also need to account as well for relatively high duties on such products: 

Lowering prices in China isn’t an alternative and won’t be until Chinese authorities cut import duties, PPR SA (PP) Deputy CEO Jean-Francois Palus told analysts last month. As China cuts taxes on consumer goods this year, Branchini said he expects the duty on luxury goods eventually to reach between 10 percent and 12 percent compared with 17 percent currently. 

Very interesting stuff, and I should have more to say about luxury in general and LVMH in particular in the very near future.

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Strange Tales of Delta Air Buying an Oil Refinery

With airlines being almost universally unprofitable these days--even Thai Airways is reportedly going to have an unprofitable 2012 or only its second unprofitable year in 51 years of operation--saying that costly aviation fuel is having negative effects on the airline industry is an understatement. From the Land of Smiles' flag carrier, let's turn our attention to the Land of Fats' largest carrier, Delta. A few weeks ago, I noticed an interesting feature about this perennial money loser considering the purchase of a refinery to deal with sky-high fuel costs. Now it's almost a fact: Delta nears completion of a deal to buy a refinery that ConocoPhillips is offloading:

 Delta Air Lines Inc. (DAL) is bringing some jet-fuel production in house, breaking with U.S. carriers’ reliance on outside providers, by acquiring a refinery that Phillips 66 had targeted for shutdown. The world’s second-biggest airline will pay $180 million for the complex in suburban Philadelphia, according to a statement yesterday. Pennsylvania’s state government is putting up $30 million in assistance to defray the expense.

An airline-owned refinery is an experiment in the U.S. industry, said Ray Neidl, an airline analyst at Maxim Group LLC in New York. Atlanta-based Delta estimated the accord will save $300 million on its annual fuel bill, which was $11.8 billion last year, or about $32 million a day. “Nothing ventured, nothing gained,” said Neidl, who has a buy rating on Delta shares. “Delta likes to try new things and I’m sure they studied this for months and ran the calculations. Nobody has done something quite like this before.”

Well that's one optimistic take on the Delta purchase. However, more analysts are skeptical about the costs savings available here, instead focusing on Delta's expansion of non-core functions and its implications for its flight operations. It goes back to time-tested debates about supply chain management and when the vertical integration or "make" decision outweighs the "buy" decision. To be sure, what we have here is a supremely commodified product, so there's no novelty factor involved which usually points in the direction of a "make" decision. Delta's counterargument though would be that these are extraordinary times during which it's better to make certain things in-house. At Bloomberg, Virginia Postrel outlines the sensible case against Delta's plan:

“If markets work well, you’re always better off using the market. Let somebody specialize in what they do and trade with them,” says Richard N. Langlois, an economist at the University of Connecticut whose work on what he calls the “vanishing hand” looks at why corporations have become less vertically integrated in recent decades. “If there are markets that are well functioning for your inputs and there aren’t high transaction costs or other problems, you’re generally better off buying things in markets than owning them yourself.” The vertical integration that Alfred Chandler chronicled in his influential 1977 book “The Visible Hand,” Langlois argues, was “an adaptation to particular historical circumstances” -- specifically, underdeveloped input markets...

In Delta’s case, that means flying airplanes, not refining oil. Delta doesn’t need its own refinery to obtain jet fuel, which is traded in a thick worldwide market, any more than it needs to own a peanut farm to supply in-air snacks. And it seems unlikely that Delta would be noticeably better at running a refinery than any other potential buyer--or, for that matter, ConocoPhillips, which plans to close down the refinery if it can’t make a deal.

The proposed purchase “doesn’t make a huge amount of economic sense -- in fact quite the opposite,” says Craig Pirrong, a finance professor and director of the Global Energy Management Institute at the University of Houston’s Bauer College of Business. You might think that owning a refinery would at least protect the airline from price fluctuations. But, Pirrong notes, crude oil prices affect the profits of airlines and oil refineries exactly the same way. When oil prices go up, their profits go down. Owning a refinery would simply magnify the effect. “If anything,” he says, “it increases the risk exposure that has bedeviled the airline industry for years.” 

I believe these arguments make sense: it's the price of crude oil, not refining it, that is primarily behind costly aviation fuel. Moreover, if a dedicated energy concern alike ConocoPhillips couldn't make ends meet, what better chance does an energy industry neophyte like Delta? Still, you can't deny Delta's chutzpah. For its next act, I'd like to see it buy an inflatable woman doll maker to produce floatation devices. Delta may be losing lots of money, but it might as well have fun doing so.

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Egypt's Beer- & Bikini-Approving Muslim Brotherhood

I suppose that attracting tourists is generic task for governments the world over nowadays. There is also a certain amount of homogenization involved in tourism with providing amenities that punters now expect unless you're offering ecotourism or frontier tourism options where roughing it out is part of the attraction. At the current time, Egypt's Muslim Brotherhood is facing pressures too familiar to troubled nations in terms of generating funding during a time of crisis. It has already (cautiously) approached the IMF in search of a (highly improbable) conditionality-free loan.

However, aside from being made to comply with the strictures laid down by foreigners alike IMF officials, a Muslim fundamentalist organization also needs to deal with...moral impediments to spinning cash. Tourists in particular are a noisome lot, prone to binge drinking and displaying much flesh in public--strongly disapproved of by religious authorities perhaps, but whose foreign exchange is most welcome especially at this point in time.

Accordingly, the WSJ has an interesting feature on the bourgeoisification of the Muslim Brotherhood. While there are certainly lots of old school elements in positions of leadership keen on introducing the hardline on this sort of moral decay, there too is an up-and-coming generation that is more realistic about what needs to be done to bring in the punters from abroad. Meet the Arab world's version of Clinton's dictum that it's the economy, stupid:

Hard reality is steering that transformation. Confronted with a badly sinking economy, the Brotherhood doesn't have the luxury of harping endlessly about Zionist conspiracies, American hypocrisy, or bikini-clad tourists—not if it wants to put Egypt back together again.

Tourism revenue dropped by at least one-third since the uprising, according to government statistics. And billions of dollars of annual foreign investment—which peaked at $13.7 billion in 2007—were almost entirely choked off. "Egypt is running smack into an economic wall," said Karim Sadek, a managing director at Citadel Capital, a Cairo-based private-equity firm.

A Gallup poll conducted between April and December of last year showed 54% of Egyptians placed jobs and economic development as their top priority, while less than 1% cited implementation of Islamic law. The results were consistent across all political parties, even Islamist ones. "Their supporters want the economy fixed, not religious solutions," said Dalia Mogahed, head of the Abu Dhabi Gallup Center, which conducted the poll.

And whom else would they talk to other than representatives of global capital:

The Brotherhood has received multiple delegations of foreign investors, including J.P. Morgan Chase & Co. and Morgan Stanley. The Brotherhood is meeting with executives from leading U.S. corporations that operate in Egypt, including oil and gas producer Apache Corp., Coca-Cola Co., General Electric Co. and General Motors Co. The meetings are part of a broad, tentative rapprochement between the West and the Islamist forces coming to power as part of the Arab Spring.

Advocates of engagement with the region's Islamists have maintained that integrating these movements into politics is the surest means of moderating them, and now that thesis is suddenly being tested on a broad stage. 

As the post title mentions, the morals policing squad has been muzzled for now by the dictates of attracting foreign exchange:

One concern was what the Brotherhood's Islamist agenda might do to tourism, an industry worth $13 billion a year to Egypt and employing 11% of the work force. During the recent campaign for parliament, some Brotherhood candidates advocated banning alcohol sales and forcing Western tourists to cover up on Egypt's beaches.

When Essam el-Eryan, a member of the movement's leadership bureau, met with an influential Egyptian business association in January, he was bombarded with worried questions about the future of tourism in Egypt, according to several people present. A few weeks later, in early February, Mr. Eryan met with tourism operators. He had a surprising message: "He said very clearly: beer and bikinis are OK," a businessman who attended recalled.

Mr. Eryan couldn't be reached to comment. No one believes the Brotherhood is suddenly pro-bikinis and beer. But it is hard to find a member willing to publicly denounce such vices nowadays. "We can't tell people how to dress when they can't put food in their stomach," said Mr. Haddad. 

Elsewhere this article discusses whether this compromise is temporary. That is, if and when Egypt regains its financial footing, will concessions to Eurotrash and other denizens of beach culture be curtailed? At the moment, though, let the fat guys in Speedos (and their female equivalents) be on Sharm el Sheikh.

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Goin' Down: Those Crappy US Airlines, Cruise Lines

For those of you who remember your high school literature, Charon in Dante Alighieri's Inferno was the ferryman of Hades who transported the souls of the dead across the river Styx on a journey to farther reaches of the underworld. In today's international political economy, you can argue that American travel services now perform similar functions. Perhaps ol' Charon has hung up his oars for good and struck a deal with Satan himself to outsource these devilish duties. At any rate, modern American travel services epitomize America itself circa 2012: an economically unviable entity that should be put out to pasture ASAP if our contemporary era of subprime globalization had any sense (which it doesn't).

For a country that pioneered the concept of services marketing, its cutting-edge research, and its application to real-world business, it remains astounding how poor the United States' travel services are. Truly subprime, in fact. Let us begin with the most egregious violator of economic logic, the US airline industry. Given how flying into and around the US presents America's face to the world at large, this industry drags the USA's tarnished reputation further into the mud. We all know the maths of it: In no small part due to American warmongering in Iraq and perhaps Iran in the near future via the Bushite doctrine of pre-emptive strike, oil prices have shot through the roof and caused American carriers already on shaky ground post-9/11 to cease being businesses in the commonly understood sense. In the decade since, these airlines have lost over $50 billion. Especially if you're of the "deficits don't matter" persuasion, you can of course argue that this amount pales in comparison with the US federal deficit. But, the larger point is that the constant need to subsidize this money loser and keep interstate/international air travel is but another leech on the decaying body politic of America.

At the end of last year, we received news that American Airlines entered bankruptcy proceedings. This action completed the cycle of every single major US carrier (save for Southwest, but some would say it doesn't count as a discount carrier) declaring insolvency at least once. Hilariously, it was not long before that when American Airlines proudly proclaimed that it made the largest order in airline history with Airbus and Boeing. Again it's symptomatic of America nowadays: speaking loudly, carrying no stick. The truth is more straightforward: US carriers have among the oldest fleets, poorest customer ratings, surliest and highly unionized flight crew, lousiest on-time performance, a chequered history with lost baggage...the list goes on and on. Let's just say you won't be hearing "Relax" playing in the background with this lot. That they run old jets exacerbates their status as perennial money losers given that older designs are less fuel-efficient than modern ones. America and its airlines: misery loves companies.

* * *

We also received truly appalling news of the Costa Concordia sinking in Italy. My first reaction was, "That's impossible! European cruise lines aren't into PR fiascoes." Its online advertising states "Experience the Costa Concordia cruise ship for a cruise vacation you will never forget." Quite so. Ever-so-slightly more investigation reveals that the parent company of the doomed liner is none other than the former Carnival Cruise Lines. Having a long memory--sometimes a blessing, often a curse--I recall the good ol' days of its operation when the worst sort of maltreatment passengers encountered on Carnival was chronic food poisoning [1. 2, 3]. Apparently unsatisfied with such offences to passenger health, they hired some nutter to run a $600 million vessel into something.

You can argue that Carnival improved somewhat by linking up with a British cruise line. You can further argue that it has done reasonably well compared to its airline counterparts. All I can say is wait till the lawyers are done with Carnival. There may have been a smidgen of improvement via the British involvement, but traditional American hallmarks of harming the customer never really go away in these sorts of services. How about giving a 30% discount to survivors of the ill-fated Costa Concordia on future Carnival trips to add insult to injury? Let's say the PR geniuses at Carnival will never get over that blunder. US airlines may be terrible, but outright termination is admittedly seldom on the cards. It's even pulled much advertising out of sheer shame.

And don't get me started on how US airports have suffered from neglect alike the rest of America's rotting infrastructure. With New York's JFK Airport ranked worst in the world, America's shame is only increased. Got that, America #1 cheerleaders? Instead of telling us how great your nation is and how stupid us primitives are, why not address your thoroughly rotten transportation services that reveals the joke is on you?

Certainly Obama's drive to double exports in five years should benefit from services people actually can, ah, stomach using? That such matters appear like a pipe dream in modern America tells you how far it's fallen. Hellbound, in fact--go ask Charon.

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2012 EU Carbon Tax on Airlines: US, China Whine

For some strange reason, the end of the year--especially between Christmas and New Year--is an especially busy one for trade matters. Sometime ago I discussed how Airbus was in danger of losing aircraft orders due to China being wary of impending EU regulations subjecting even foreign airlines to EU carbon limits under the Emissions Trading System (ETS). If you're unfamiliar with it, PriceWaterhouseCoopers has a neat summary as it applies to airlines. At the start of 2012, these emissions laws will come into effect. North American airlines mounted a challenge recently, but were not entertained by the European legal powers-that-be:

The European Court of Justice threw out Wednesday a case brought by north American airlines against a new EU system charging airlines for carbon emissions. European Union law "including aviation activities in the EU's emissions trading scheme is valid," said judges in a ruling which tees up US reprisals threatened by Secretary of State Hillary Clinton.

The EU is to include all airlines in its Emissions Trading System (ETS), used to charge industries such as oil refineries, power stations and steel works for CO2 emissions as part of Europe's efforts against climate change. Furious US, Canadian and other carriers say their inclusion violates international aviation pacts, but the European Commission said following the ruling that the ETS would enter force as scheduled on January 1.

Under the scheme, airlines would have to pay for 15 percent of the polluting rights accorded to them, the figure rising to 18 percent in 2013-2020. "Application of the emissions trading scheme to aviation infringes neither the principles of customary international law at issue nor the Open Skies Agreement" across the Atlantic [improving access of foreign carriers to European airports], the court decided.

"It is only if the operators of such aircraft choose to operate a commercial air route arriving at or departing from an airport situated in the EU that they are subject to the emissions trading scheme," it added. As a result of this choice, the EU system "infringes neither the principle of territoriality nor the sovereignty of third states, since the scheme is applicable to the operators only when their aircraft are physically in the territory of one of the member states of the EU."

Let's say the EU has rubbed virtually everyone else the wrong way on the matter:

In a letter to EU officials dated December 16, Clinton listed 43 nations from Argentina to Russia to Venezuela also opposed to the EU move. "Halt or, at a minimum, delay or suspend application of this directive," she wrote. "Re-engage with the rest of the world. "The United States stands ready to engage in such an effort. Absent such willingness on the part of the EU, we will be compelled to take appropriate action."

The US House of Representatives passed a bill in October directing the US government to forbid US carriers to take part "in any emissions trading scheme unilaterally established by the European Union."

The (increasingly air travel-happy) Chinese, once more, are particularly aggrieved judging from the reports emanating from our favourite official news agency, which is talking about "trade war"--the aforementioned Airbus incident notwithstanding:

Beijing criticized a decision by Europe's highest court to allow airlines to be charged for carbon emissions on flights to and from the European Union, with state media warning on Thursday it could spark a trade spat and the foreign ministry urging talks.

"This is a trade barrier in the name of environmental protection and will strike a wide blow to passenger benefits and the international airline industry," the state-run Xinhua News Agency said in a commentary. "It will be difficult to avoid a trade war focused on an aviation 'carbon tax'," said Xinhua, whose editorials generally reflect the official government position.

My take is that the law disadvantages non-European airlines proportionately more given that their originating or destination airports are usually farther afield than those which mostly ply their trade in Europe itself.

Also, the EU Court of Justice ruling that US & PRC complaints fail to pass muster since their airlines choose to fly to European destinations and aren't being "forced" to do so is far from unchallengeable. The famous precedent of the tuna-dolphin case comes to mind. Ironically, the US was ruled against by the GATT for "extraterritoriality" or forcing others wishing to sell tuna products in the US to comply with domestic American law protecting dolphins from being caught in tuna nets via the Marine Mammal Protection Act. In the carbon tax matter, the EU takes the role of the US in foisting its carbon tax law on international airlines--particularly those of the bellyaching US and China.

Is it protectionism in disguise as the Chinese suggest? Again, the law applies to all airlines--although international ones will likely have to pony up more per flight on average given that they fly greater distances than those that operate mostly in Europe. However, the tuna-dolphin case sets a precedent which may work in the United States' favour this time around over the application of domestic law internationally via the notion of "extraterritoriality."

Hence, I would not be surprised to see the US and China filing complaints at the WTO next year against the EU. Fancy that; the US and China being on the same side of a trade issue in 2012.

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Decline's Bright Side: BRICs Tourists Do America

If there's any consolation to going down the plumbing system of economic history, it's probably this: Chinese and Brazilian tourists are taking advantage of their strengthening currencies to go on shopping binges in America--where goods are admittedly still among the cheapest in the world. They're also seeing the sights while they're at it:

The U.S. is struggling to keep up with surging demand for visas in China and Brazil, as the growing middle class in the world’s two biggest emerging markets flock to American shopping malls and tourist meccas.

The U.S. plans to boost by 100 people this year its staff dedicated to processing visas in the two countries after it issued 35 percent more travel permits in China this year and 44 percent more in Brazil, Ed Ramotowski, managing director for U.S. visas, said in a conference call with reporters yesterday.

“It’s a function of the robust economy in Brazil,” Donald Jacobson, who oversees visa operations at the U.S. Embassy in Brasilia, said in the same conference call. “Their currency is very strong against the dollar and Brazilians are coming to America to visit Disney World and do lots of shopping.”

To promote job growth and welcome more visitors from the increasingly affluent countries, the U.S. hopes it can handle up to 4 million visa applications in the two countries by 2013, more than double the current amount, Ramotowski said. Together the two countries accounted for about 1.8 million of the 7.5 million visas issued last year.

Ooh, the irony. Consider: (1) America's bad habit of relying too much on consumer spending to fuel growth in recent decades may now have put into place an infrastructure for accommodating tourists visiting the US in its sunset years before its hegemony passes into The Great Strip Mall in the Sky. Also, (2) with any number of consumer goods now Made in China, the Chinese may in more than a few instances be buying products made at home that have become relatively more affordable Stateside due to dollar devaluation.

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