Financial Myths: A Stitch in Time, Part II

Michael McTague |

Saves nine. In the last issue we drilled down into the real General Motors (GM) story, a prime example of why this myth makes a great deal of sense for investors and managers. Don’t wait until the sleeve tears off or the button falls when you are standing next to the subway peering into the tunnel. At the first sign of a problem, especially if it relates to the quality of the product or service, take action; prevent disaster. Even when the money flows profusely, pay attention to what is not working.

Because this myth is so pervasive, two more examples need the surgeon’s treatment. First is the notorious Carnival Cruise Line (CCL) . Even after its “expletive” cruise, their efforts to fix the problem fell short and some cruises were cancelled. Angry customers went right to the great problem solver: The US Government. New York’s senior Senator railed that many cruise lines are run by companies outside the United States. Those evil foreigners and their dangerous menus! Cruise passengers eating such “foreign” food as spaghetti carbonara or Beef Wellington and sipping single malt scotch or Napoleon brandy do not fall under the watchful eye of the US government. As a result, they are more likely to get salmonella, bubonic plague (it’s still around), mad cow disease, amoebic dysentery and a host of illnesses most US doctors seldom see. If only these wildcat cruise companies had headquarters in the US, there would never be another expletive cruise.

In fact, Carnival Cruise Lines is headquartered in Florida and a check of its posted passenger menus shows: Broiler Mahi Mahi, Chicken al la Grecque, Pan Seared Tilapia, Gazpacho Andalouse. Maybe the Senator was misinformed. Or, this may explain why New York ranks 46th in returning federal tax money to the state.

Domestic or foreign, the cruise lines reflect the pattern we saw last month with General Motors: the money rolls in; everyone is happy. Cruise passengers eat and drink non stop in a binge of luxury. Investors have good reason to celebrate. According to Cruise Market Watch, the industry has experienced an annual passenger compound annual growth rate of 7% from 1990 – 2017. Nearly 13,000,000 Americans will take a cruise this year, accounting for well more than half of the world total. According to Statistic Brain, the industry garners about $38 Billion in annual revenue. Carnival Cruises is by far the largest company with a solid 21% market share.

Profits Do Not Erase the Quality Gap

The quality gap must be addressed before the passengers rebel and before the Senator has good reason to complain. The “expletive” cruise was not the only glitch in the industry. During the Summer, Carnival’s Triumph failed a Coast Guard inspection related to fire detection and lifeboat drills during the ship’sfirst examination in Galveston, Texas, after completing $115 million in repairs. In another industry snafu, the Silver Shadow, operated by Silversea Cruises, failed an inspection by the Centers for Disease Control. The issues related to poor food handling.

The cruise lines may be reliving the problems that General Motors (GM) faced some years ago. GM rolled out luxury models for years while the Japanese began with small, efficient alternatives. In the cruise business, luxury is everywhere: all the food you can eat and liquor you can drink by the heated pool after the massage. No more shuffleboard and KoolAid! Wall-to-wall luxury. While people are wolfing down Eggs Benedict with a shot of Cognac, they don’t worry about the engine room or whether the kitchen staff wears gloves. As we saw from the GM story, with all of the needed repairs and management blunders, quality is beginning to plague the cruise ship companies.

These troubling events portend two outcomes. Either a new cruise ship contender will provide higher quality service or the industry giants will spend a bundle to fix problems that should never have taken place. If only they had taken a stitch in time!

Preventing Another Gulf Disaster

Oil spills in the Gulf have come to a halt, but are we really safer than we were a few years ago? The oil companies are pushing safety hard. Their approach to future oil spills stresses cooperation and an expansion of technical capabilities to handle larger and deeper spills. An air of confidence buoys the industry, which feels better prepared for trouble. According to Shell, “In Alaska we have invested hundreds of millions of dollars in spill response vessels, equipment, staff and training. Our staff carry out regular drills. We are ready to respond to a spill within 60 minutes, 24 hours a day.” Response to a spill is not prevention per se, but it would cut down on damage and expense.

The Helix Rapid Response is said to be a means of preventing the extent of damage that occurred during the infamous BP Oil spill in the Gulf. According to a press release, Helix is “capable of facilitating control and containment of spills in water depths up to 5,600 feet and features a 10,000 psig capping stack….the system will substantially increase its containment capacity, expanding its capabilities to water depths up to 8,000 feet and capture and processing capabilities of 55,000 barrels of oil per day and 95 million cubic feet of gas per day.” Helix is extending its capability to even greater water depths and improving its capping stack performance.

Ignoring trouble is bas news for companies and investors. So, this proves to be a powerful myth indeed. If you are going on a cruise, you really don’t have to limit yourself to a steady diet of hot dogs, fried chicken, French fries and apple pie topped off with a hefty shot of Bourbon, the quintessentially American drink, despite the views of the Senator. Enjoy yourself, but keep your eyes open for trouble.

Next month, the Myth Buster will extend the analysis of “A stitch in time saves nine” by looking at another industry.

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Michael McTague, Ph.D. is Executive Vice President at Able Global Partners, a private equity firm in New York City.

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
CCL Carnival Corporation 53.34 0.42 0.79 3,136,056
GM General Motors Company 37.66 1.24 3.40 26,434,231
HINOY Hino Motors Ltd. ADR 101.63 0.00 0.00 43

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