Portfolio.com: Business Travel

Sorrell Squared

Wed, 22 Apr 2009 12:00:00 GMT

Over the past 24 years, Sir Martin Sorrell has transformed a London-based shell company into a marketing communications giant, a conglomerate with more than 100 companies specializing in everything from advertising to consumer research. WPP Group counts the world’s biggest brands—including Procter & Gamble, Coca-Cola Co., and Ford Motor Co.—among its clients.

But this knight has seen better days. While in 2008 the company saw profit growth, 2009 got off to a disastrous start, Sorrell says, as clients across the globe reined in spending. The company recently announced plans to lay off about 2 percent of its 112,000 employees.

And what about the challenge of advising clients on how to brand products in an increasingly digital and fragmented world, in multiple languages and cultures? As Sorrell will tell you, the changes in advertising, in both speed and complexity, are nothing short of extraordinary.

Condé Nast Portfolio reporter Matthew Malone interviewed the executive at WPP’s Manhattan headquarters. Sorrell, seated in front of a painting of a knight on horseback trampling an adversary, discussed topics ranging from economic recovery to why WPP and Google are no longer just “frenemies.” Here’s an edited transcript.

How do the current challenges in the ad industry compare with others you’ve faced?

I’ve been in the business now—it makes me sound very old—for 30 years or thereabouts. It’s as difficult as it’s ever been.

When do you think the economic recovery will begin? Didn’t you recently say the second half of 2009?

I said the second half would be better than the first half; 2009 is a write-off. I think maybe in 2010 we begin to see some relative improvement. But just recently, a few things happened that are pretty shattering, in my mind. It seems as though governments everywhere are flailing around, trying to find a solution. GE had said its dividend was safe but had to cut it in February, the first time since the Great Depression.

How much has ad spending among your clients declined this year?

I can’t discuss the specifics, but Group M, one of our companies, has just come out with a forecast that advertising will decline by 4 percent worldwide this year. Advertising is about 40 percent of our business. Our budgets are indicating minus 2 percent, which includes 60 percent in other industries, which are not as recession-prone.

Will things decline further before they bounce back?

I would be surprised if spending fell further than that in 2010. If anything, I would expect worldwide GDP to improve a bit, 2010 over 2009. And if advertising as a proportion of GDP stays constant, you would expect it to be either flat or up. I think the direct answer to the question is no, but you never know.

You work with some of the biggest companies in the world. How are your clients reacting to all of this?

Clients have become much tougher in terms of demanding efficiency and effectiveness. I’m not complaining about it. It’s just a fact.

Are your clients cutting your compensation or trying to squeeze you in any way?

Clients are putting a lot of pressure on the agencies. There have been one or two competitors who’ve cut their prices quite violently in order to win business. There is an amount of price competition, but of course that will only create further concentration in the industry.

Is WPP cutting its prices?

I don’t think we have that much, actually.

When will we get back to 2008 levels of ad spending?

If things decline 4 or 5 percent this year, you won’t recoup that in one year. So one would anticipate you’d have to wait until 2010 or 2011.
Which categories will come back first? Not cars, I’d imagine.

You have to be very careful about this. In the car category, in order to survive and prosper, these companies are going to have to invest in new models. They’re going to have to invest in marketing behind it. I think when a recovery comes, you’ll see automobiles come back. Not in as strong a form, but it will come back. You’ll see financial services come back, and you’ll see travel and retail come back, although retail at the lower price points is currently quite vigorous.

Which of your competitors is in the worst shape?

I think it’s probably the midsize firms. The smaller companies get hit by the recession first. As for the big competitors, is IPG in a weak position? Well, it’s in a stronger position than it was last year. And that leaves Omnicom, which I think is the strongest of our competitors, and Publicis. I think there will be some consolidation; when it gets cold, people like to huddle together. I think Publicis would love to buy IPG, if it had the opportunity. I think that Havas’ chairman, Vincent Bolloré, would love to get Havas and Aegis together.

How about consolidation for WPP? You’ve undertaken a few hostile takeovers in your day.

There’s no such thing as a hostile acquisition, since it’s not hostile to clients or the people in the business or the share owners. It’s probably hostile to the CEO, but that’s about it.

What do you have your eye on?

We’ll continue to add smaller stuff—limited to about £100 million [about $140 million] a year—in new markets, new media, and consumer insight, which are our three areas of focus.

Given the breadth of WPP’s expertise, you’re in a better position than most to meet the challenge posed by the shift from traditional advertising to new media. What’s your solution?

If it’s true what you’ve said, then I’m a complete duffer, because I haven’t come up with any solution. There are two approaches that are certainly transitory solutions. One is to broaden the media you cover, to the whole industry—or as much of it as you can afford. And you particularly focus on new media in the hope that you develop an advertising or subscription-based model that will give the thing viability. The other is geographical. I think the most vulnerable media owner is a media owner that’s rooted in one country, in one medium. WPP is going to be more Asian, Latin American, African, Middle Eastern, and Central and Eastern European.

What will your industry look like in five years?

It’s going to be more dominated by PCs, internet, video content, social networking. Our competitors say it’s about creative ideas. We are totally in agreement with that. But they’re missing the trick—that is, the application of technology to our businesses. It’s not about building server farms or hiring PhDs or competing with Google and Microsoft. It’s about applying the sort of things that Google and Microsoft and Yahoo and AOL and Facebook and Flickr and Wikipedia and everybody else have to our business. And I think we understand that far better than anybody else.

I read somewhere that you describe your relationship with Google as “frenemies.”

Totally. But I reclassified it recently as “friendly frenemy.” The reason we’re frenemies is that Google competes with us through the acquisition of DoubleClick. But we buy about $850 million worth of search advertising from them. We’re their biggest agency customer. And we’re also picking some of the best research projects we can do with Google, to prove the effectiveness of Web advertising and search and the like.

In your mind, what’s the state of the American brand these days?

The change in the administration, whether people like it or not, has made “brand America” much friendlier. But that could change as well. I don’t want to be fatalistic about it, but to some extent, these things are cycles in history. You go back and look at the early 19th century, China and India were 40 percent of world GNP. And then over the past 200 years they went down, and now they’ve come up again. So at the end of the day, it’s learn Chinese, isn’t it? Or maybe Portuguese—Brazil is not doing badly. There isn’t Canadian, but we can learn French and go to Canada. They haven’t done badly either.

You once told a reporter, “There is no yacht, no gold-plated Rolls-Royce. I don’t have a massive wine collection or art collection. My interests are very focused on business.” Now that you’re in your mid-sixties, do you regret that singular focus?

At business school, we had this course that if you wanted to get an A—this is absolutely true—all you did on your final paper was make sure to include a diagram with three circles. One represented family, one career, and one society. And you said that life was about the intersection of those things, and how you balanced those three things. That’s all it took to get an A. I got an A-minus. But all jokes aside, I thought that was a very good description. And have I been good at balancing those three things? The answer is no. I’ve tried, but you tend to get consumed by one or two of the three and not all three, and that’s wrong. So I think that would be the only regret.

What hard choices do you expect to have to make in the coming months?

I think difficult choice is when you’ve got parts of the world that are growing and parts of the world contacting, getting that balance is really tough to do. It means you have to expand various part of the operation and contract others. The biggest challenge, which everybody has, which is in the short term, is making sure that our investment in people is tied to the growth of our revenues.

Newspaper ad spending is expected to decline signifcantly this year, compounding an already miserable trend. Do papers like the New York Times and The Wall Street Journal stand a chance?

It's probably pretty impossible for them to be as profitable as they were before. It’s coming at them in all directions. And when they go into new media, it only generates traffic and interest, not revenue. With the financial crisis, you talk to any media owner and the traffic on the sites is up. The trouble is, they can't—here's that word—“monetize” them—they can't make money out of them.

You’ve been outspoken in your belief that web sites should be responsible – for libel, etc. – for the content that appears there. Why?

If you own the channel, I think you're responsible for the content.

You’re 64. How long do you plan to run the company? Oh, as long as they’ll have me. You start the business in a room with two people, and you have a romantic attachment to it. And it’s very difficult to figure out when you’re doing more harm than good. But it’s more interesting now than it’s ever been. I wouldn’t call it fun, but I think it’s very challenging intellectually.

Jeffrey Sachs, International Man of Misery

Wed, 22 Apr 2009 12:00:00 GMT

1. Do-Gooders Are...IrritatingTokyo: The Palace Hotel. Breakfast with Jeffrey Sachs.
Admit it: Do-gooders are irritating. They make the rest of us seem so self-serving, selfish, and self-absorbed. And of course—for the most part—we are, but who likes to be reminded of it? Yes, millions are starving to death in Africa, but we’ve got our own problems to worry about now. Yet the do-gooders still want to make us feel guilty about famine somewhere far off. Irritating.

But take a moment and consider the plight of Jeffrey Sachs, one of the world’s most prominent poverty fighters, America’s intellectual do-gooder-in-chief. Even when the West was flush with cash, his was no easy task: maniacally crisscrossing the globe, going from one poverty confab to another, trying to get the do-gooder bureaucracies of the world on the same page. Now that we’re in economic free fall? Forget it.

Nobody wants to hear about the eternal “plight of the poor” or what seems like an endless series of famines and slaughters. An estimated $500 billion in aid has been funneled into Africa in the past half-century, and it was never enough. There were always well-meaning types like Sachs, coming around again and again with a metaphorical begging bowl for some new plan or other that would finally fix things and allow us to cross an item off our bucket list: “Cure poverty—done.” ( View a slideshow featuring some of Jeffrey Sachs' celebrity friends.)

But now we’ve got people being forced out into the streets in the great cities of the West, and we’ve got to pay multimillion-dollar bonuses to thank the bankers for bankrupting our economy, for god’s sake. Who wants to hear about starving children?

I’d been wondering about the dynamics of do-gooderism even before the crash, back when I had breakfast with Sachs in Tokyo at the Palace Hotel (named after the nearby Imperial Palace) in March 2008. Sachs, the PowerPoint man for Bono and Bill Gates, Kofi Annan and Angelina Jolie, had let me accompany him on one of his high-level begging missions to Japan. ( View a graphic outlining Jeffrey Sach's grueling itineary.)

It was a surreal scene that morning. People wearing full-face, high-tech surgical masks and garbed in business attire drifted through the hotel lobby, acting as if that combination weren’t a bit weird or ominous. I thought there must have been some post-atomic Japanese horror movie being filmed nearby until Sachs explained.

It was not fear of breathing in germs, pollution, or radiation-tainted air that motivated the mask wearers, he said. Rather, it was a manifestation of the admirable politesse of Japanese culture: Those who had a cold or the flu wore a mask to better avoid infecting others.

Still, instinctively, it was hard not to feel disapproved of—that the masks were a reproof, as if the wearers were protecting themselves from our uncleanliness. I came to think of this as a kind of metaphor for the way one feels in the presence of all types of do-gooders; it’s as if they’re wearing invisible masks to protect themselves from the cynical, inertial moral contagion of our indifference.

Sachs himself doesn’t give off that vibe of do-gooder disdain. His is not the guilt-tripping emotionalism of a Sally Struthers trudging through the muck of a third-world village on a late-night TV ad, swatting flies away from children with famine-swollen bellies, rubbing our noses in the stench of our unconcern.

No, Sachs is careful to make understated appeals to reason, logic, and economic theory. His two bestselling books, The End of Poverty and Common Wealth, are replete with challenging charts and eye-glazing graphs. Here’s where we are; here’s where the differential equations say we can be, saving the starving from Sally Struthers.
Sachs is, after all, a supreme rationalist, a numbers man among bleeding hearts, an economist with a PhD from Harvard and one of the youngest professors ever to get tenure there. He now heads up his own academic mega-think tank, Columbia University’s Earth Institute. He is poverty’s chief public intellectual, the go-to guy when, say, Charlie Rose wants to get serious about the poor. He has been called “the most important economist in the world” by the New York Times Magazine. The Daily Telegraph referred to him as a dispenser of “moral medicine.”

There are doubters, though: policy critics within the “dev biz,” as some insiders call the global antipoverty development institutions. Indeed, Sachs is at the center of a great debate—actually, several linked and probably interminable and unresolvable great debates—over the eternal poverty questions: How bad are things, really? Has the half-trillion dollars funneled into Africa in the past 50 years helped, or—as Zambian economist Dambisa Moyo, among others, says—has it actually hurt?

How could it hurt? By distorting the political culture of Africa—fattening corrupt kleptocrats who have diverted untold billions away from the needy and into Swiss bank accounts and crippled their countries’ progress toward self-sufficiency. In other words, the question is whether the corrupt political culture in these poverty-stricken nations must be reformed before aid can make a difference, or whether aid and accompanying development can reform the political culture.

Certain of Sachs’ critics within the dev biz dismiss him as “one of the world’s most gifted self-publicists” flogging “superficially attractive but deeply flawed ideas,” as former World Bank official David Ellerman puts it. He says that Sachs’ prescriptions rely on top-down, neocolonial, interventionist solutions that have failed in the past.

Meanwhile, Naomi Klein, an antiglobalization writer and activist, calls Sachs “Doctor Shock.” She accuses him of having a dark past in which he prescribed not “moral medicine” but “shock therapy” economics for populations that were already too stunned to resist.

Other critics blame him and his whiz-kid colleagues—the so-called Harvard boys, including Obama’s economics guru Lawrence Summers—for missing a historic opportunity more than a decade ago in post-Soviet Russia. The disastrous attempt to turn a titanic collectivist economy into a capitalist democracy virtually overnight—an attempt that “privatized” the Russian economy into poverty, oligarchy, and gangsterism in the ’90s—gave capitalist democracy a bad name and paved the way for Putinism and renewed political and even military hostility, as evidenced by the invasion of Georgia. Will Sachs be remembered for saving the world in Africa or setting it on the path to destruction in Russia?

Sachs calls the reporting on his role in Russia “unfair” and even “ridiculous,” but no doubt he’s a global player: He’s one of the few individuals who can be both credited with a plan for global salvation and blamed for the renewed potential for global destruction.

But we like our do-gooder icons to have problematic pasts, don’t we? It allows us to fit their lives into our favorite contemporary narrative: redemption. Reputational rehab. Becoming the Sally Struthers of intellectuals has allowed Jeffrey Sachs to largely erase his identification with the Russian fiasco and become the white knight of do-gooders, or at least their Don Quixote.

Nonetheless, what Sachs is quick to call the cynicism of his critics can, at times, get under his skin. When it happens, it comes as a bit of a surprise, because on the surface he seems a mild, unassuming, just-the-facts-ma’am type, at least in the presence of a reporter. His undramatic manner is reflected in his emphatically bland garb, the Midwestern flatness of his voice, and the hairpiece-looking (but in fact real) haystack atop his head, all of which suggest not some Northeast Corridor slickster but rather a Corn Belt farm-implements salesman. But once in a while, one can hear what sounds like a combination of injury and outrage in his voice when he gets going on the topic of those who question his solutions.

“I find the level of cynicism among thinking people unacceptably high,” he told me over the phone shortly before the Tokyo trip. “What I don’t really appreciate is the complacency of thinking people—in the sense that there are a lot of very well-trained people who should know better. And if they don’t like my ideas, they should at least feel some responsibility to not just naysay but come up with other ideas. But not to accept 10 million children dying every year of extreme poverty?”
Note that figure of “10 million children,” the ones “dying every year of extreme poverty.” That’s the rhetorical club he wields against cynics, citing it without melodrama during long disquisitions on the conditions necessary to abolish extreme poverty. “Extreme poverty,” by the way, is a technical term in the jargon of the poverty-industrial complex. It doesn’t simply refer to those who are really, really poor. It is the threshold that defines the “bottom billion” of the world’s poor, the ones who earn less than a dollar a day. Extreme poverty—according to the Sachsians, at least—differs from ordinary poverty because the extremely impoverished are so poor, they lack the ability to lift themselves out of the “poverty trap,” another key Sachsian term. That phrase refers to the quicksand of disease, drought, and famine that renders a population unable to escape poverty by their own efforts.

The human cost: approximately 10 million children a year. We never see them appear and disappear from the planet. They may as well be 10 million miles away. Sachs doesn’t tell weepy sob stories about them. He just mentions the number and leaves it up to us to make of it what we will—or to convict ourselves of callousness if we use the abstract number to hold the suffering at arm’s length.

2. The Willy Loman of Antipoverty ProductsSeeing Sachs in action in Tokyo was useful for thinking about these questions. I sat in on about a half-dozen meetings and a shabu-shabu luncheon in the basement restaurant of a Tokyo skyscraper with foreign-ministry officials and got a sense of how Sachs does his job—saving the world and all that—on a daily basis. It’s low-key, collegial, often technical and intellectual, but when you come down to it, Sachs is the Willy Loman of the dev biz. He’s got a six-point program to restore antipoverty programs after the crash. No, two six-point programs. (Point three of program two: “The dollar will need to depreciate relative to a basket of Asian currencies, a tricky maneuver but no less important for that.”) He has 80 Millennium Villages, demonstration communities in underdeveloped sub-Saharan Africa that need investment at a time when nobody’s investing, even in developed countries. He needs R&D funding for giant arrays of parabolic mirrors in the desert that he thinks could solve the renewable-energy problem. On and on.

So at the heart of the do-gooder’s job is incessant travel to do-gooder conferences, public and private, to sell a line of goods. He just got in from Norway, he said in Tokyo. “Norway was a meeting on climate change hosted by the minister of foreign affairs,” he told me over the breakfast buffet at the Palace Hotel. “Since they do such good things, and I have so many links with them, when they called I just had to squeeze it in.”

It’s all about those links. After Tokyo, he’s off to Shanghai and then to South Korea, where a member of the Jeffrey Sachs do-gooder mafia has just been elected prime minister. “The new prime minister is a longtime friend and colleague of mine,” Sachs says. “He is the mentor, in many ways, of the secretary general”—United Nations secretary general Ban Ki-moon—“who was his deputy, and he’s now acting as special envoy, and suddenly he became prime minister just a couple of weeks ago, and I told him I was going to be in Asia and would like to stop by.”

“At this stage of my life”—Sachs is 54—“it’s actually quite remarkable to see so many colleagues from graduate school or from early days in senior positions. Bob Zoellick and I worked together at Harvard, and he’s of course president of the World Bank now. But we go back 30 years. Today, a classmate of mine was nominated to be deputy governor of the central bank of Japan.” It’s not that Sachs is well-connected. He is the connection.

While he’s known for his association with celebs like Bono and Angelina Jolie (MTV made a documentary called The Diary of Angelina Jolie and Dr. Jeffrey Sachs in Africa), it’s this government-NGO-academia-think-tank-consultant network that powers the Sachs machine. He makes the connections between the PowerPoints and the power people.

3. Monetizing the Western ConscienceEven in good economic times, altruism is a hard sell. Good luck getting anything out of Congress, where foreign aid has long been about as popular as child porn and which has lately reserved its largesse for the bankers who destroyed our economy.

Still, you have to admire the shrewd way in which Sachs has managed to find a chink in the armor of some of America’s largest private corporations. He divulges his strategy one afternoon at his elegant Upper West Side townhouse, which he shares with his wife, Sonia, and their three children. Columbia University bought the property when it lured him from Harvard in 2002; the university, not Sachs, owns it. It’s an enviable if not showy abode, the walls of which are covered with intricately patterned Bolivian woven fabrics.

The secret of his pitch to corporate America is the way he has sought to put a price on meaning. A low, low price.

He has intuited that, deep down, we all would find a greater sense of meaning in life if we believed that we were engaged, even at a distance, in saving 10 million children a year. Sachs is offering that at rock-bottom rates.

“If my theory is right, and just 1 percent of what we have could make the transformative difference abroad?” he says. “First of all, a lot of people are willing to spend 1 percent on meaning, you know. If it turned out that really you need 10 percent or 15 percent of what we have” to end extreme poverty, “then it’s going to have to be someone else giving a sermon, probably about salvation and fire and brimstone. But if it’s just 1 percent, you can see so many pathways.”

If my theory is right... Of course, there’s that little matter.

But through strength of will, savvy publicity, and a boost from the U.N., Sachs has pushed his agenda to the fore, to the bestseller lists, to Charlie Rose and the New York Times editorial page. For better or worse, the Sachs plan is the most visible one on the table.

What does it consist of? In patchwork charity efforts of the past, “humanitarian rescue” has meant parachuting in vaccination teams here, distributing seed stock there, but with little coordination. As Sachs’ PowerPoint presentation shows, if you bring five or six key elements together, you reach critical mass—the antipoverty tipping point—and you boost the victims of extreme poverty over the threshold to ordinary poverty, where they are able to make a transition to sustainable living, if not immediate prosperity. That’s what he says he has already accomplished with his Millennium Villages in sub-Saharan African nations.

“These are all previously existing villages,” Sachs told me. “They were impoverished, hungry, and basically devoid of infrastructure and public services at the start of the project.” Sachs persuaded the U.N. to endorse his “quick-impact” program to put the villages on the road to sustainability in 2005. He got key funding from the government of Japan and from private philanthropists he roped in himself, as well as from the U.N. By 2006, after the Sachs blitz, villages like Sauri, in Kenya; Koraro, in Ethiopia; and Mwandama, in Malawi, were seeing food-production increases of 5, 8, and 15 times, respectively.

The idea is that once these villages—which now incorporate a total of about a half-million people, he says—reach economic self-sufficiency, they begin to spread, attracting government and private investment.

Critics have disagreed; one called the Millennium Villages “development Disneylands,” public-relations showcases. But Sachs says what they really show is that it would cost less than seven-tenths of a penny from each dollar of the developed world’s gross national product to end extreme poverty.

“You’ve monetized the Western conscience, right?” I found myself asking Sachs, almost plaintively. “You’ve put a price on how little it would cost to feel good about ourselves.”

“I guess it’s true,” he said. “I’m trying to give people no excuses not to do this.”

When he talks to companies, his pitch is all about talent recruitment and “reputational costs.” He says, “These businesses are finding that when they go to the campuses in the U.S.” to recruit, “often the first thing they hear is, ‘So what are you doing in Africa?’ And they’re stunned. ‘What do you mean, what are we doing? We’re not doing anything in Africa.’ And the students say to them, ‘Well, I want to work for a company that’s doing something in Africa, because I think that’s important.’ And so many companies have come to me and said, ‘We want to do something in Africa; otherwise we can’t recruit.’ It’s very practical.”
Everyone benefits, Sachs says. He allows the companies to buy a good reputation, which recruiters can then sell to the best and brightest in the talent pool.

“I’ve heard it over and over again from CEOs, who say, ‘We’re so happy we’re doing this. It’s the most meaningful thing our business has done, and I can’t tell you how much employee feedback I’m getting and how exciting this is,’ ” Sachs says. And he’s not talking about small fry. “We’re working with General Electric, which has equipped clinics and surgical units and so forth in all of these extremely poor communities, and with fantastic results. And with Ericsson, they’re providing the cell-phone and internet connectivity in all of the village areas, and it’s just a phenomenally—it’s breakthrough technology. To go from a completely isolated world—no electricity, no road, no contact, dying of extreme poverty—to having cell-phone connectivity, which means emergency-health-delivery services, being able to call for one of a hundred reasons, including figuring out what market prices are in three potential places where an output might be transported.

“And KPMG, they’re doing a lot of due diligence and investment-environment and business-environment analysis in these small cities near the villages where we’re working. So they’re using their absolute core business, consulting and accounting acumen, to help cities that most people have never heard of—Kumasi, Ghana; Kisumu, Kenya; or Akure, Nigeria—get their business environment straightened out so that foreign investment can come in. Becton Dickinson has helped us with a lot of diagnostic equipment and support, and Novartis has provided antimalaria medicines to the communities, and Sumitomo Chemical has provided long-lasting insecticide-treated bed nets. And the list really does go on.”

Is this the way the world will end poverty? Will Sachs get a Nobel? Or will the crash crush his hopes? Will he turn out to be just another Quixote whose failure leaves the field once again to Sally Struthers? Before getting into these matters, perhaps now is the time for a brief PowerPoint-like presentation of the life of Jeffrey Sachs up to that morning in Tokyo.

FIRST SLIDE: Here’s young Jeffrey Sachs growing up in a Detroit suburb, practicing card tricks. His parents were civil-rights activists who inculcated him with reverence for F.D.R. and the New Deal’s use of government intervention to alleviate a downward spiral into misery that free markets alone could not cure. (Sound familiar?)

“I’m a product of a household that is a product of the New Deal,” Sachs told me. “If you look back, that for me is a watershed of good political sense—of how to make a civil society and how to make a peaceful, coherent society that addresses urgent needs and at the same time takes the benefits of free markets. Back to college, I’ve believed in a mixed economy.”

NEXT SLIDE: Here’s Sachs at Harvard, dazzling his elders to such an extent that, at age 29, he becomes one of Harvard’s youngest tenured full professors ever (I hear he did well on his SATs too), being called upon by the government of Bolivia to cure its 14,000 percent yearly inflation rate.

At Harvard, he said, he was powerfully influenced by iconic liberal economist John Kenneth Galbraith, disciple of economist John Maynard Keynes and the Keynesian tradition of mixed capitalism and government intervention.

Perhaps one reason Sachs emphasizes the F.D.R.-J.K.G.-J.M.K. connection is that critics like Naomi Klein have argued that, in his Bolivian and Eastern European interventions, Sachs had been seduced by the doctrines of Galbraith’s archrival, Milton Friedman, the strict laissez-faire theorist whose “Chicago boys” used “shock therapy” to privatize Chile’s economy without objecting strenuously to the death squads that enforced their “free-market reforms.”

NEXT SLIDE: Here’s Poland, a Sachs success story—after some travail. The trade union Solidarity called in Sachs almost immediately after it took over the government from the Communist Party. In one of Sachs’ favorite stories, he told the union it could save the economy from collapsing under the weight of a $40 billion foreign debt load by just refusing to pay. In a moment that Sachs is obviously fond of recalling, he said, in effect, “Just send all your creditors a postcard telling them the new regime is not honoring any Communist-era incurred debt.” Not a single zloty. It worked!
NEXT SLIDE: Here’s Sachs defending the collateral damage incurred by his sudden “transformations” of collapsing economies, the kind of thing his critics call shock therapy. (In Bolivia, the government kidnapped and sequestered labor leaders to prevent them from interfering with Sachs’ draconian revamping of the economy—“junta-lite” tactics, Naomi Klein called them.) “When a guy comes into the emergency room and his heart’s stopped,” Sachs said, “you just rip open the sternum, and you don’t worry about the scars that you leave. The idea is to get the guy’s heart beating again.”

NEXT SLIDE: There are a lot of debates about how big a role he played in post-Soviet Russia and how much of the blame he deserves, but most agree that it wasn’t a pretty sight by the end. Sachs—along with the other Harvard boys, as they came to be called, à la Friedman’s Chicago boys—parachuted in and convinced Boris Yeltsin’s economic team of “reformers” that rather than move gradually, they needed to privatize immediately, mainly by selling off state assets and giving citizens soon-to-be-useless vouchers to buy stock in the privatized companies that resulted.

It was, by almost all accounts, a horror story. Sachs told me that he feels he’s been victimized by unfair reporting about his role.

I had heard he was touchy about it, and the most I could get out of him was this: “I just think we made a lot of mistakes.” He left it a little unclear who “we” were, suggesting that the key mistake was the Harvard boys’ excessive optimism that the U.S. government, the World Bank, and the International Monetary Fund would cobble together a Marshall Plan-type rescue of Russia in the name of capitalist democracy. They wouldn’t miss a once-in-history opportunity like that, would they? In fact, they would, and they did.

4. Bono and Moron InsuranceNEXT SLIDE: Close-up on Bono, around the year 2000, when he was making the transition from singer-songwriter to would-be saint, getting deeply involved with Africa and antipoverty efforts.

Then, Bono meeting Sachs. “My great friend Bobby Shriver,” Bono wrote in his introduction to Sachs’ The End of Poverty, “had advised me to meet [Sachs] in order to know what I was talking about before I went up to Capitol Hill to lobby on behalf of Jubilee 2000”—Bono’s third-world debt-cancellation campaign. (Gotta love “my great friend Bobby Shriver.” Bono has picked up the rhetoric of the rich, presumably the better to help the poor.)

Here we see the template for the transaction that has allowed Sachs to put his solutions—his agenda—in the forefront of the public mind, even if some economists don’t consider him to be in the forefront of his profession. (“He’s not even a development economist,” one grumbled to me. “He’s a macroeconomist.”) Sachs is moron insurance for aspiring saintly celebs who want to be do-gooders but don’t want to be seen as celeb airhead do-gooder clichés. In return, the celebs shine their light on Sachs’ projects, like the Millennium Villages, which are photo-op lures for the novice celeb do-gooder. This arrangement may have reached its apogee with MTV’s 2005 documentary about Sachs and Angelina Jolie in Africa.

NEXT SLIDE: 9/11. “My response to September 11 was that I wanted to do something more for the United Nations, and I thought it was particularly urgent and a dangerous time, and I wanted to support multilateral processes,” Sachs said. “And at the same time, Columbia was trying to recruit me. Kofi said, ‘Come as my adviser on the Millennium Development Goals and organize an effort,’ and Columbia University offered me the Earth Institute position, and so after 31 years, I said goodbye to Harvard.”

5. Quixote or Card Sharp? There was a moment in the Palace Hotel in Tokyo that morning that threw into relief the issues raised by Sachs and his critics. We had adjourned from the breakfast room to the lounge, where Sachs was meeting with then-Prime Minister Yasuo Fukuda’s science adviser.

Sachs is trying to make the transition from being known mainly as a poverty-development person to someone who can straddle the looming divide—death match, really—between the poverty-development do-gooders and the climate-change do-gooders. The rapid development that has raised literally billions of people out of extreme poverty in India and China has been dependent on dirty coal-burning plants. The climate-change people want to reduce dirty-energy use, but doing so, say some of the poverty people, risks cutting off the means of raising starving people out of extreme poverty. Look what happened when the climate-change do-gooders’ cry for biofuels led to land once used for food crops being shifted to growing plants to make fuel: soaring food prices, food riots, starvation spreading again.
Sachs knows of some ingenious ideas for dealing with the energy crisis, one of which he discussed with the science adviser: giant arrays of parabolic mirrors in the Sahara desert. According to Sachs, with the right technology, you could focus the glare of sunlight off the desert sand and use the heat to boil water to drive enough energy-producing turbine generators to power all of Europe.

Well, I’m no techie, but it sounded a little far off in the future, if not utterly undoable, to me. (Where does the water come from?) Nonetheless, there was something about the grand, visionary reach of it. It suddenly captured what I found appealing about Sachs: He’s Don Quixote, and the giant parabolic mirrors—the analogy is not precise—are his windmills.

But then, after the meeting with Fukuda’s science adviser, came the revealing moment. I’d asked Sachs what he did in his downtime during his globe-trotting “endless tour.”

Sachs was silent. Then one of his chief assistants, Joanna Rubenstein, prompted him.

“There is sleight of hand,” Rubenstein said.

It turns out, Sachs is something of a card sharp, or anyway a clever trickster with cards.

Sachs didn’t look entirely happy with this disclosure. He says it just kind of happened, his learning to do card tricks. He’d spent a lot of time with cards as a young devotee of bridge.

Still, this unexpected Music Man sharpie side of him dramatizes the divide in the dev biz regarding Sachs: Should we place our confidence in him, or is he a kind of confidence man in the do-gooder trade whose main skill is making himself the center of attention?

“If ending poverty is so easy, why hasn’t it been done?” William Easterly, Sachs’ most vocal opponent, asks. Easterly, a former World Bank official now at New York University and the Brookings Institution, wrote a well-received book called The White Man’s Burden, which accused Western aid programs of being neocolonialist.

And later during that day in Tokyo, I thought I picked up skepticism from some of the earnest Japanese poverty bureaucrats to whom Sachs was appealing for funding for more Millennium Villages, among other projects.

Sachs wanted to encourage the Japanese government to promote private investment in Africa, particularly in ventures that would bring added support and “sustainability” to his development villages and the surrounding areas. The Japanese seemed to me to be politely suggesting that the political culture of these nations (none of which were named) had to change before Japanese businesspeople could be persuaded to set up shop there and provide markets for the products of the Millennium Villages. I got the impression Sachs, on the other hand, believed that successful development was the very thing that could bring about an economic transformation of the political culture of these places—or at least that those 10 million starving children couldn’t wait until after the political culture was changed to be saved. It’s the perennial chicken-and-egg question of antipoverty economics.

It’s difficult for an outsider to judge the different sets of facts and interpretations of facts that each side uses. Even one of Sachs’ allies, Oxford’s Paul Collier, says that Sachs “has overplayed the importance of aid” and that Easterly “is right to mock the delusions of the aid lobby.” On the other hand, Collier says, Easterly “exaggerates the downside and again neglects the scope for other policies.”

True, waiting for trial-and-error, pragmatic, self-generated development sounds far more holistic than Sachs’ interventionist approach. But even his opponents will concede that to wait for the right political and economic culture to evolve before getting vaccination teams and antimalarial medicine into stricken villages is not justified.

Some of Sachs’ successes have been undeniable—particularly his role in implementing the U.S. anti-AIDS and antimalaria campaigns and in advancing the “green revolution” in seed stocks that has allowed once-infertile drylands to feed millions who otherwise would have starved. Such achievements have allowed Sachs to transcend his controversial past. It fits the redemption narrative.

But that’s the past. The future is looking bleak.

6. The Billionaire BegathonOne afternoon in his townhouse in March 2008, months before the crash of the global economy, Sachs was telling me about how exhausting it was to fit the pieces together to get the funding for his programs, how much effort it took to get governments, NGOs, and corporations on the same page.
In a kind of despair, he spoke about what I like to call his billionaire-begathon fantasy.

Sachs said there were going to be 1,100 billionaires on that year’s Forbes list and their assets would be something like $4.2 trillion. If they allowed him to manage their money, he said, he could show them how they could end extreme poverty all by themselves without the rest of us lifting a finger.

“They wouldn’t have to give away a cent,” Sachs said. He’d just need the interest: “They could just put half their assets into an interest-bearing trust.” He’s done the math. “That would be $2.1 trillion, and 5 percent payment on that would be $105 billion a year. That would do the job. Actually, that would be quite good.”

“Are you serious?” I asked.

“I’m getting ready to go door-to-door,” he said, at least half seriously.

Still, I kind of like Sachs’ idea for a billionaire begathon: fast, efficient, no more global-poverty confabs. But when I spoke to him a month into the Obama administration, he conceded that the crash had wiped out so much wealth that even his fantasy was, in effect, defunded: This year, Forbes listed just 793 billionaires, worth a total of $2 trillion.

He’s back to doing multipoint programs for the G-20 nations. He emailed me a 45-page, small-type proposal, “Smallholder Food Production and Poverty Reduction: Principles for a Financial Coordination Mechanism (FCM) to Support Smallholder Farmers.”

On the phone, he was talking a mile a minute, dancing as fast as he could, describing the multitude of effects that the economic crisis has had, about how “it’s been a very, very tough few months. With African economic growth cut in half, cuts in foreign aid, everything has been made more urgent, especially the food crisis, and I’ve been spending a major amount of time trying to mobilize desperately needed funding for peasant farmers, and—it’s just overwhelming.” He uses phrases like “shockingly difficult” and “nightmare” and wonders aloud, almost hopelessly, why, when trillions are being thrown around, a few billion can’t be found to fight the extreme poverty that kills 10 million kids a year.

I took it all in, and later I found myself wondering, Why does he do it? Especially now, when it seemed to me the subtext of all these new six-point proposals and 45-page G-20 programs is that everything he’s built up in the past decade is sliding down the tubes, and he’s engaged in a desperate Sisyphean effort to roll the rock up the hill from the bottom again.

I can’t read minds. But I have a feeling that at least part of the answer to
why he does it is because he can, and because there are not too many others who can hold the whole miserable picture in their mind and, instead of giving up hope, translate the misery into salvific equations.

It’s probably hopeless, even more now than it was before, but he does it because, I suspect, he thinks no one else could.

And he just doesn’t want to leave the job to Sally Struthers.
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Bumpy Ride

Wed, 22 Apr 2009 12:00:00 GMT

As the deadline approaches for its maiden test flight, Boeing Co.’s first 787 Dreamliner sits idly in a bunker tucked away in the eastern corner of the company’s gargantuan factory in the Seattle suburb of Everett, Washington. Although the sleek plane, with its distinctive swept-back wings elegantly curved like a gliding predator’s, is unfinished and nearly two years behind schedule, the manufacturing pace is unhurried, the factory floor relatively quiet. As they have for much of the time since the plane was announced in 2003, Boeing workers are standing by, waiting for parts to arrive from suppliers around the world.

Even when it races, nose up, into the sky, the initial test version of the Dreamliner will go aloft with temporary fasteners—and missing some less critical parts, such as those for lighting and bathrooms. One reason is that Boeing has redesigned 30 percent of the plane to reduce weight, an unprecedented degree of change for an aircraft this late in development. As one of many grim jokes making the rounds on Boeing’s factory floor goes, “Maybe they meant a bad dream.” ( View a slideshow detailing Dreamliner production miscues.)

The Dreamliner’s delays are expected to cost Boeing as much as $10 billion in canceled orders and compensation to airlines. The fiasco has become an object lesson for manufacturers in how not to do global outsourcing and has eroded Boeing’s reputation for efficiency and innovation.

Now, on the eve of its big launch, the Dreamliner carries the company’s hopes of recapturing lost revenue and repairing the damage to its image. If the plane passes the rigorous yearlong series of flight tests that begin this spring, it could lead Boeing out of the financial crisis. But if the Dreamliner fails, Boeing could become the General Motors of the skies, with enormous repercussions for the U.S. economy and the U.S. manufacturing base. Although Boeing announced in January that it was laying off 10,000 workers, it still employs more than 150,000 people in the U.S. and is the nation’s No. 1 exporter. About 70 percent of Boeing shares are held by institutions, including all of the major mutual funds and Bank of America Corp., its biggest shareholder.

Indeed, a machinists strike last fall crippled Boeing’s production and contributed to a 6.2 percent decline in the U.S. gross domestic product in the fourth quarter. Boeing is so vital to a recovery that if it sputters, the federal government may be forced to bail it out, as it has automakers GM and Chrysler LLC. ( View an interactive feature showing how the Dreamliner is manufactured.)

“It may be a stretch to say, ‘What’s good for Boeing is good for the country,’ but not a big stretch,” says Scott Hamilton, an aerospace analyst with Leeham Co., an industry consulting firm.

Boeing, the world’s largest maker of commercial jetliners and military aircraft, envisioned the Dreamliner, for long-range flights, as an efficient, fuel-saving alternative to its aging but still hugely profitable 777 jet. The first commercial airplane made chiefly from plastics, which are lighter and stronger than traditional aluminum, the Dreamliner will use 20 percent less fuel than jets of similar size, while reaching the same top speed as a 777, of about 640 miles per hour. Its passengers—250 at full capacity, 50 fewer than the 777—will enjoy the industry’s roomiest seats and largest windows, as well as plasma televisions. For safety, the Dreamliner’s advanced self-monitoring system automatically reports maintenance issues to ground personnel.

But the plane fell victim to infighting between Boeing’s bean counters and engineers, who had to gamble on a low-cost—but unrealistic—manufacturing strategy. “We may have gone a little too far, too fast” with the technology and materials and in outsourcing production, Boeing chief executive James McNerney told Condé Nast Portfolio. “The program was more than we could handle.”

The Dreamliner debacle would be bad news in good times, but it is a nightmare for Boeing in this global economic crisis. Boeing has received about 900 advance orders for the Dreamliner, the most of any new plane, at about $200 million apiece. But with air traffic down from last year, carriers have begun to cancel orders. “I’d have concerns about every customer right now,” says Richard Aboulafia, a vice president at Teal Group Corp., a consulting firm that follows the aerospace and defense industries. Aboulafia estimates that between 30 and 70 percent of all orders for jets industrywide will be at least deferred, if not canceled. In his worst-case scenario, 630 orders would be postponed or dropped outright, a potential loss of $126 billion in revenue.

Already this year, a Russian carrier, a Dubai leasing company, and a Hong Kong businessman have called off purchases of 32 Dreamliners, worth more than $6 billion altogether. Australia’s Qantas Airways Ltd., which ordered 65 Boeing 787s, may cancel 15 of them. And Japan’s All Nippon Airways Co., which ordered 50 in 2004, is facing such heavy losses with the collapse of trans-Pacific air travel that Moody’s Investors Service has put a negative outlook on its long-term debt. That, in turn, could hamper the airline’s efforts to obtain funding to buy the jets.

Airlines could seek as much as $4 billion in compensation for losses linked to delays, and Boeing is not expected to make any money on the first 100 or so Dreamliners it delivers. Some carriers, weary of waiting for the Dreamliner, bought or leased planes from Boeing’s biggest rival, Airbus SAS, a European consortium. “We’re pretty fed up,” says the chief executive of one major carrier that ordered 15 Dreamliners. “We’ve gotten no clarity from Boeing.”

Perhaps worst of all, Boeing has forfeited a significant revenue stream—from Dreamliners that would have been delivered and paid for—that could have propped up the company through the downturn. Boeing’s cash reserves plummeted during 2008 from $7 billion to $3 billion, which will make it difficult to develop new planes.

While conceding that the next few years will be tough, CEO McNerney dismisses the notion that the Dreamliner’s moment has passed. Because of the long lead time from conception to delivery, he says, it’s not unusual for a new plane to bump up against a recession. And since Boeing can make fewer than 100 Dreamliners a year, the company would have a five-year backlog even if half of the 900 orders were canceled. “The fact is that 95 percent of the pipeline for the Dreamliner would have been exposed to this financial crisis even if we delivered on time,” says McNerney.

The Dreamliner’s problems have exacerbated the broader decline of Boeing, once one of the world’s most admired manufacturers. In the past year, Boeing’s stock price has lost about 60 percent of its value, more than the Dow Jones industrial average. In trying to fix the 787, Boeing shifted engineers away from other projects, causing a lag in developing freighters and other passenger planes. Boeing’s revenue dropped 8 percent, and its operating income fell 32 percent from 2007 to 2008. The latest results offer no comfort. In early April, Boeing reduced expectations by 38 cents a share for first-quarter earnings, which will be announced April 22, and said production of the 777 will be trimmed from seven to five aircraft per month starting in June 2010. In response, a number of top analysts downgraded Boeing’s stock and Standard & Poor’s Rating Services began a review of the company’s debt for a possible downgrade. And after dominating jet manufacturing for decades, in 2008 Boeing fell behind Airbus in orders and shipments by more than 100 planes.

Boeing’s military unit, which generated 50 percent of the company’s revenue last year but lost top managers to the Dreamliner, is struggling as well. The Pentagon recently passed over Boeing’s bids for about $40 billion in defense contracts for navigation satellites, aerial refueling tankers, and unmanned Navy spy planes, an unprecedented losing streak for the company.

Boeing also stumbled by adopting a Dreamliner-like outsourcing strategy on a $20 million Homeland Security contract to create a 28-mile “virtual fence” along the Mexican border, with infrared cameras, ground sensors, radar, unmanned planes, and databanks to guard against illegal immigration. When Boeing delivered the equipment in 2007, hardly any of the pieces, bought from dozens of subcontractors, fit together. After much trial and error, a scaled-down version was switched on this year.

Boeing’s slide can be traced to the company’s ill-fated $13 billion purchase of McDonnell Douglas Corp. Under chairman John McDonnell and chief executive Harry Stonecipher, McDonnell Douglas starved its design and engineering operations and became little more than a sales organization, barely surviving on offshoots of its aging DC-9 and DC-10 models. The 1997 acquisition infected Boeing’s forward-thinking culture, emphasizing cost-cutting at the expense of innovation.

McDonnell and Stonecipher, both of whom joined Boeing’s board, successfully argued for improving profit margins on existing lines instead of introducing new commercial jets. Boeing cut its annual research-and-development budget for commercial aviation from more than 4.5 percent of airplane sales in 1997 to slightly more than 3 percent in 2003. At the same time, Airbus’ R&D budget topped 8 percent of sales.

But by 2003, Alan Mulally, who headed Boeing’s commercial-airplane division, was convinced that Boeing needed a fresh plane. Inspired by Toyota’s combination of technological prowess and lean efficiency, Mulally had spearheaded development of the 777 in the early 1990s, transforming Boeing into a world-class manufacturer. Now he believed that to preserve its eroding market-share leadership, Boeing had to produce a jet that would capture the imagination of the airlines and the attention of Wall Street. Originally called the 7E7, Mulally’s baby was renamed in a public contest that drew 500,000 online voters. By a large majority, they dubbed it the Dreamliner.

Mulally’s ambitions collided with the frugality of the former McDonnell Douglas executives. Conceptual drawings showed that the Dreamliner’s cost would at least match the $10 billion-plus price tag of the 777. After becoming chief executive in 2003, Stonecipher said he intended to seek board approval for the Dreamliner. However, the unspoken message was “but not at the current price,” says Jon Ostrower, an aviation insider who writes for Flightglobal.com. Mulally was told that the plane’s projected development costs would have to be 50 percent or more below the 777’s.

To meet this demand, Mulally came up with a wildly unorthodox plan: He would farm out the design, engineering, and manufacturing of the 787—virtually everything except final assembly—to suppliers that would shoulder more than $9 billion of the project’s $13 billion cost, in exchange for lucrative, multiyear guaranteed contracts and a slice of the plane’s sales. These outside companies would coordinate with one another to produce whole sections of the plane, stuffed with assembled components, systems, ducting, insulation, and wiring. Boeing workers in Everett would merely have to connect the major parts of the aircraft.

No large manufacturer had ever before so audaciously turned over control of the entire process—from concept to shipment—to outside firms. In a critical oversight, no provision was made for monitoring the suppliers. Mike Denton, vice president of engineering for Boeing’s commercial-airplanes division, recalls that the vision for the Dreamliner was “not to encumber the partners with the Boeing way of doing everything. So we erred on the side of giving them more free rein than in retrospect we should have.”

By the end of 2003, the company had greenlighted the Dreamliner.

Moving quickly, Boeing signed up dozens of suppliers. Japan’s Mitsubishi Corp. agreed to make the wings; France’s Messier-Dowty SA took on the main landing gear; and Italy’s Alenia Aeronautica SpA would build the 64-foot-wide horizontal stabilizer. The vertical fin, the sole piece of the airframe slated to be made in the Seattle area, would connect to a rudder from Chengdu, China, and a front-facing edge from Shenyang, China.

In 2005, Stonecipher was fired for having an inappropriate relationship with a female executive. After McNerney was chosen as chief executive, Mulally left Boeing in 2006. Whether Mulally could have made a success of the outsourcing strategy, had he stayed, is one of the great what-ifs of the Dreamliner saga. He became chief executive of Ford Motor Co., where he introduced more efficient techniques in the automaker’s factories. In part because of Mulally’s streamlining, Ford has been able to wave off government bailout money taken by its rivals.

The suppliers were expected to deliver their completed parts in early 2007, giving Boeing enough time to assemble the initial Dreamliner for its first public display on July 8, 2007—or 7/8/07—a date chosen to match the plane’s model number. Under pressure from Boeing, the suppliers sent to Everett as much as they had finished. Sections arrived in an incomplete or defective state, or failed to fit adjacent parts made by other suppliers. The Dreamliner that Boeing rolled out to the applause of 15,000 workers and their families and friends resembled a mismatched model airplane.

Unbeknownst to Boeing, one important supplier was being pared down by a prominent private equity firm. Vought Aircraft Industries Inc. was supposed to build the two aft barrels of the fuselage in a new factory in Charleston, South Carolina. Once completed, these parts were to be sent next door to another new factory—a joint venture between Vought and Alenia Aeronautica—to be connected to fuselage sections, wiring boxes, and the main landing gear.

But Boeing didn’t realize that the Carlyle Group, which had acquired Vought in 2000, was starving it of resources while making a few cosmetic improvements to attract potential buyers—a once-common private equity tactic. By early 2006, Vought was facing a severe “liquidity crisis” and nearly went bankrupt, chief executive Elmer Doty told analysts. It couldn’t afford the new plants, employee training, and fuselage design and assembly and had to “reconstitute” its engineering department. “We are among the riskiest, if not the riskiest” of the Dreamliner suppliers, Doty acknowledged.

When Vought sent empty fuselage barrels that were short of vital fasteners, Boeing finally took notice. The company compelled Vought to fire the executive in charge of operations in Charleston and then acquired Vought’s 50 percent stake in the joint venture with Alenia. After having spent almost $300 million on the Dreamliner project in 2008, Vought had to borrow $200 million more last year, when it finally shipped the first of its fully completed fuselage sets. Vought has asked Boeing to redraw its contract to cover more up-front expenses. So have other hard-pressed suppliers, potentially costing Boeing hundreds of millions of dollars.

McNerney says Boeing has learned from its mistakes and now monitors suppliers closely. Hundreds of Boeing employees were dispatched to suppliers to implement the “Boeing way,” and McNerney has visited many of the factories, sometimes unannounced. “We overwhelmed the suppliers with Boeing folks in reaction to not having enough early on,” he says.

Across from the Dreamliner’s placid bunker, on the opposite side of the vast barnlike plant, Boeing’s storied past and manufacturing prowess are impressively on display. A platoon of 777s is under construction on a production line superior to any other in the aerospace industry—one Boeing decided not to use for the Dreamliner because outsourcing was cheaper. Rather than assembling 777s one by one, parked side by side—the traditional approach for jet builders—Boeing has coupled its famed wide-body to a continuously moving platform that creeps along at a scarcely noticeable 1.8 inches per minute.

As the plane’s hull enters a sector, hundreds of workers standing on hoists and derricks rivet, screw, or snap into place components, wiring bundles, engine parts, and instrumentation.

Boeing does its utmost to avoid assembly delays of even a few minutes. Boeing workers monitor each 777’s exact coordinates on the factory floor from the time the jet ambles in from the plant’s rear gate, with just its aft fuselage joined to its main body, to the time it reaches the 300-foot-wide hangar doors as a completed plane.

Boeing consistently makes about seven “triple sevens” a month and boasts a backlog of about 350 orders for the $250 million plane. In the first two months of this year, the 777 had a net gain of three orders while the Dreamliner lost 32.

The moving assembly line in the 777 plant in Everett—and another in Renton, Washington, where the 737 is built—has produced impressive results that the Dreamliner program can only, well, dream about. Assembly time is down 21 percent, time spent in the factory has been reduced from 26 days to 17, and 20 percent of mistakes have been eliminated. By these measures, Boeing is at least four years ahead of Airbus.

Despite Boeing’s recent failures, its innovative spirit—reflected in the 777 and in the Dreamliner’s design—remains praiseworthy. If the economy rebounds by the time the Dreamliner makes its first commercial flight next year, the plane could still become the blockbuster Boeing envisioned. But so far, it’s just a cautionary tale. “The lesson is that manufacturing programs cannot operate as islands,” McNerney says, but must meet companywide standards. “I think we are centered on that now,” he notes ruefully. “A little later than we needed to be for the 787.”

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The CEO BFF

Wed, 22 Apr 2009 10:00:00 GMT

From the late 1980s through the 1990s, nearly half of Disney’s board members had close connections to then-CEO Michael Eisner, including Eisner’s architect, Robert Stern; his personal attorney, Irwin Russell; and the principal of the grade school where at least one of his kids was enrolled.

Manhattan real estate company SL Green has given millions in business to various companies owned by chairman Stephen Green’s son, Gary. The amounts have increased from less than $200,000 in 1994 to nearly $15 million by 2008.

In February 2008, Dell spent $155 million to buy MessageOne, a company owned by Adam Dell, brother of Dell CEO Michael Dell.

Since 2005, Best Buy has purchased nearly $80 million worth of fixtures from a company owned by a brother of former CEO and current chairman Richard Schulze.
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Smith (continued)

Wed, 22 Apr 2009 10:00:00 GMT

The irony is thick. With his 1989 film, Moore wrote Smith’s cultural epitaph. Smith was the remorseless corporate goon who slashed jobs and cut the heart out of picturesque Flint, Michigan. But the fact is, Smith did what had to be done, and can be faulted only for doing less than what was required. Given the historical and macroeconomic context—rising Japan Inc., the tightening of crash and emissions regulations, GM buckling under its own outdated sprawl—Smith should have shuttered many more plants and pulled the plug on many more company towns so that GM could refocus its resources. If he had, he might have saved tens of thousands of jobs in the long run. Instead, he managed to go down in history as twice feckless—the GM boss who did too much and too little.

He started his career at the company in 1949 as a green-eyeshade guy, a lowly accounting clerk. His 1984 reorganization attempted to streamline GM’s back-of-the-house operations but was, in a word, a disaster. It sowed confusion and disorder that practically idled the automaker for months. Current CEO Rick Wagoner has said, “We’ve been 12 to 14 years digging out from that.”

Smith, a tightly wound, work-all-night autocrat, remote and austere, had the right idea but may have lacked the intuition to understand how his rip-up-the-carpet redo would affect the delicate web of informal communication that GM relied upon. Few today would dispute that GM had to consolidate the sprawling conglomerate Alfred Sloan took control of in the 1920s. If only Smith had done the job more artfully.

Perks Gone Wild

Wed, 22 Apr 2009 10:00:00 GMT

In 2007, Denver-based Qwest Communications agreed to allow the stepdaughter of CEO Edward Mueller access to the company’s jet so that she could continue high school in the San Francisco Bay Area.

When Nike CEO William Perez resigned in January 2006, after just a year on the job, the company spent $3.2 million to purchase his Portland home and another $580,000 to renovate it.

After Werner Enterprises founder Clarence Werner stepped down as CEO in 2007, the transportation company agreed to build a 24,000-square-foot hunting lodge on a 580-acre spread Werner owned in Nebraska. The company also agreed to pay the annual taxes on the property.

When Morgans Hotel Group hired Fred Kleisner as interim CEO, it agreed to pay a housing allowance of up to $30,000 a month.

Henry Frick, the No. 2 at Carnegie Steel in the 1880s, also owned a company that manufactured coke, an ingredient necessary for steelmaking. All of Carnegie’s coke contracts went to Frick.

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Rich Array of Airline, Hotel Deals

Tue, 21 Apr 2009 04:00:00 GMT

I spend an inordinate amount of time tracking airfares and hotel rates and say this without fear of contradiction: This is the best time in a decade to get a deal. Long haul or short, budget digs or palatial stays, leisure and business travel prices have reached comparative, historic lows.

In other words, time to watch your back. If you think buying travel is tricky when prices are high, you have no idea how complicated life on the road can be when prices are falling. The travel industry doesn't lower prices graciously or transparently. There are always trapdoors, tricks, and an endless parade of extras that can needlessly inflate your fares and room rates.

Consider what follows a cheat sheet to avoid getting tricked in the next few weeks and months. We'll revisit this topic as frequently as necessary to keep you abreast of this most extraordinary time in travel buying.

Buy Now, Check Later
Several carriers tried to raise fares over the weekend, their second failed attempt in as many weekends. (Airlines usually try to raise prices on weekends, when bookings are light, so they can rescind the increases by Monday morning if the lemming-like industry doesn't act in lockstep.) You can look at the attempted price hikes as delusional or an indication that at least some carriers see glimmers of hope for a summer traffic bump. Either way, chances are that we've reached a temporary floor in airfares, so now would be a good time to lock in summer flights.

With the requisite 60-day advance purchase and Saturday-night stay requirement, business-class fares to Europe are now as low as $1,798 roundtrip before taxes. That's just a few hundred dollars more than you'll pay for a coach seat on shorter notice later this year. Business-class fares to Latin America are falling too. Up-front fares to Asia remain high considering a rapid decline in traffic, but coach prices across the Pacific are lower than across the Atlantic on a fare-per-mile basis. And you can't complain much about domestic fares: We've already seen several $49-to-$99 fare wars. In fact, Virgin America, the struggling startup, has cut some transcontinental fares to as low as $79 one-way this spring.

Although I recommend you buy now, you should always double-check prices again before you travel. There are automated fare-watch programs—Yapta is a current favorite of price-obsessive fliers—but you can also do it yourself a few weeks before you fly. If you find a substantially lower fare, call the airline and get a voucher for the price difference, minus an admittedly hefty ticket-rewrite fee.

Beware Bogus BoGos
The low price of premium-class tickets has mooted the classic "buy one, get one" (BoGo) promotion, but that hasn't stopped carriers from trotting out the gimmick in hopes you're not paying attention. Earlier this year, for example, South African Airways offered one for coach travel, but the required "buy one" price was just $100 less than if you had purchased two tickets separately. Qantas ran a two-for-one sale on business-class seats last week, but its buy-one price was literally twice as much as competitors were charging for a single seat. Also rendered virtually useless in the current market: the much-heralded International Airline Program available with certain American Express cards. It will give you a free companion first- or business-class ticket when you buy one—but only if your purchase is at full fare, a price that is now often four or five times higher than the current sale rates freely available in the marketplace.

Added Value or Lower Prices
Never as monolithic as the airlines, the hotel industry is split on how to get heads back on beds. As room rates and occupancy levels have plummeted, some chains (most notably Hilton) have indulged in what the industry calls "naked discounting." That's when you simply slash nightly rates as low as required to fill a room. Other hotel players (like Marriott and many pricey resorts and independent properties) are trying to keep published rates high, but larding them with "value-added" freebies. Sometimes it's free meals or spa treatments, and sometimes it's several hundred dollars worth of resort "credits" that travelers can use as they wish. Other times, the value-added inducement is third-party gift cards. So far this year, for example, Marriott outposts have offered gift cards for Target and Amazon.com as part of the nightly room rate.

Which is better? Depends on you. I prefer the rate reduction because things like a free Sunday brunch "worth" $45 is useless to a guy whose morning intake is invariably a bagel and coffee. But if you like what the hotel is offering—and understand its actual retail value—go for it.

The Blind-Buying Bonanza
Blind bidding for flights is passé now that airlines publicly sell seats at giveaway prices on their own proprietary websites. But so-called "opaque" operations such as Priceline.com, Hotwire.com, and Lastminute.com have gained new popularity with upscale travelers because top-notch hotels around the world now dump their excess capacity into the blind-booking pools. Even four- and five-star properties work with the opaque sites these days, and they sell deeply discounted rooms to travelers who pony up payment before they know what hotel they are buying.

I'm not a fan of blind booking—to me, lodgings aren't a commodity—but many travelers whose taste I trust recently have secured huge discounts on desirable hotels and resorts using Hotwire and Priceline. And third-party sites such as Bidding for Travel have sprung up to allow bidders to swap intelligence on what they've scored and which properties currently use the opaque sites. There's still another twist on the bidding sites: Luxury Link electronically auctions accommodations and travel packages at deluxe properties around the world. I have used Luxury Link myself for holidays. If you know the property and what it normally charges, you can bid with confidence—assuming, of course, you want to travel when the hotel or resort is offering rooms.

The Mileage Markdown
Travel is so slow just now—airline traffic is down around 10 percent compared with last year's already depressed levels and average hotel occupancy has fallen to around 50 percent—that airlines and hotels have even begun to mark down the price of staying and flying for free via frequent-travel programs. A steady stream of private promotions offering flights for up to 25 percent fewer miles and hotel rooms for substantially fewer points has hit travelers' email inboxes in recent weeks. To take advantage of these private sales, make sure you're signed up to receive the promotional offers from your favorite airline and hotel programs.

And while we're talking about frequency programs, another point to keep in mind: If you're relatively flush with cash, airlines and hotels are offering lavish points and miles promotions when you book paid rooms and flights. After a two-night stay in a Manhattan hotel last month, I earned enough bonus points for a free night in an Italian resort I've been eyeing for a holiday next month. And all of the major airlines are currently running double or even triple "elite miles" promotions through mid-June. Once you register, you receive bonus miles toward your elite status next year. Earning or upgrading your elite status for 2010 will come in handy if the economy recovers next year.

The Fine Print…
One notable exception to the fire-sale nature of travel this year is car rentals. If anything, prices have risen compared with last year. The reason: Rental firms have been hit by the credit crunch and have had difficulty raising cash to finance new fleets. The result is a double whammy: Daily rates, especially for midweek business rentals in major cities, are rising—and the cars you're renting are older, have more cosmetic damage, and may not be as mechanically reliable as they once were.

Related Links
The Great Getaways
Bargain Bin
Lots of Room at the Inn

Two Years of 2B

Tue, 14 Apr 2009 04:00:00 GMT

This is the start of the third year that I metaphorically plop down in Seat 2B once a week and attempt to make sense of life for business travelers. And since no one deserves a free ride in a power chair, even if that chair is an airline seat, I think now is a good time to try to make sense of what has gone before.

But be warned: There are no overarching trends here. As is so often the case on the road, these last two years have been almost totally reactive: to insane swings in the price of fuel to the apparently endless cycle of boom-and-bust that dominates hotel development, and, of course, to the economic wave that has carried us from the relatively giddy times of April 2007 to our current…uh, well…to whatever it is we're living and working through.

Southwest's Steady Course
Even the nation's one financially sound U.S. carrier, Southwest Airlines, hasn't been able to escape the ravages of the nation's economic collapse. Its traffic is down about in line with industry-wide trends and it has taken the unprecedented step of trimming its overall capacity by 4 percent this year. And the airline's vaunted fuel-hedging strategy, which saved the carrier about $3.5 billion in the last decade, cost it money in the second half of 2008 as oil prices collapsed. But some things never change: Southwest is using the downturn to position itself as an alternative to the nation's mainline carriers. After decades of shunning some of the largest U.S. cities, it launched flights to Minneapolis last month, is scheduled to begin its first-ever flights into New York (via LaGuardia Airport) in June, and will serve Boston's Logan Airport in the fall.

United's Inexorable Decline
It's gone from worst to even worse than that at United Airlines, the most troubled of the nation's so-called "legacy" carriers. Once the nation's largest airline, United is hemorrhaging after a bungled mega-bankruptcy and years of management missteps. About 40 percent of what flies as United Airlines is subcontracted to regional airlines and much of the remaining service is actually code-share operations with its international partners in the Star Alliance. Every one of its union contracts becomes "amendable" next year (airline contracts never technically expire). Compared with the other legacy carriers, its cash reserves are small and there are few unencumbered assets to hock. And early next year, it will have to discuss cash-draining "holdbacks" with JP Morgan Chase, its credit-card processor. Operationally, there's no good news, either, since its once-profitable service to the Pacific Rim is deteriorating rapidly due to plunging yields to Asia and fresh competition on its Australia routes.

Fate of the Fourth Class
The worldwide collapse of premium-class traffic since last fall has had the expected effect: Airlines have stepped up their discounting in business class and more carriers are adding a fourth class, which is rather generically known as "premium economy." The discounting trend is both structurally strategic—the airlines now offer a range of discounts from three to 60 days before departure—and tantalizingly tactical, with sale fares slashing as much as 75 percent off the price of international business class. As for premium economy, Air France added the new cabin on three premier routes (from Paris to New York, Tokyo, and Osaka). But the fate of fourth class is far from secure. Even as Air France was debuting, OpenSkies, British Airways' boutique carrier, was renaming its fourth cabin as the "biz seat." The reason? Premium economy still exists in a computer-coded limbo, which makes selling it via the airline industry's omnipresent global reservation services difficult.

The Banking Blues and London Rediscovered
If I've been at all prescient in the last two years, it was the Run on the Bankers column that posted shortly after Lehman Brothers tanked last September. Exactly in line with the meltdown of the markets, bankers stopped flying, and that has caused the calamitous decline in premium-class airline revenue. It's been especially tough on British Airways, which is disproportionately dependent on premium flying on the NyLon (New York-London) route. And there's no doubt that BA (and London) are still suffering a year on from the disastrous opening weeks of Terminal 5 at Heathrow Airport in March 2008. The good news for those of us who love London? The British capital is cheap again for upscale American visitors, thanks to massive airfare and hotel discounts and the precipitous decline of the value of the British pound.

Counterintuitive Currency
Just before the world's economies shuddered, the U.S. dollar was at an unconscionable, unaffordable low ebb. But for reasons known only to the masters of the universe, the U.S. dollar has gained strength against almost all of the world's currencies as the American economy weakened. If you've got any discretionary income left, this will be a great summer to travel virtually anywhere in the world. The dollar is buying 20 to 50 percent more than last spring and summer. The only exception: Japan, where the dollar continues to languish at or below the 100-yen mark.

A Fee By Any Other Name
Still, it isn't all bread and dollar-denominated chocolates overseas. Banks and other financial institutions continue to raise the fees they charge when you use your ATM or credit card outside of the United States. The latest trick: Currency-exchange fees of 3 percent or more even if you use your own bank's ATM card to make a withdrawal from your own account at an overseas ATM owned and operated by said bank. Even financial institutions that continue to advertise fee-free ATM usage are adopting the currency gambit. One example: Charles Schwab Bank, whose print ads promise in big, bold type that there are "No ATM fees—we rebate all ATM fees from any ATM. Period." But as Schwab's fine print makes clear, "ATM free rebates do not include currency exchange fees or other fees." Some of the few truly fee-free ports in the storm are the credit cards and ATM cards issued by Capital One.

The Fine Print…
Allow me to end this column where I began in April 2007: I still believe the single best investment you can make in your on-the-road comfort and productivity is Priority Pass, the worldwide airport-lounge access program. The fees haven't changed, but the lounge network has grown by 20 percent, to more than 600 clubs in 300 cities.

Related Links
The Business-Travel Blues
Flying Fourth Class
The Commuter Conundrum

The Security Swamp

Tue, 07 Apr 2009 04:00:00 GMT

The name on my passport, my preferred form of travel identification, is Joseph Angelo Brancatelli. I was born on May 22, 1953. And I am a male.

I tell you these admittedly prosaic bits of personal trivia because I want you to know that I am not against giving this information to the Transportation Security Administration (TSA). And if you want to fly, you, too, will soon be required to disclose this data to the TSA, the lumbering, leaderless, secretive bureaucracy that has spent the years since 9/11 alternately keeping us safe and infuriating us.

Secure Flight, the official name of this latest bit of data mining by the federal bureaucracy with the power over your freedom of movement, kicked in last week in typical TSA style: suddenly, with virtually no public discussion and even fewer details about its implementation. According to the agency's press release, which is buried half-a-dozen clicks deep on the TSA website, Secure Flight is now operative on four airlines. Which airlines? The TSA won't say. When will Secure Flight be extended to other carriers? Sometime in the next year, but the agency won't publicly disclose a timeline or discuss the whys, wherefores, and practical details.

Before we can even discuss why a federal agency needs to know when you were born before it permits you to fly, let's back up and explain the security swamp that the TSA has created.

Born in haste after 9/11, the TSA was specifically tasked by Congress to assume overall authority for airport security and pre-flight passenger screening. Before that, airlines were required to oversee security checkpoints, and carriers farmed out the job to rent-a-cop agencies. Their work was shoddy, and the minimum-wage screeners were often untrained.

Despite some birthing pains and well-publicized missteps, the TSA eventually got a more professional crew of 40,000 or so screeners working the checkpoints. Generally speaking, the checkpoint experience is more professional and courteous now, if not actually more secure. In fact, despite rigorous employee training and billions of dollars spent on new technology, random tests show that TSA screeners miss as much contraband as their minimum-wage, rent-a-cop predecessors.

But the TSA's mission wasn't just passenger checkpoints. Congress asked the new agency to screen all cargo traveling on passenger jets. (The TSA has resisted the mandate and still doesn't screen all cargo.) Congress also empowered the TSA to oversee a private "trusted traveler" program that would speed the journey of frequent fliers who voluntarily submitted to invasive background checks. (The TSA has all but killed trusted traveler, which morphed into inconsequential "registered traveler" programs like Clear.)

Most important of all perhaps, both Congress and the 9/11 Commission wanted the TSA to get a handle on "watch lists" and other government data programs aimed at identifying potential terrorists before they flew. And nowhere has the agency been more ham-fisted than in the information arena.

The TSA's first attempt to corral data, CAPPS II, was an operational and Constitutional nightmare. The Orwellian scheme envisioned travelers being profiled with huge amounts of sensitive private data—credit records, for example—that the government would store indefinitely. Everyone—privacy advocates, airlines, airports, civil libertarians and certainly travelers—hated CAPPS II. The TSA grudgingly killed the plan in 2004 after some high-profile data-handling gaffes made its implementation a political impossibility.

While this security kabuki was playing out, the number and size of government watch lists of potential terrorists ballooned. Current estimates say there are as many as a million entries on the various lists, although the TSA argues that only a few thousand actual people are suspect.

But how do you reconcile the blizzard of watch-list names—some as common as Nelson, which has been a hassle for singer/actor David Nelson of Ozzie & Harriet TV fame—with the actual bad guys who are threats to aviation?

Enter Secure Flight, a stripped-down version of CAPPS II. The TSA's theory: If passengers submit their exact names, dates of birth, and their gender when they make reservations, the agency could proactively separate the terrorist Nelsons from the television Nelsons, and guarantee that the average Joe—or, in my case, the average Joseph Angelo—won't be fingered as a potential troublemaker.

Theoretically, giving the TSA that basic information seems logical enough. But the logistics are something else again: Airline websites and reservations systems, third-party travel agencies, and the GDS (global distribution system) computers that power those ticketing engines haven't been programmed to gather birthday and gender data. And Secure Flight's insistence that the name on a ticket exactly match the name on a traveler's identification is also problematic: Fliers often use several kinds of ID that do not always have exactly the same name. (Does your driver's license and passport have exactly the same name on it?) Many travelers have existing airline profiles and frequent-flier program membership under names that do not exactly match the one on their IDs.

Another fly in the Secure Flight ointment: While the TSA is assuming the watch list functions from the airlines, the carriers will still be required to gather the name, birth date, and gender information and transmit it to the agency. Meshing the airline computers with the TSA systems has been troublesome in the past and, from the outside, it looks like very little planning has been done to ensure that Secure Flight runs smoothly.

The TSA "announced this thing in 2005 and, as usual, they announced it without considering practical realities," one airline executive told me last week. "And any time you deal with the government on stuff like this, it's a nightmare."

What can you do about all of this? For now, very little. Settle on a single form of identification for all travel purposes and make sure that you use that name exactly when making reservations. Check that the name that airlines have for you—on preference profiles, frequent-flier programs, airport club memberships, etc.—matches the name on your chosen form of identification.

Then wait for that glorious day when the TSA solemnly and suddenly, and almost assuredly without advance warning, decides that Secure Flight is in effect across the nation's airline system.

The Fine Print…
You may wonder why I haven't asked anyone from the Transportation Security Administration to comment on Secure Flight. The reason is simple: No one is really in charge of the agency. The Bush-era administrator, Kip Hawley, left with the previous president and the Obama Administration has yet to name his successor. Everyone, from acting administrator Gale Rossides on down, is a Bush holdover. And no one seems to know what President Obama or Homeland Security Secretary Janet Napolitano thinks about the TSA, Secure Flight, or any airline-security issue.

Related Links
Under the Radar
An Airline That Made Money?
Europe Investigates Trans-Atlantic Airlines

State of Independence

Tue, 31 Mar 2009 04:00:00 GMT

The moment I first laid eyes on the Greenbrier Resort in 2004, I blurted out what I thought was an incredibly obvious observation: "This," I said about the 6,500-acre, 720-room hideaway in rural West Virginia, "will make a great Marriott one day."

My guide, who worked for an outside PR firm hired to revive the resort's flagging reputation, was aghast. She gamely protested the accuracy of my first impression and insisted the Greenbrier was above the unabashedly commercial, cookie-cutter nature of chain hostelries. But as I wandered around still-icy golf courses, inspected florid guestrooms and outdated public areas, and noted archaic house rules (the only dining room required a jacket and tie), I was convinced that the Greenbrier would never survive as an independent.

Well, the 230-year-old lodging icon has succumbed. The owner, railroad company CSX Corp., put the Greenbrier into Chapter XI bankruptcy in late March, claiming $90 million in losses during the last six years. And CSX promptly called in—you guessed it—Marriott. CSX is so desperate to unload the hotel that it will provide Marriott with as much as $50 million to operate the Greenbrier during the first two years. Marriott will then buy the resort within seven years for between $60 million and $110 million. Pending bankruptcy court approval, the deal could close by summer.

Now, no one is aghast at the prospect of a chain running the Greenbrier. The unions seem amenable to Marriott's arrival. West Virginia governor Joe Manchin publicly applauded the deal. Newspapers statewide have cast Marriott's arrival as a "rescue." And locals in hardscrabble Greenbrier County support anything that will save the resort's approximately 1,300 jobs.

Like all luxury hotels that have hit the economic and emotional skids, the Greenbrier's tale is unique: CSX has been a distracted and ham-fisted owner, battling both the hotel's unions and the resort's former president, who sued for $50 million. The sprawling resort is physically isolated and expensive to operate. (CSX recently spent $50 million on improvements in a misguided attempt to regain the fifth Mobil Guide star it lost in 2000.) And despite the loyalty of generations of repeat visitors and fanatic golfers, the Greenbrier was disproportionately dependent on corporate meetings, a travel category that has been devastated by the weak economy and the "AIG Effect."

But the Greenbrier's sale to Marriott also raises a more universal question: Can any luxury hotel or resort thrive—or even survive—as an independent property? In a world where a handful of global hotel chains—Hilton, Marriott, Starwood, Hyatt, Accor of France, and InterContinental of Britain—dominate the lodging market, can a single property, no matter how famous, stand alone?

At least on the surface, the answer is no. About half of the properties on the Condé Nast Traveler Gold List and half of those that earn the prestigious five-star rating from the Mobil Guide are part of chains now, albeit luxury and ultra-deluxe operators such as Four Seasons or Fairmont of Canada; Mandarin Oriental and Peninsula of Hong Kong; Aman Resorts of Singapore; and Taj of India. The Blackstone Group, which owns many of the world's best-known luxury independents as well as Hilton Hotels, is building a deluxe brand too. It is aligning its independents like the Boca Raton Resort in Florida and the Boulders in Arizona with the Waldorf Astoria Collection, which was created by Hilton using the cachet of its eponymous New York hotel.

Other luxury brands have huge corporate parents too. St. Regis is owned by Starwood, best know for its Westin, W and Sheraton hotels. Ritz-Carlton is owned by Marriott. And some luxury hotels you may think of as independent are actually part of a chain. The Plaza in New York, which reopened last year, is managed by Fairmont. The Pierre, which reopens in New York this spring, is operated by Taj. The newly renovated Mauna Kea Beach Hotel on the Big Island of Hawaii is run by Prince Hotels of Japan. The Dorchester in London? It's part of the Dorchester Group, which is aligned with the Beverly Hills hotel, the Plaza Athenee in Paris, and the Principe di Savoia in Milan.

"Chains always outperform" independent hotels, says LodgeWorks' Tony Isaac, a man who knows the industry from both sides of the fence. LodgeWorks manages hotels in the Hyatt and Hilton chains, helped create the Residence Inn brand (now owned by Marriott), and is building its own Hotel Sierra chain.

But Isaac has just built an upscale independent hotel too. The Avia opened in January in Savannah and was promptly named a great romantic getaway by Travel & Leisure magazine. Why does a guy who admits chains outperform independents go ahead and open an independent anyway?

"Chains add about 10 points to your occupancy rate. But if you're part of a chain, you pay 12 to 14 percent for the frequent guest plan, the reservation service, and other brand programs," he explains. "If you're in the right market, it's not too much of an economic disadvantage to be an independent—and then you have the flexibility to do what you wish and manage as you choose."

That's the argument made by Sean Hehir, managing director of Trinity Investments, a real estate firm that purchased Honolulu's iconic Kahala Resort in 2006. The beachfront property opened as a Hilton hotel in 1964 and spent most of its recent history as a Mandarin Oriental. But Hehir believes the Kahala has unique advantages that appeal to the luxury traveler who isn't interested in brands.

"We're not subject to a brand policy that may not have any relevance to a particular property," he says. "We manage for the long-term best interest of us as owners and the luxury travelers as guests."

But even Hehir admits you need the right combination of factors to survive as an independent in today's chain-dominated world. In the Kahala's case, it's the unbeatable location on a sandy beach in Honolulu's choicest neighborhood and the fact that another Trinity principal, Chuck Sweeney, has a long history as a hotel manager. (Sweeney founded the company that became Embassy Suites, now a Hilton brand.)

For James Bermingham, managing director of the spectacular Montage Resort in Laguna Beach, the advantage is a laser-like concentration on guest services and proximity to wealthy, sophisticated travelers in Southern California. Both the five-year-old Laguna Beach property and the new Montage in Beverly Hills (it opened last fall) can tap into millions of upmarket buyers within 60 miles of the resorts.

"The 'staycation' trend helps Montage," he says. "Guests who want an extraordinary luxury experience very close to home see the Montage properties and they know they won't be getting a chain hotel."

The Fine Print…
Most observers think fewer luxury hotels will still be independent after the current recession, but there is a notable dissenter. Michael Matthews, who has been the general manager of top-notch chain hotels (the Ritz-Carlton in Hong Kong) and independent deluxe resorts (the Ventana Inn in Big Sur) thinks high costs will drive some luxury properties out of the major chains. "If you're 'flagged' as a chain, you have no independence at all," he says. "A lot of hotels will drop the flag and take the 14 percent fees they pay and use that money to do what they think makes most sense for their own hotel."

Related Links
Starwood Fights Hilton Over Zen
Bargain Bin
Heartbreak Hotels