star-telegram.com: Mitchell Schnurman

Mitchell Schnurman: Questions outnumber answers at RadioShack

Sun, 11 May 2008 08:19 CDT

By Mitchell Schnurman

Is Julian Day stripping down RadioShack for a sale?

Since Day arrived almost two years ago as a heralded turnaround artist, he's ruthlessly cut people, stores and employee morale. That produced rising profits and cash flow, and a serious side effect: steadily declining same-store sales.

In the latest quarter, gains from the skin-tight cost controls appear to have hit a wall. Not even cost-cutting could stave off a decline in the bottom line.

That makes it fair to wonder about the endgame for RadioShack. Retailers can't simply cut their way to prosperity, even if they're as aggressive as Day, so what's next if RadioShack can't figure out a way to grow again?

Rumors have circulated that Dell might buy the chain to get a national footprint to hawk its computers. And when Blockbuster bid for Circuit City in April, there was more speculation about RadioShack's future as an independent company.

These notions gain some currency, because Day has eliminated so much of RadioShack's corporate structure. Payroll and commissions alone were slashed by 20 percent last year, and RadioShack reduced overhead by another $31 million in the first quarter. Again, job cuts at headquarters and the stores accounted for most of the savings.

Now Day is signaling it's time for a change at RadioShack and a new focus on growing revenues. In November, he hired a merchandise manager from Sears, and an analyst expects a marketing chief to be added soon.

Better late than never, but it's hard to understand why a retailer would delay such key hires for so long. Even if cost-cutting is the priority, you can't build a sustainable retail operation without a strong merchant in place.

Meanwhile, the company has lost much of its top talent through layoffs and defections, especially in merchandising and marketing.

And after 22 months on the job, Day still has not articulated a clear marketing strategy for RadioShack -- not to most employees, investors or the press. And people outside his inner circle have no idea how he's trying to differentiate RadioShack from the competition.

Maybe more details will come Thursday, when the company holds its annual meeting in Fort Worth, and Day speaks in public. Shareholders rarely raise a fuss in such settings, but Day's glow has faded in the past 12 months, as the stock price lost more than half its value.

Early in his tenure, Wall Street cheered Day, as RadioShack's stock soared from less than $14 to $35. Investors were betting that the new chairman and CEO would boost RadioShack's cash flow and deploy it for a productive purpose.

As that hope faded, the focus has returned to RadioShack's business itself and the ground it's losing to Best Buy, Wal-Mart and others that sell consumer electronics. The company reported strong sales of GPS devices and storage media, and first-quarter wireless sales actually rose a bit -- up 0.7 percent.

But in every other category, sales fell again, repeating the dominant theme under Day so far. Accessories declined 2.3 percent; personal electronics, which include iPods, fell 1.6 percent; home products, including phones, audio-video and TV satellite systems, were down 16.5 percent; batteries, historically a cash cow, fell 4.8 percent; services like prepaid wireless time and warranties, were down 7.9 percent; kiosk sales dropped 10.5 percent.

RadioShack's stock closed at $14.99 Friday, about a dollar higher than when Day took over in July 2006. Analyst ratings put it among the lowest-ranked companies on the S&P 500, at No. 490.

This month, one analyst upgraded RadioShack to a "buy" -- the only such recommendation among 16 analysts surveyed by Bloomberg. He cited the new hires, including an operations executive added from Blockbuster.

Day doesn't talk to reporters and has just one conference call a year with analysts, so his goals for the company can be tough to decipher. In his letter to shareholders in the recent annual report, he acknowledges the concern about declining sales.

A year ago, he said that "sales increases are good when they are profitable, and bad when they are not." He stands by that, he wrote: "But I would also contend that we have now achieved a robust economic model for your company -- a secure and profitable base on which we now need to build profitable sales."

He cited the recent executive hires and says he's looking for more talent "to reflect our desire to grow profitable sales."

Who's to argue with a goal of profitable sales? But that's a simplistic explanation, even for an annual report, and hardly a business strategy by itself.

Rising cost of energy hits south hardest

Sun, 11 May 2008 09:14 CDT

By MITCHELL SCHNURMAN

You don't have to drive a truck to feel the pain of higher energy prices.

And don't blame gasoline alone. Electricity and natural gas prices are higher, too. Bigger houses, flat-screen TVs and suburban sprawl also play roles in the squeeze.

Add it up, and households in the South are spending 10.6 percent of family budgets on energy, which is the biggest bite in at least 25 years.

By comparison, energy accounted for 7.2 percent of family spending in 2002, according to a recent study by the Bureau of Labor Statistics.

Since that time, we crossed the threshold into real economic pain -- the kind of pain that changes behavior. The question is whether the changes will stick and how far consumers may go to cut their energy bills.

Large SUV sales plunged 28 percent nationwide in the first quarter, and four-cylinder cars became the rage again. That contributed to a decline in gasoline consumption nationwide, with demand falling for three straight months. The government predicts that annual gas usage will decline for the first time since 1991.

This indicates that people are responding to higher energy prices. There are anecdotes about more people turning to mass transit, car-pooling, turning up the thermostat and putting in extra insulation. Home builders also report that buyers are asking for money-saving appliances and other green features.

Even two presidential candidates are touting a gas-tax holiday for the summer.

"After three years, people are starting to feel the impact of rising energy prices," says Cheryl Abbot, the BLS regional economist in Dallas, who recently finished a study on energy spending in the South. "In the past, we used to gripe about it a lot, but we could afford it."

Her report, published in the April issue of the Monthly Labor Review, helps explain why many consumers didn't bother with energy efficiency in the past. From 1984 to 2004, energy expenses steadily took a smaller share of household spending, even though gas prices occasionally spiked.

Prices generally fell back, she says, reinforcing the notion that increases were temporary. Perhaps that gave people the confidence to buy gas-guzzling SUVs and big homes, and to outfit them with the latest electronics.

For the past 20 years, the Census Bureau's Southern region -- 16 states that include Texas, Florida and Virginia -- has been the nation's biggest energy hog. That comes with the territory, when a place has high growth, hot summers and long commutes.

But if the sprawling lifestyle of the South demands more energy, it also makes the region more susceptible to price swings. In 1984, household spending on energy in the South was 0.4 percentage points higher than the United States as a whole; in March 2008, Abbot says, spending in the South was 1.1 percentage points higher.

Abbot's data are taken from two BLS surveys that don't break out numbers for Texas, but she says the trends fit. Separate data from the Energy Information Administration shows that Texas spends more on energy than any state, topping California and doubling the total spent in New York.

"We use more gasoline, we drive more miles, and we have a totally different view of long distances," she says, contrasting Texas with the clustered cites in the Northeast.

That means the South takes a bigger hit from big increases in crude oil, now trading above $120 a barrel and setting new records. On Tuesday, one analyst predicted that crude could spike to $200 within two years.

While crude prices directly affect gasoline at the pump, natural gas also tends to move in a parallel direction. That's another issue for the South, because natural gas is widely used to produce electricity in the region.

In Texas, residents started feeling the sting of rising electricity rates several years ago. But Abbot's study found a contrast between gasoline and electricity, with electricity demand influenced more by lifestyle than price.

In the past two decades, the average size of a home in the South grew by 43 percent, more than the national average. And there was a surge in the number of computers, TVs, refrigerators and other appliances in the home.

From 1984 to 2006, the price of electricity rose 56 percent in the South, but spending on electricity grew by almost double that amount. So even if new appliances were more energy efficient, those gains were swamped by the sheer increase in units.

Leave the future alone

Wed, 07 May 2008 08:58 CDT

By Mitchell Schnurman

We can't turn back the clock, but two candidates for the board of Tarrant County College want to stop it.

Jerry Pikulinski and Joe Hudson say they'd try to halt construction of the groundbreaking campus in downtown Fort Worth, which has been under way for more than a year. Then they'd sell the buildings and land and look for space to rent.

This proposal is impractical -- even wacko -- given that TCC has invested tens of millions of dollars and passed a major hurdle, submitting its plan to the Army Corps of Engineers for approval. Don't forget, too, that thousands of prospective students near downtown are ready to flock to the campus when it opens in a few years.

Think they'd be excited about going to class in a nondescript building?

Fortunately, there's no threat of scrapping the campus project, even if Pikulinski and Hudson are elected Saturday. (They face incumbent Kristin Vandergriff and Conrad Heede, respectively, both of whom want to complete the campus as planned.) TCC's seven-member board of trustees has supported the project unanimously, despite rising costs.

Still, the election is meaningful, because the campus is a test of the big idea and the political will to see it through.

It's also the dominant issue in the campaign, overshadowing the district's progress in eliminating debt, setting ambitious goals for minorities and creating scholarship funds for many students.

Mistakes have been made on the downtown campus, and the estimated costs have more than doubled to about $300 million. But in the future, when it's thriving and serving as a linchpin for an expanding downtown, people won't be whining about cost overruns.

More likely, they'll be celebrating the college district's vision and its willingness to step up for the community at large. And throughout the country, Fort Worth will be recognized for how it brought affordable higher education into the heart of an urban center.

Then we'll mock the idea of stopping the campus in midconstruction, just as we chuckle at the notion that some folks once proposed bulldozing the Tarrant County Courthouse.

Courthouse controversy

Mike Moncrief, now Fort Worth's mayor, was county judge in 1981, when he spearheaded the courthouse restoration. Initially, taxpayers were supposed to pay about $3 million, but the final cost topped $10 million.

Predictably, controversy erupted. There was criticism of the county's management of the project and a grand jury investigation into surplus materials that disappeared. Jurors even examined antique furniture in Moncrief's office.

At one point, Moncrief urged schoolchildren to collect pennies to offset the rising costs, and private donors ultimately gave $200,000. But when the building reopened in 1983, it won rave reviews.

Perhaps the most telling quote came from then Mayor Bob Bolen, who thanked county leaders for stepping forward and filling a void.

"We probably wouldn't have voted to do it," Bolen said of city officials, "because we couldn't stand the heat."

Today, Moncrief acknowledges how intense the debate became: "I left some of my hide on those courthouse walls," he said.

Courage, commitment

Sometimes, leaders have to buck up and take the pressure and do what they believe is right. That takes political courage and commitment to a vision.

The campus opponents have a legitimate point of view -- that TCC simply shouldn't spend so much on a single location -- but they don't offer a creative alternative.

Airline mergers offer few benefits

Sun, 04 May 2008 09:10 CDT

By MITCHELL SCHNURMAN

Consider the problems that American Airlines faces right now: a slowdown in the national economy, record fuel prices, deepening losses, a sinking stock price, the threat of regulators grounding more flights and an angry labor force that's staging a public revolt.

Sound like a good time for a merger?

Consolidation is all the talk in the airline industry these days, with key players arguing that combining and shrinking is the only way to survive the latest shakeout. This month, Delta and Northwest announced plans for a merger, and last weekend, Continental rejected an overture from United, which has reportedly moved on to courting US Airways.

Fortunately, American hasn't been drawn into the game, and its restraint is both admirable and sensible.

There's plenty of pressure to do something from Wall Street, which flourishes on dealmaking and the rising stock prices that go with it. But American is already the world's largest airline, with great service throughout the United States, Latin America and Europe.

And at the moment, American executives can't afford to be distracted by the elusive promise of growth.

CEO Gerard Arpey and his team already have a formidable assignment: finding common ground with their employees. That means negotiating new contracts with each union, keeping a lid on costs and restoring the morale that helped revive American a few years ago.

Dealing with that elephant in the room should take precedence over acquisition ambitions. Especially when pilots are running attack ads against the company, and flight attendants are urging senior executives to resign over their bonuses.

Air travel is still a service business, and American has to make up a lot of ground on that front. An acquisition makes that harder, not easier.

"American doesn't want a merger, and it doesn't need one," says longtime industry analyst Mike Boyd of the Boyd Group in Evergreen, Colo. "It can stand on the sidelines and let the others fight with their labor unions and try to integrate their computer systems. American can be free to concentrate on its business."

The Fort Worth carrier has been listening to proposals from other airlines, according to news reports, and there's no harm in that. The conversations could lead to an expanded airline alliance, which is an easy way to boost revenue and broaden the network. Or it could position American to pick up routes that have to be sold off as part of another merger.

But all that is playing around the edges, which is where American should be.

Mergers have been a disappointment in the airline business, and they've generally delivered less than promised across all industries. Many are rightly dubious about one of the key goals of the consolidation wave -- to raise ticket prices.

With fewer giant airlines, it will be easier to cut flights and increase prices, the rationale goes. But discounters and others are usually quick to move into any market that gets out of balance and offers an opening.

"The constant threat from competing airlines increases the challenge of raising fares or reducing costs -- the very benefits consolidation is supposed to produce," says a recent report by Moody's Investors Service that casts doubts on the movement.

American knows firsthand about the disappointment of acquisitions. It bought AirCal in 1986, aiming for a stronger presence on the West Coast. Soon after, carriers flooded into the market, boosted capacity and drove down prices. American was soon bleeding red ink at its hub in San Jose, Calif.

By the early 1990s, it was cutting service there as part of its "Transition Plan" to focus on more profitable routes.

In late 1998, American bought Reno Air, in part to correct the mistakes of AirCal. But pilots objected to the impact on their seniority lists and the threat from the growth of regional jets. Within a few months, 2,500 American pilots called in sick, and hundreds of flights were canceled.

A judge slapped the pilots union with a $45 million fine for damages from the sickout. By then, everybody connected with American had taken a hit, and labor relations deteriorated further.

In early 2001, American bought the assets of bankrupt TWA for $742 million in cash, and inherited 20,000 workers and $2 billion in debt. By the end of the year, the economy was in the tank and 9-/11 had forever changed air travel. American, like all airlines, had to shrink.

There is more than one way to go green

Sun, 04 May 2008 09:10 CDT

By Mitchell Schnurman

Like most home builders these days, Frank McCaslin is especially eager to sell his stock of finished houses. But he's passing on the chance to add an environmental seal of approval from the local builders association -- a label that declares Green Built North Texas.

He's not down on going green. He just believes that buyers are most interested in the green that saves money, especially as utility prices soar. So he focuses on simple ways to cut electric and water bills without worrying about issues like salvaging drywall scraps.

"Everything I use is off the shelf," McCaslin said, "and people save a lot."

Conservation used to be primarily a matter of social conscience, but higher energy costs have made it a financial imperative, too. Texas' scorching summers and high electric rates put our utility spending among the highest in the country.

The home-building industry is touting green initiatives here and nationwide, hoping to spark interest in its innovations and help break a terrible sales slump. For consumers, the trend is both promising and confusing. Energy efficiency can cut operating costs significantly, but home buyers have to decide what part of green building matters to them, what's worth the price and, as with any hot trend, what's mainly hype -- known as greenwashing.

McCaslin's approach is old school. He has been building custom homes in Tarrant County since 1976, and energy efficiency is a cornerstone of his sales pitch. He's settled on a dozen techniques that work well in our climate and deliver a measurable return.

It's not complicated; by relying on his experience and common sense, he's found applications that pay off.

That's far simpler than programs, like Green Built, that have the same goal and are establishing national and local standards for green building. They use point systems and a cafeteria-style approach that lets builders and buyers pick among strategies to score bronze, silver or gold designations.

Adding solar panels, for instance, brings a lot of extra points in the ratings from the National Association of Home Builders. And in a North Texas example, Green Built builders can choose among three ways to reduce waste: a rainwater catch system, high-performance fixtures or a drip-irrigation system.

The formal systems have two objectives: to build eco-friendly homes that use fewer resources and to develop a green brand that resonates with buyers.

About 70 builders in North Texas have agreed to adhere to the Green Built standards, including Wall Homes in Arlington, which signed up last week. President Steve Wall said it was the right thing to do and said it would cost less than 1 percent of the home price to meet the rules; that's less than you might expect, because many builders are already using green building techniques.

Still, Wall said, "It'll probably to be difficult to recover all of the costs" because most buyers are unwilling to pay a premium to be green.

The contrast between McCaslin's approach and a formal rating system illustrates the challenge for consumers. It's tough to determine what works best, and new technologies are emerging regularly, often with claims of fantastic savings.

Formal green programs often cost more and deliver less than promised, one researcher says, while low-tech, even obvious moves -- turning off computers at night, for instance -- produce good results.

"Cookie-cutter approaches have a real marketing advantage because everybody can claim they're green," said Todd Myers, environmental director of the Washington Policy Center in Seattle. "But a green seal may be as much about marketing as saving money."

For the research group, he looked at school construction and energy bills to compare the effects of green building. That's more reliable than comparing homes, because sizes and energy use are similar among schools. He found that green schools spend more on energy, in part because they have larger windows (to let in more natural light) and extra systems to recycle air (required for airtight buildings).

A Tacoma, Wash., middle school, built to a high green standard, was projected to save 35 percent on energy. But Myers says it used 25 percent more energy than the average Tacoma middle school.

In the best cases, building supervisors applied their experience and focused on improvements that had the most impact, Meyers said. And on mandates that didn't offer much promise, they did the minimum.

In the past, most home buyers didn't think about green building. Even today, given a choice between extra insulation in the attic and hardwood floors, most choose amenities they see. But the green movement represents a great opportunity for builders because new homes have a decided edge in the efficiency race.

Compared with retrofitting an existing house, it's relatively inexpensive in new construction to upgrade windows, air conditioners and plumbing and install radiant barriers in the walls and attic. Some cities are mandating green building standards, but it's the builders and entrepreneurs who are innovating.

Texas' edge in luring firms? Growth

Wed, 23 Apr 2008 06:56 CDT

By MITCHELL SCHNURMAN

Texas isn't the center of the business universe, but it's getting closer. For the first time, more Fortune 500 companies are based here than in any other state, according to the magazine's annual rankings, released Monday.

It's customary to assume that Texas is rising because land is cheap, unions are weaker, there's no state income tax and we dole out tax breaks like water.

All that may be true, but the cost of doing business isn't the state's decisive edge. One study puts our costs just below the national average because of high electric bills. And we continue to lag shamefully on quality-of-life measures like high-school graduation rates, crime and poverty.

So what's most important to Texas' becoming a magnet for business? This is where the growth is.

The state's population has been rising steadily for almost three decades, fueled by migration and the higher birthrate of younger residents. Since 2000, North Texas has added an average of about 180,000 residents a year. Naturally, business has followed the growth of the Sun Belt and added to the momentum.

It also helps that Texas has four distinct, fast-growing metro areas: Houston, Dallas-Fort Worth (second and third, respectively, as home to Fortune 500 companies), San Antonio and Austin.

From American Airlines' move to Fort Worth in the late 1970s to J.C. Penney, Exxon and, most recently, Comerica, big corporate players continue to flock here.

When people and companies move to Texas, they almost always cut costs and find it easier to do business because of the state's central location. Others also move here to expand their potential market and establish a foothold in a growing region.

All that attracts more players and spurs local business creation. Tech startups, service companies and medical centers have grown into some of the largest employers. And most years, Texas cities are among the leaders nationwide in creating jobs.

Albert Niemi Jr. of Southern Methodist University has studied regional changes and business relocations for three decades, but he likes to track an informal measure: the attitudes of incoming freshmen.

SMU surveys students every year, asking why they selected the school. Native Texans cite the opportunity for scholarships, he says. But among those from other states and countries, Niemi says the No. 1 factor is the local economy and the chance to work here after graduation.

"Their parents are telling them that they can get a good job in Texas," said Niemi, dean of SMU's Cox School of Business.

He also cites past news reports about New Englanders sending more students to colleges in the Southeast and Southwest. That's meaningful because the Northeast is home to many of the finest universities in the country.

People in their 20s and 30s who want to leave the Northeast and Upper Midwest used to head to California first. Now, he says, many are making Texas the top destination.

"We're getting the future because the job growth is more vibrant here," Niemi said.

Such growth creates problems, particularly in air quality, traffic congestion and infrastructure. But most communities would rather deal with those pains than vacant buildings, a declining population and falling tax revenues.

Some of Texas' gains in the Fortune 500 have come at the expense of California. In the past four years, Fluor Corp. (No. 148) and Tenet Healthcare (No. 280) moved their California headquarters to North Texas.

New York state ranks second in the number of Fortune 500 companies -- 55 to Texas' 58. But in the larger universe of the Fortune 1,000, Texas' advantage swells. It's home to 113 such companies, compared with 103 in California and 93 in New York.

In most surveys on state business climates, Texas ranks near the top. It has been rated No. 1 for the past three years in a poll of CEOs by Chief Executive magazine, which gives the state high marks for its tax and regulatory policies. In contrast, California has been ranked last for the past three years.

Texas is ranked No. 8 by the Tax Foundation, scoring lower on tax rates for corporations, sales and property.

It's time to invest in our state's colleges

Sun, 20 Apr 2008 08:28 CDT

By Mitchell Schnurman

For many people, college has become unaffordable. Is it becoming inaccessible, too?

Not at most schools, which still admit almost two-thirds of qualified applicants. But in-state students whose hearts are set on the University of Texas at Austin had better be in the top 10 percent of their graduating class.

Otherwise, they have a better chance of getting into Yale or Harvard.

This is a dramatic shift from even a decade ago, when 73 percent of applicants were admitted to the state's flagship university. Now, it's more like 4 in 10 -- and far, far fewer if you're not a top 10-percenter.

This reality has forced scores of Texas students and their parents to adjust their ambitions. More than a few are taking their money to big state schools like LSU, Arkansas, Georgia and Oklahoma, and research suggests that many are unlikely to return to live here.

Much of the debate on this topic centers on the top-10 law and how it's crowding out some excellent students who are also class presidents or state band champs. But there's a broader, more crucial issue at play: How do we nurture enough great schools so students believe they have a good alternative to UT, Texas A&M and Rice?

"This capacity crisis is the canary in the [coal] mine," Bill Powers, the UT president, said during a telephone interview last week. "It's telling us that we don't have enough high-quality capacity at our public universities in Texas."

The state's population is growing in size and sophistication, and that alone justifies a significant improvement and expansion in universities. That's expensive, of course, but such an investment would keep more Texas talent in the state while also helping recruit companies and highly educated workers. It would attract more federal research dollars, too, an advantage that California and Massachusetts have long enjoyed.

Because of Texas' size, growth and pockets of wealth, it can legitimately aspire to become a leading economic and cultural center. But it's hard to imagine reaching that goal without increasing the quality and depth of our colleges.

Texas has many strong schools, both public and private. They're growing and getting better, thanks to the general increase in college applicants nationwide, and perhaps because the 10 percent law has pushed some strong students their way.

But the perception persists that UT, A&M and Rice are significantly better, and those three are indeed rated as the state's top research schools.

If others narrow that gap, that would take away some of the sting of the top-10 law -- or whatever merit system is used to screen out many applicants at UT. More students who aren't accepted at their first choice may be mildly disappointed, rather than devastated, Powers said.

He points to the University of California system as an example. When students don't get into UC-Berkeley (where he graduated with a chemistry degree in 1967), they may be accepted at UC-San Diego or UC-Irvine.

"They're disappointed, but they still feel like they're going to a great school," Powers said.

California does have a beautiful coastline, dotted with public universities and a lot more per-capita funding for higher education.

In Texas, education leaders have designated seven emerging research universities, including two large schools: Texas Tech and the University of Houston. At UT-Dallas, President David Daniel has proposed that lawmakers offer incentive funds to give each school a fair shot at increasing its stature.

The state could provide matching funds for merit-based scholarships, graduate-student fellowships and endowed professorships, he says. This would limit political fights over which schools get new money and reward school leaders who find a way to attract top talent.

Powers tried to get the Legislature to amend the 10 percent law last year, and he's staying on the case. He proposes limiting the guaranteed acceptances to half the freshman class; the rest would be selected on traditional criteria -- class rank, sure, but also SAT scores, leadership, outside activities and other traits.

Eventually, UT-Austin may end up with a freshman class in which nearly everyone is ranked in the top 10 percent. That has already happened at UC-Berkeley and UCLA, but those schools don't grant automatic admission to a 10-percenter, and they don't consider class rank only.

The quality of the applicants simply rose, because the size of the applicant pool exploded. UT-Austin has seen a surge, too: Ten years ago, 16,797 applied to the flagship, officials said; this year, the number was 29,223, an increase of 74 percent in the past decade.

Circuit City bid could be a big misstep

Wed, 16 Apr 2008 06:15 CDT

By MITCHELL SCHNURMAN

Blockbuster shocked Wall Street on Monday with a billion-dollar bid for Circuit City, but this isn't the first time the Dallas video-rental chain has chased consumer electronics. The last experiment didn't end well.

Seven years ago, Blockbuster teamed up with Fort Worth-based RadioShack on a store-within-a-store concept, and they predicted great things.

"The intent of the alliance is to create a full-service, home-entertainment destination within Blockbuster," the companies said in a news release.

Blockbuster's top executive emphasized the marketing strength of "neighborhood, one-stop shopping," and RadioShack's CEO called the deal "an enormous opportunity for accelerated growth."

RadioShack said it could add 10,000 jobs, and one analyst predicted an extra $1.3 billion in annual sales. The stock prices of both companies rose on the news.

They soon launched the program at 130 Blockbuster locations, with plans to roll out the remaining 5,000 or so stores the following year. But within six months, RadioShack pulled the plug, saying the venture wasn't profitable. It took a $3 million charge.

"There are more cost-effective ways to extend our reach," Len Roberts, then RadioShack's CEO, told The Wall Street Journal.

Blockbuster's plans for Circuit City differ in significant ways -- foremost, it wants to be the owner, not partner, and that translates into a much firmer commitment. The acquisition would also let Blockbuster hawk monthly subscriptions at Circuit City, which would spur revenue.

That's an expensive way to grow, however, and shows how much the company is willing to stretch to reinvent its slowing business. Cable companies, online players, big-box retailers, kiosk operators and even iTunes are chipping away at Blockbuster's market.

They pose a serious challenge, as evidenced by a stock price of $2.80 a share on Tuesday, down from more than $16 four years ago.

But Blockbuster's aggressiveness doesn't mean customers will clamor for pricey high-def DVD players or flat-screen TVs from their rental stores. And why do Blockbuster execs, led by turnaround CEO Jim Keyes, believe they can take on Best Buy, Wal-Mart, Costco and the other heavyweights in the industry?

Blockbuster may be a well-known brand, but competition in the space is brutal, and the landscape is littered with retailers that didn't cut it. Maybe that's why investors were so down on the Blockbuster proposal.

"What are we missing?" wrote analyst Gary Balter of Credit Suisse, adding that he doesn't see "what either company gains from combining a poorly positioned large store chain with a poorly positioned smaller store chain."

Unless Blockbuster is really aiming for the cash on Circuit City's books, Balter wrote, which would make this a financial move, rather than operational.

Analyst Michael Pachter of Wedbush Morgan Securities has a strong "buy" recommendation on Blockbuster but fears management will be distracted now. His report on Blockbuster's bid is titled "Snatching defeat from the jaws of victory."

Blockbuster's stock fell 10 percent Monday, and before the announcement, it had already declined 48 percent in the past year. Circuit City's stock got a bump Monday, but it's still down 79 percent in the past 12 months, and its 2007 losses are even larger than Blockbuster's.

RadioShack's conclusion -- that there are more cost-effective ways to boost revenues -- seems instructive now. RadioShack was planning to invest up to $300 million to build boutique stores in Blockbuster and agreed to pay a licensing fee and percentage of revenue.

In contrast, Blockbuster proposes paying up to $1.3 billion in cash to acquire Circuit City, which would be twice Blockbuster's market value. And because it would close an unstated number of stores between the two companies -- a key part of the strategy is to cut costs -- it faces some steep one-time charges.

Blockbuster's bid is not a hostile takeover, but more of a trial balloon. It's been talking with Circuit City management for a few months and wanted more financial details so it could decide whether to make definitive bid. Circuit City has balked, in part because it doubts that Blockbuster can raise the funds for the deal; Blockbuster is hoping shareholders will push Circuit City to be more cooperative.

Keyes and his management team took over an ailing Blockbuster last year and have made real progress. They cut costs, raised prices and started exploring ways to make the bricks-and-mortar stores pay off. The company said it will report a $30 million profit for the first quarter after losing $49 million in the same period a year ago.

FAA needs common sense on air safety

Sun, 13 Apr 2008 08:15 CDT

By Mitchell Schnurman

Now that the Federal Aviation Administration has shown some teeth, how about a sense of proportion?

Last week's fiasco with American Airlines could have been avoided -- and without undermining the FAA's push to improve safety. Instead, the agency threw the book at American, and the airline had to ground much of its fleet, cancel 3,000 flights and disrupt the lives of more than a quarter-million people.

That would be an appropriate response if the public faced an imminent threat. But the only urgency here was politics, and a regulatory agency used the equivalent of its nuclear option to demonstrate some backbone.

Should we demand zero tolerance on airline safety? The simple answer is yes, but that's no excuse to forgo common sense.

The possibility that something might go wrong is not the same as a probability. And such distinctions should be made, whether the subject is airline safety, national security or school violence. We don't seem to appreciate such nuances. At airports, we still pat down frail grandmas and make a woman pull out her nipple ring with pliers. We suspend a high school student for having a butter knife in a car.

In that context, maybe it's not surprising that American flights were grounded, because plastic clips were about a quarter-inch too far apart on wire bundles. Never mind that American found no evidence of damaged wires, which is the threat behind the safety initiative.

Or that American and other airlines were given the past 18 months to wrap the wires in a protective sleeve. Maybe American didn't wrap them exactly right, but that lapse doesn't sound like an imminent threat.

And if last week's action was a penalty for missing a deadline -- rather than a move to keep unsafe planes out of the air -- how about slapping American with a fine and letting 300,000 customers get to their destinations?

The bottom line, according to the FAA, is that American didn't handle the wires correctly, and it had ample time to do so. If the planes aren't in compliance, they don't fly, period.

American's reputation has been savaged by all this, and it's spending a fortune to get the planes back and appease frustrated passengers. But a backlash is building against the FAA, too.

"You know what FAA stands for?" Jay Leno asked his TV audience last week. "Find another airline -- you're screwed."

American CEO Gerard Arpey apologized and took responsibility for the whole thing. But his words and the facts don't exactly line up.

He says American's MD-80s are safe to fly, but 300 were grounded. He says American has the best mechanics in the world and they're "absolutely not to blame for this." But two weeks earlier, the same planes were taken out of service, and mechanics didn't fix them right. "I'm in no way being critical of the FAA," he says, adding that federal inspectors are just doing their job.

We could use a little more candor and less diplomacy, because a lot of people are paying a steep price. Fact is, the FAA moved the goal posts.

What was acceptable six months ago is acceptable no longer, not after Rep. Jim Oberstar, D-Minn., and whistle-blowers started accusing the FAA of being too cozy with the airlines.

A fiercer FAA is not necessarily a bad thing. This month's congressional hearings about maintenance lapses at Southwest Airlines showed that inspectors and company employees can be too close -- and, as an FAA official testified, put passengers at risk.

American, like all carriers, has to adjust to regulators who now demand precise adherence to the rules. And in the end, air travel may become even more safe, which would really be saying something.

The question is whether we can get to that place with less chaos -- without grounding planes to speed the process.

In the past, airlines usually got waivers from the FAA, so they could correct problems in the normal course of business and keep air service intact. Early last week, American requested this so-called "alternate means of compliance" from the FAA and expected to get the OK. Adjusting the wire wraps may have taken a week or two, rather than three or four days, and passengers wouldn't have to spend the night on airport cots.

But American's request was denied, and an FAA spokeswoman said the planes were not in compliance, so they weren't allowed to fly.

Time for union, management at American to face reality

Sun, 04 May 2008 09:10 CDT

By MITCHELL SCHNURMAN

Who can handle the truth at American Airlines?

When a union official said soaring fuel prices might limit the gains on a new labor contract, there was such an outcry that he was put on administrative leave.

Never mind that John Conley of the Transport Workers Union wasn't negotiating the new deal with management. Or that he was merely stating the obvious, a fact borne out last week after three airlines ran out of money and shut down.

Conley's error was telling it like it is, rather than how union members want it to be -- an impolitic move for someone in a political position.

But contract talks are under way with the carrier's unions, and that makes this the silly season at American Airlines, to borrow a phrase from the presidential candidates.

It's not just mechanics who seem out of touch with reality; pilots are paying for billboards that slam the company they work for, and members of management act as if their bonuses should be immune from economic turmoil.

We need more straight talk like Conley's, and from all corners. With oil at $100 a barrel, union leaders should acknowledge that outside conditions can wreck American's world, and management has to do more to restore morale than put a freeze on hiring.

American estimates that it will spend an extra $2.5 billion on fuel this year. And increases in fuel costs since 2003 have practically wiped out the company's mammoth gains from streamlining operations and cutting worker pay.

It's not unusual for American to be waylaid by a fuel-price shock or a recession, because its business is so capital-intensive and cyclical. What the current crisis demonstrates is that labor contracts have to be designed so American can survive the deepest troughs.

But five years after agreeing to major concessions that kept American out of bankruptcy, workers are clamoring for their just rewards, not more talk of doom and gloom. In an interview Tuesday, Conley stood by his earlier statement that sought to lower workers' expectations; but he said he should have emphasized the sacrifices that members made to turn American around and what they're due in return.

Among the pilots, the posture is even more aggressive. They just unveiled a blistering billboard that manages to attack management and turn off customers at the same time.

"AA's top priority? Not you!" the billboard proclaims, adding that 250,000 American flights were canceled or delayed last year. It urges people to share their American stories on the Web.

As for fuel and the economy, the pilots union is dismissive. Pilots worked out one of their best deals in the early 1990s in the wake of recession and war. And one of their worst contracts came in the late '90s, when the economy was booming.

Fuel is just another operating cost, pilots say, and it's up to executives to figure out how to cope. While they're at it, they can also take on the pilots' wish list: a 50 percent raise, a signing bonus and a slew of paid holidays, including Super Bowl Sunday.

But the posturing isn't limited to one side. The board of directors and senior executives have a blind spot that's big enough to fly an airplane through. Next week, American is expected to award another slate of performance bonuses to more than 800 executives and managers.

Last year, those awards totaled $160 million. This time, they're expected to be closer to $30 million after AMR's stock price dropped 60 percent in the past six months.

The awards have always been a slap to rank-and-file workers, who took deep cuts in 2003. Last year, American earned strong profits and gave up to $800 to each employee, but that wasn't enough to move the needle on most family budgets.

"Our members are feeling the brunt of the bad economy, too," Conley said.

Most union groups are still talking with management about company finances, conserving fuel and others ways to improve. And the TWU's past efforts are still considered a model in labor-management collaboration.

While other airlines closed facilities and outsourced maintenance, American beefed up its service and began landing outside work. The airline and the union were optimistic when they talked in the fall about extending the current deal.