American Air Tries To Show Its Softer Side

[Nightwatch]

Mop the floor? That would be the right profession for them, maybe with amfa they'll be able to cross train into their, and your, true forte. No wonder..HAHAHA

 

[FWAAA]

Just a note about my GEICO story: In 1999, Buffett announced that ad spending would continue at a strong rate. Turns out, in 2000, Buffett admitted that it didn't quite pan out as planned. Here's the story:

http://www.berkshirehathaway.com/letters/1999htm.html

Then in 2000, the truth is revealed:

On the minus side, policyholder growth at GEICO slowed to a halt as the year progressed. It has become much more expensive to obtain new business. I told you last year that we would get our money’s worth from stepped-up advertising at GEICO in 2000, but I was wrong. We’ll examine the reasons later in the report.

Agonizing over errors is a mistake. But acknowledging and analyzing them can be useful, though that practice is rare in corporate boardrooms. There, Charlie and I have almost never witnessed a candid post-mortem of a failed decision, particularly one involving an acquisition. A notable exception to this never-look-back approach is that of The Washington Post Company, which unfailingly and objectively reviews its acquisitions three years after they are made. Elsewhere, triumphs are trumpeted, but dumb decisions either get no follow-up or are rationalized.

The financial consequences of these boners are regularly dumped into massive restructuring charges or write-offs that are casually waved off as "nonrecurring." Managements just love these. Indeed, in recent years it has seemed that no earnings statement is complete without them. The origins of these charges, though, are never explored. When it comes to corporate blunders, CEOs invoke the concept of the Virgin Birth.

To get back to our examination of GEICO: There are at least four factors that could account for the increased costs we experienced in obtaining new business last year, and all probably contributed in some manner.

First, in our advertising we have pushed "frequency" very hard, and we probably overstepped in certain media. We’ve always known that increasing the number of messages through any medium would eventually produce diminishing returns. The third ad in an hour on a given cable channel is simply not going to be as effective as the first.

Second, we may have already picked much of the low-hanging fruit. Clearly, the willingness to do business with a direct marketer of insurance varies widely among individuals: Indeed, some percentage of Americans - particularly older ones - are reluctant to make direct purchases of any kind. Over the years, however, this reluctance will ebb. A new generation with new habits will find the savings from direct purchase of their auto insurance too compelling to ignore.

Another factor that surely decreased the conversion of inquiries into sales was stricter underwriting by GEICO. Both the frequency and severity of losses increased during the year, and rates in certain areas became inadequate, in some cases substantially so. In these instances, we necessarily tightened our underwriting standards. This tightening, as well as the many rate increases we put in during the year, made our offerings less attractive to some prospects.

A high percentage of callers, it should be emphasized, can still save money by insuring with us. Understandably, however, some prospects will switch to save $200 per year but will not switch to save $50. Therefore, rate increases that bring our prices closer to those of our competitors will hurt our acceptance rate, even when we continue to offer the best deal.

In just the last few years, far more drivers have learned to associate the GEICO brand with saving money on their insurance. We will pound that theme relentlessly until all Americans are aware of the value that we offer.

http://www.berkshirehathaway.com/2000ar/2000letter.html

Whoops! Although they were wrong about recouping their advertising investment, it is noteworthy that Buffett still said "We will pound that theme relentlessly until all Americans are aware of the value that we offer."

So even though the big increase in ads didn't do its intended job, Buffett still sees the need for advertising and the benefits in it.

To me, advertising has always seemed like money flushed down the john. I like to think I make my purchasing decisions without taking into account the ads on TV, radio, magazines and billboards. But if Warren Buffett thinks it has its place, then who am I to argue? He's a lot smarter (and richer) than I am.

 

[Bob Owens]

FWAAA,Sep 13 2004, 06:01 AM]
Thanks.

I honestly don't know much about the AIP, except that the first $25 payout only cost the company about $2 million or so. Chump change.

I agree, chump change. We gave up over $200/week in pay for a possible $25 every quarter.

I assume that if the employees meet the customer service goals and the company meets its financial metrics, the employees may earn another payout, but I do not know for certain.

Was that a typo, should it have been paycut or payout?

I hope you aren't assuming that the $50 million for this ad campaign is an increase in the company's ad spending - as I posted before, last year AMR spent $150 million for advertising; in 2002 it was $161 million; in 2001 it spent $202 million and in 2000 the ad budget was $221 million. AMR has slowly trimmed ad spending since 2000, which may or may not have been the right thing to do.

The $50 million figure touted by the news release is just what this campaign will cost, which will probably come out of this years' ad budget (which I assume is about $160 million or so). It's not like it's $50 million of new spending; it just means that AMR will spend $50 million on this campaign instead of the "I flew American for $69" campaign that featured Green Onions that has run for the past year or so. That campaign probably cost $50 million.

Now you are assuming arent you?

I am reminded of a Warren Buffett letter to shareholders a few years ago when he explained the sudden increase in GEICO TV and radio ads. He said that his managers at GEICO convinced him that spending tons of $$$ on ads would drive new business. Buffett said he was skeptical, but it worked. GEICO wrote lots and lots of new policies, earning lots more new business than he ever expected. More than enough to pay for the ads.

Coke, McDonald's and other consumer companies spend tods of money on ads, and they are successful.

Like them or not, Wal-Mart spends like a sailor on ads, and their revenues and profits just keep growing.

Even Southwest spends like a drunken sailor on ads: If AMR's ad budget was a big as WN's on a proportional basis, it would be $475 million a year instead of a measly $160 million. Then again, maybe WN threw away the $155 million it spent in 2003. But I doubt it.

Well isnt it true that there is more to it than just spending money on ads? Isnt it true that you could spend a ton of money on ineffective ads or spend much less on effective ones? You are making it sound like spending on advertising is a sure thing. Thats not so is it? My local utility spends almost nothing on advertizing yet they are making tons of money. When is the last time you saw a TV ad for Microsoft?

Maybe advertising is a waste of money. Then again, maybe the $600 million spent on catering (2004 estimate) is a waste. Who needs all that ice, soda, alcohol, food and snacks? After all, they already bought a ticket. Why cater the planes? They won't know the difference.

Well if thats true, that they wont notice the difference, then yes it is a waste of money, but then again maybe you dont know the airline business as well as you try and let on.