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Judgment call - Will oil prices force managers to tear up the business model?

Dean White
PA Consulting Group
Financial Times
18 June 2008

Four professionals offer expert advice

This FT column asks professional services experts to comment on a current business issue. This week's topic: soaring oil prices.

The problem

Record oil prices are causing havoc in energy-intensive industries. United Airlines last week announced it would slash more than a fifth of its aircraft fleet and cut 55,000 jobs. Carmakers face falling sales of gas-guzzling sport-utility vehicles and pick-up trucks; General Motors last week announced plans to close four SUV and truck plants in the US, Canada and Mexico. Other sectors in pain include steelmakers, hauliers and logistics groups.

Managers in fuel-hungry businesses face a tough decision: whether to respond immediately with a transformed business model or to ride out the period in hope of an eventual easing in prices and the prospect of increased market share when the worst is over. How to decide?

The advice

The consultant - Dean White

Any company, regardless of its energy intensity, would be wise to re-evaluate its business model given today’s reality of $130 oil prices. That means looking to energy efficiency measures, bringing forward capital expenditure on  more efficient  production processes, and exploring more radical options such as fuel substitution or even shutting lines of business. It also means looking at the impact on customers and the implications for demand.

The task is most urgent for energy intensive industries. Even in the airline industry, though, there are exceptions. Southwest Airlines continues to maintain profitability partly because it has hedged its fuel at the oil equivalent of $57 a barrel. For others less fortunate  the focus needs to be on managing the double blow of an economic slowdown and fuel cost pressures. The solution has to be to boost load factors through reducing capacity, while also adjusting prices. In fuel price terra incognita, the alternative - a wait-and-see approach -  could prove disastrous.

Dean White is head of Emerging markets at PA Consulting Group

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