2004 Business And Industry Outlook

American Airlines passenger aircraft are seen at Lambert International Airport in St. Louis, Tuesday, Aug. 13, 2002. In the past year American has overhauled flight schedules at its hubs to use planes and employees more efficiently, reduced the number of different jets it flies to cut maintenance costs and tested a new fare structure to offer lower prices for business travelers _ each move a nod to the Southwest Ailines method. AP

For an industry-by-industry look at the year ahead, prominent executives in each sector provide their views on important trends for 2004.

Retail: Mackey McDonald, chairman, CEO and president of VF Corp.

Despite a rebounding economy, don't expect consumers to go on big shopping sprees in 2004, says McDonald, who runs the nation's No. 1 jeans maker.

"We continue to see consumers be very selective in their spending," he said.

He noted consumers are either looking for big discounts or something that is innovative, like the latest in stain-resistant khakis. Consumer electronics, home improvement and other areas are still competing with apparel for shoppers' dollars.

Prices will keep going down, McDonald believes. Retailers will keep inventories lean, putting more pressure on manufacturers to be agile and react quickly to any sudden demand for a particular product.

McDonald believes that chains like Wal-Mart Stores Inc. will continue to focus on building national brands and developing their own store labels. The biggest losers will be the second-tier brands, which he expects will shrink even more next year.

The fortunes of department stores, which are struggling, won't dramatically improve in the new year, but those that have merchandise that's different from their rivals will do better, he says.

There will be continued consolidation in the overall apparel industry, as the big titans like Liz Claiborne Inc., Kellwood Co. and VF compete to buy small companies and increase their market share, he said.

Online sales of apparel, while growing, will remain limited. Internet sales of some products, like bras, jeans and swimwear, won't gain much ground, he said.
Airlines: Gerard Arpey, CEO of AMR Corp.

After more than two years in crisis, the nation's major airlines will start to see the benefits of cost cutting and restructuring, Arpey believes. The economic upswing will boost travel demand, if only slightly.

"We're excited about the prospect of growing again and competing again," he says.

AMR owns American Airlines, which, like many of its competitors, plans to add capacity for the first time in several years in 2004, and hire back a small percentage of the tens of thousands of employees it has laid off since late 2001. Analysts expect the nation's six largest carriers to increase capacity by as much as 4 percent -- a significant chunk of that coming from flying more frequently, not from adding more plane

Whether or not the industry returns to profitability in 2004 will depend, Arpey says, on the economy, the price of jet fuel and business travel demand. Either way, hub-and-spoke carriers such as American and Delta are now in a much better position to compete with profitable low-cost carriers such as JetBlue and Southwest, whose discount fares and efficient operations have reset industry standards.

Carriers are experimenting with everything from new in-flight entertainment systems to better quality food (only some of which is free), as the industry attempts to distinguish between what fliers want and what they value.

"All the arrows are pointed generally in the right direction," Arpey said. "But clearly, we have a long way to go."
Telecommunications: Ed Whitacre, chairman and CEO of SBC Communications.

In 2004, the telecommunications industry will be closely watching a court challenge by the local Bells to federal rules on local access rates, Whitacre says.

Determined to fuel competition, the Federal Communications Commission forced the Baby Bells to lease their local phone lines at low rates to rivals such as AT&T Corp. It also rocked the wireless industry with new rules enabling customers to keep their cell phone numbers when they change service providers.

Whitacre says the access rules discourage regional Bells like his, which operates in the Southwest and Midwest, from building out more bandwidth-rich networks, including stringing fiber optics to the home.

The new year also brings speculation that one or more big mergers are needed in an industry stricken by price wars and emerging technologies such as Voice over Internet Protocol (VoIP) phone service.

Whitacre, whose company is a majority owner of Cingular Wireless, the nation's second biggest cell phone carrier, did not wish to speculate on mergers. But he called VoIP, the carrying of voice calls over the Internet, a big question looming over the industry "another form of arbitrage on the telephone network."

Regulators will need to decide whether Internet calls, which are more efficient than traditional voice calls, will be taxed like telephone services and whether FCC charges paid by wireline and wireless phone customers will be applied.
Health Care: Dr. John W. Rowe, chairman and CEO of Aetna Inc.

Rowe will be watching to see if so-called consumer-driven health plans, a much-discussed but still relatively new form of medical coverage, "gain traction" in 2004.

Designed to help reduce health care costs, the plans provide employees with a set amount of money to pay for health needs. Once the fund is exhausted, a deductible sets in, which can be as little as $500 for a single person or as much as $5,000 for a family. When the deductible is passed, a traditional plan kicks in. Rowe believes these plans will gain popularity, as they give users more say over their spending.

Health care premiums will continue to rise, but less than the mid-teen percentage increases of recent years. As employers continue to grapple with the high price of drugs and other medical services, they are shifting more costs to employees, tempering the use of doctors, hospitals and medicines.

But moderating use of health services poses a dilemma for the health insurers because they may have trouble justifying hefty premium increases, forcing them to cut costs and increase membership in order to achieve profits. One way to deal with the situation will be through more mergers.

Two months ago, Anthem Inc. announced it was buying Wellpoint Health Networks Inc. and UnitedHealth Group said it was purchasing Mid Atlantic Medical Services Inc.
Autos: Paul Ballew, executive director of global market and industry analysis at General Motors Corp.

Ballew predicts U.S. sales of new cars, trucks and sport utility vehicles will grow next year in line with economic growth, slightly more than 2 percent.

Carmakers "made a conscious decision to be aggressive on price as we went through the recession and events of 9-11," he notes. "The question for us is: As the economy continues to strengthen, how much relief do we get on the pricing side?"

Intense competition will keep prices from rising but "we think we'll get some relief...if incentives level off, if pricing is half as negative as it's been over the last couple of years, that's a benefit for us."

Ballew likes the growth already being registered in the truck market and the premium car markets. And low prices have "allowed buyers to buy up."

Signs that the economy is rapidly improving could help the labor market. "The other upside is international markets are recovering and expanding," he says.

The biggest risk right now is some unforeseen development, like a terrorist act or a disruption of oil supplies. "We always assume those things are low probabilities, but they're very legitimate risks we have to take into account."
Banking: Ajay Banga, president of Citigroup retail banking for North America.

Although banking is one of the most mature businesses in America, it still hasn't reached all potential customers. Thus Banga foresees increasing competition among banks for Hispanic and other immigrant populations.

Many of the nation's largest financial institutions are increasingly developing advertising, Spanish-language Web sites and products, such as low-fee money transfers, to lure in Hispanic customers.

Banks also will keep putting more emphasis on their online operations. One reason, Banga says, is that Web users are "a very sticky customer base" i.e. ones who will remain loyal to which banks can offer a variety of products.

Even with online transactions "here to stay," banks will open more branches in 2004, continuing a trend of recent years, he says.

"You always need branches...for people to feel they are dealing with a real institution that has their money," he said.

He anticipates more merger and acquisition activity, but it could be slowed down by the "premium" that an acquiring institution has to pay for another bank. In October, for example, Bank of America Corp. agreed to pay $47 billion to acquire FleetBoston Financial Corp., a price about 40 percent above FleetBoston's share price.

"Consolidation in the banking industry certainly isn't complete," Banga said.
Media: Mel Karmazin, president and chief operating officer of Viacom Inc. (CBSNews.com is part of Viacom.)

Karmazin sees a "very strong" outlook for advertising revenue in 2004, with a double boost coming from a presidential election as well as the Olympic games -- a phenomenon called the "quadrennial effect" since it comes only once every four years.

Deregulation of media will slow down, he believes. While Viacom and other large conglomerates benefited in 2003 from a drive by the FCC to loosen media ownership rules, those steps led to strong opposition from advocacy groups and in Congress.

During a presidential election year, Karmazin said, "Congress tends to avoid doing anything controversial."

The home video market will grow, as more DVD players find their way into more living rooms at home and abroad. DVD sales have provided a bonanza to movie studios.

But there will also be more use of Personal Video Recorders (PVRs), such as TiVo. This means more pressure on broadcasters to ensure that viewers don't simply skip over all the commercials as they watch playback of recorded shows, which would have advertisers screaming for rate cuts.

"More and more time will be spent making our commercials more relevant, more entertaining and integrating them better into the programming," Karmazin says.

A workable business model for selling movies online will emerge in the next year or two, he said. "You can't just have the pirates being the ones offering the content," Karmazin said. "If the consumer wants to watch movies on the Internet, then we need to legally provide the consumer with that option."
Insurance: Edward J. Zore, president and CEO of Northwestern Mutual Life Insurance Co.

With the economy improving, "the financial situation of most people is stabilizing or getting better, and people have more confidence," Zore says. That means consumers will be more willing to sit down with their insurance agents and do some financial planning.

Life insurance premiums should be stable, but there could be increases in disability and long-term care policies, he believes. Firming interest rates should be a plus for the industry, since that will increase the return on their investments.

Zore says he won't be surprised to see more new products offered to baby boomers, who constitute a large and affluent consumer group.

In some cases, "companies are trying to take their basic products and reconfigure them to provide a different set of benefits for their customers." One example is long-term care policies that are structured to provide income if the policy owner is disabled before age 65. Another is variable life insurance for use in sophisticated financial planning.

Immediate annuities could become hot sellers, too, he said. These are insurance products bought with a single payment with a specified payout plan that starts right away.

Baby boomers, he pointed out, are likely to find immediate annuities an attractive place to stash the money the collect from their pensions or their 401(k) retirement plans.

There's been consolidation in the insurance industry, with the most recent examples being the merger of Travelers Property Casualty Corp. with The St. Paul Cos. Inc. and Manulife Financial Corp.'s purchase of John Hancock Financial Services. Zore expects more.
Energy: Daniel Yergin, chairman of Cambridge Energy Research Associates

The improving U.S. economy, coupled with political instability in some major crude oil-producing regions, is likely to keep upward pressure on oil prices in the near term, Yergin says, and that could mean higher costs for heating oil, gasoline and other refined products.

"The key factors for oil prices in 2004 are Iraq, Russia, world GDP and China," he said.

In Iraq, the question will be how quickly oil production and exports grow amid a post-war reconstruction that has been slowed by sabotage. "The issue is security," he said.

In Russia, the person to watch is President Vladimir Putin, whose jailing of the country's wealthiest man, an oil executive, rattled the nerves of Western investors eager to invest in that country's rapidly growing petroleum industry.

As far as worldwide demand for oil, Yergin expects rising car sales in China to compound the effects of an apparent global economic turnaround.

The weather is also an important, if underestimated, factor that influences consumption, determining the level at which thermostats are set this winter and how many road trips are taken next summer.

The U.S. natural gas market will experience turbulence for years to come, Yergin said, with supplies tight and prices high because of declining production. Imports of natural gas in its liquid state will help, but the infrastructure needed to boost this emerging trade will take years to build.

Fixing weaknesses in the U.S. power grid that were exposed by the Aug. 14 blackout will be a top priority and will likely lead "to a change in the organization of markets," Yergin said. First up: mandatory reliability standards.
Semiconductors: Craig Barrett, CEO of Intel Corp.

After suffering the worst downturn in its history, the semiconductor industry began to bounce back to life in 2003 and it's expected to continue that growth in 2004 as consumers and businesses buy new equipment to take advantage of the latest innovations, Barrett says.

There will be even more increases in the performance of microprocessors, the silicon-based "brains" of computers, he says. But those improvements won't be based solely on jumps in raw speed.

Chipmakers will enhance performance by enabling technologies that squeeze more work out of each microprocessor even at the same "speed," or clock cycle.

Chips with multiple processing engines are in the pipeline, as are chips that can handle multiple operating environments and others that provide hardware-based security.

"There are a lot of auxiliary technologies that are starting to be incorporated in microprocessors, which will come out over the next couple years," Barrett said.

As the market grows, the chip industry also is focusing on specific segments.

In 2003, for instance, Intel pushed mobile computing and wireless networking with its Centrino chip. Wi-Fi wireless networking is not overhyped.
  • Austin Burke

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