Broker, Trader, Lawyer, Spy - Eamon Javers [87]
Kelly follows his nonanswer with what BIA calls a protest statement: He says, “We want to be the low-fare leader.” Again, he doesn’t answer the question, which was whether Southwest is still considering a fare increase. He describes what Southwest wants to be, not what it is going to do. Were the BIA team’s pens scribbling furiously during this exchange?
Then, as a closer, Kelly adds what BIA would call a qualifying answer: “This is actually a perfect environment for us.” By using the word “actually,” was Kelly trying to persuade the listener of something that on its face wouldn’t make any sense?
Was Kelly trying to duck the question about whether Southwest would have to raise its fares? Soon enough, it did just that: at the end of 2005, Southwest bragged in its annual report to shareholders that the company had raised fares only “modestly” throughout that year. The report noted that the average passenger fare increased from $88.57 in 2004 to $93.68 in 2005.10
Later in the earnings call, the trained BIA observers listening in might have concluded that the executives were uncomfortable with their own earnings predictions. Lehman Brothers’ analyst Gary Chase tried to pin Kelly down, asking, “Can you just sort of help us think through why you think 15 percent is an achievable growth goal for next year?”
“Well, first of all, it’s a goal,” responded Kelly. He added several caveats about what it would take for the company to hit the number: the economy would need to remain healthy, competitors would need to remain predictable, and maybe some improvements in the Baltimore market would be needed.
Still, he said, “We are not conceding that we cannot improve our earnings next year by 15 percent. And we just want to make that very clear because there are already reports out there that are suggesting that our earnings are going to decline, and that is not acceptable to us.”
But then he concludes on this tepid note: “At this point, it certainly looks to us like a reasonable goal.” Notice Kelly’s use of several qualifying phrases in a row: “at this point,” “certainly looks to us,” “reasonable goal.” That’s far from a full-throated endorsement of the company’s own revenue projections.
Certain statements in the Southwest earnings call contrast with the positive buzz the company received that day. Even though the company has an excellent reputation and even then was receiving kudos for an innovative hedging strategy to blunt the impact of rising fuel costs, something was giving the executives discomfort about their future.
Sharp traders at Ziff Brothers could have used that information in conjunction with everything else they knew about Southwest to form a picture of a company unable to keep up its earnings streak. In fact, an executive familiar with BIA says Ziff concluded from the call that Southwest’s executives weren’t confident they’d be able to repeat their earnings success in the next quarter. The source says Ziff shorted Southwest’s stock, and in doing so, may have made a good deal of money. The positive glow from the healthy earnings report lasted only until July 18, when the stock peaked at around $14.75 per share before settling into a slump that would last for more than a month. By the end of August, the stock was trading at about $13.50 per share.
DESPITE THEIR SUCCESSES, not every client was as impressed by the BIA team’s presentation or its tactics. That same summer of 2005, BIA’s Don Carlson, who had been an attorney with Goldman Sachs, brought Phil Houston and Mike Floyd to meet with Goldman’s own internal business intelligence division. The BIA team hoped to land Goldman Sachs as a client. For BIA, working with Goldman Sachs would be a gold mine: it had thousands of employees, so a contract for BIA’s interrogation training alone could be hugely lucrative. In 2005, Goldman had more than $20 billion in revenue. The firm would have nearly unlimited budgets for research and investigations. Conceivably, this one client could double BIA’s revenue as soon as it signed a contract.
A lot was on the line when Carlson,