In the meantime, though, the dislocation and the rough-and-ready look of the hastily arranged new office are oddly appropriate for this moment in AmEx' 151-year history. If the old space spoke of permanence and stability, the new one suggests a willingness to dig into important issues in the midst of crisis, appearances be damned. As Chenault confronts an array of challenges that suddenly beset his company--not all of them the result of September 11--he will need exactly that kind of spirit.
Less than 10 months ago, on Jan. 1, Chenault got his dream job as CEO, one of the few African Americans to lead a major corporation. His arrival in the corner office came with extraordinarily high expectations. Like General Electric Co.'s Jeffrey R. Immelt, the 50-year-old Chenault was taking over a highly successful and transformed enterprise from an executive who wore very big shoes, the gruff and demanding Harvey Golub.
The meticulously planned transition had all the signs of a perfect handoff. With a smiling Golub by his side as chairman in January, Chenault proudly announced record earnings of $2.8 billion on $22.1 billion in revenues in 2000. But the good news was not to last. Just four months later, as Golub was giving up the chairmanship, Chenault shocked Wall Street with a $182 million write-off on some surprisingly risky high-yield junk bonds in its money-management operation in Minneapolis. The new CEO quickly reassured shareholders the worst was over. It wasn't: In July, he dropped a bigger bombshell, with an additional $826 million charge on the same portfolio. The huge hit drove AmEx' second-quarter income down 76%, to $178 million.
If Chenault stumbled in his first test as CEO by giving some the impression that he wasn't fully on top of the bond problem, he has surely shown the right leadership stuff since the attack that cost the lives of 11 employees. Stuck in Salt Lake City on a business trip when the terrorists struck, Chenault took command long distance. When the first plane crashed, Chenault was on the phone with a New York colleague from his hotel room. He asked to be transferred to security and instructed them to evacuate the building immediately. Edward P. Gilligan, who heads up the Global Corporate Services unit, recalls that when he made his way home to New Jersey on the afternoon of September 11, his wife handed him the phone as he walked through the door. It was Chenault, first to check on Gilligan's safety, second to convene a meeting of top execs. "He was there, and he was in the middle of it," says Gilligan.
The hundreds of ad hoc decisions made by Chenault and his team were guided by two overriding concerns: employee safety and customer service. AmEx helped 560,000 stranded cardholders get home, in some cases chartering airplanes and buses to ferry them across the country. It waived millions of dollars in delinquent fees on late-paying cardholders and increased credit limits to cash-starved clients.HEARTFELT TALK. Most telling, Chenault gathered 5,000 American Express (AXP
) employees at the Paramount Theater in New York on Sept. 20 for a highly emotional "town hall meeting." During the session, Chenault demonstrated the poise, compassion, and decisiveness that vaulted him to the top. He told employees that he had been filled with such despair, sadness, and anger that he had seen a counselor. Twice, he rushed to spontaneously embrace grief-stricken employees. Chenault said he would donate $1 million of the company's profits to the families of the AmEx victims. "I represent the best company and the best people in the world," he concluded. "In fact, you are my strength, and I love you."
It was a poignant and unscripted moment. Says AmEx board member Charlene Barshefsky, a partner at Wilmer Cutler & Pickering, who viewed a video of the event: "The manner in which he took command, the comfort and the direction he gave to what was obviously an audience in shockwas of a caliber one rarely sees."
In the aftermath of the crisis, Chenault, a native New Yorker raised on Long Island, also has quietly emerged as one of the most visible corporate leaders in America. When President Bush visited New York, Chenault was at his side, stressing the need to improve security at the nation's airports and other public spaces. He stood with Mayor Rudolph Giuliani and Governor George Pataki when they asked for substantially more federal aid to rebuild New York. "Ken epitomizes two attributes I think will be important here," says Golub. "One is courage, and the other is composure."
Chenault, a Bowdoin College history major and Harvard Law School graduate, will certainly need plenty of both to guide his company through the coming months. As the world's No. 1 issuer of charge cards and the No. 1 travel agency, American Express now finds itself at the center of a perfect economic storm. These core businesses, which account for three of every four dollars of revenue, had already started slowing earlier in the year, along with the economy.
Then came September 11. Business and recreational travel has slowed to a crawl while the once unstoppable shopaholic U.S. consumer has now put away the plastic, further cutting into AmEx' revenues. Even the company's most valuable assets--its brand name and global scope--can be viewed as severe liabilities in the current climate when anything American can invite an irrational attack. "At the moment, all the current events are weighing against the company," says Scott Edgar, co-portfolio manager of SISE Trust Fund in Walnut Creek, Calif., which owns 160,000 shares.
Investors have already felt the pinch. AmEx stock has fallen by half, to $30 a share, in the last year, and there may be worse to come. As the economy plunges into recession, American Express is in many ways a far riskier company than it was in the last downturn, in the early '90s. It has more consumer debt, some of it of surprisingly poor quality. Its $34 billion investment portfolio clearly carries more risk than it did a decade ago. And both its core charge-card business and the financial advisory business that Chenault hopes to use as a growth engine by selling mutual funds and other products to the public operate in hotly competitive and heavily glutted industries.
The falling stock price has rekindled rumors that American Express could be acquired by Citigroup (C
), Morgan Stanley Dean Witter & Co. (MWD
), or some other suitor eager to scoop up one of the world's most valuable brands on the cheap. With the company's market value down nearly $23 billion from when Morgan reportedly expressed interest in a deal earlier this year, AmEx is now far more vulnerable to an unwanted takeover. Neither Morgan Stanley nor Citigroup would comment.
The stock could fall even further when Chenault reveals the company's third-quarter results on Oct. 22. He will unveil still more write-offs--some fully anticipated by Wall Street and some not. Analysts are braced for a charge of up to $370 million for a restructuring announced last summer that could include as many as 5,000 layoffs. Some expect up to an additional $200 million to temporarily relocate 5,000 employees to newly leased space in New Jersey and Connecticut.
What few expect, however, is more awful news from the company's $34 billion pool of investments that it manages for itself. AmEx still has about $2.7 billion in junk bonds, and more of its top-shelf investments could easily slip into the red zone. As much as a billion dollars of the portfolio at its Financial Advisors unit, for example, is tied up in travel and insurance industry debt. Defaults there are inevitable. Merrill Lynch & Co. (MER
) estimates an additional $22 million write-off will be necessary to cover junk-bond losses, but the number could prove to be much larger.
Asked if AmEx' portfolio problems are behind him, Chenault is now hardly reassuring. "We made what we then believed was a very conservative assumption relative to the economic environment," he says. "With what happened on the 11th, I'm not going to predict what the future will hold."
Most analysts agreed that Chenault lost some goodwill on the Street with the second and larger write-off. "It was an unfortunate situation, and he took it very seriously," says David Hochstim, who follows the company for Bear, Stearns & Co. "The market has written off 2001 for most companies, including AmEx. But if we end up with more write-downs, his credibility will be damaged." Chenault has said he was unaware of the risky investments, which were made while Golub was still CEO. Golub would not comment.PIVOTAL ROLE. Chenault seems neither worried nor frazzled by his misfortune. "I don't feel victimized," he says. "This company has been around for 151 years. We've dealt with a wide range of crises, and at the end of the day, I think I'm up to the challenge."
From the headquarters' building a decade ago, Chenault emerged a star by helping to turn around a drifting and troubled company. The burning question now: Can he do it again? The last time AmEx weathered a recession, in 1991, its card business was losing market share to Visa and MasterCard. Restless merchants were in revolt over the high so-called discount fees--as much as 4% compared with less than half that for Visa--that they had to fork over to American Express on every charge. The Optima card then took a surprise $155 million hit after a spike in delinquencies forced the company to write off 8% of the Optima card debt.
As president of the domestic consumer-card division, Chenault played a pivotal role in reinvigorating the card business. He moved American Express far beyond its elite but limited niche serving high-end customers who paid their bills in full each month and were charged a hefty annual fee for the privilege. He soothed relations with merchants, in many cases cutting fees. He aggressively signed on retailers like gas stations, discounters, and supermarkets. And he launched a credit-card version of a frequent-traveler program called Membership Rewards that cultivated greater loyalty and higher spending from cardholders. Chenault also vastly expanded the company's exposure in consumer lending by issuing cards that no longer required payment within 30 days. Some of the new cards were co-branded with such partners as Delta Air Lines Inc. (DAL
), and Costco Wholesale Corp. (COST
). In those deals, American Express got access to the customers in exchange for issuing and maintaining the cards. Inside, debate raged over Chenault's tactics. Some feared that the charges would erode the card's upscale position as the premium-priced plastic.
As the economy soared, Chenault's strategy looked like genius and his career took flight. For eight years, charge-card volume zoomed higher and higher--to $297 billion in 2000, up from $111 billion in 1991. Earnings rose without interruption every year from 1995 until now, hitting a record $2.8 billion in 2000, with more than $1.9 billion coming from Travel Related Services, the key card and travel unit. Chenault, a former management consultant, was tapped as vice-chairman in 1995 and as president and chief operating officer in 1997.
AmEx' change in fortune, of course, came at a time of galloping prosperity in the U.S. The true test of strategy and leadership, however, always comes in a downturn. Chenault maintains that the strengthening of the company's charge-card network, its expanded international presence, the broadening of its product offerings, and an aggressive effort to reduce costs, make American Express well-placed for the postrecession future. "We are in a substantially stronger position," he argues. "We had a relatively narrow product line, dependent on travel and entertainment." In the early 1990s, only 1% of the nation's supermarkets accepted the AmEx card. Today, more than 80% allow shoppers to charge their groceries on American Express. In the last recession, two-thirds of the company's charge volume came from travel and entertainment. Today, T&E accounts for less than half the charges.QUANTITY OVER QUALITY. These very "strengths," however, pose new and risky vulnerabilities. The company is entering this recession with roughly five times the revolving credit-card debt it had in the previous downturn---$35 billion vs. $7 billion. By the second-quarter of this year, its write-offs on bad card debt reached 5.7%, a level that exceeds the 5.2% average for all credit cards, many of which lack the prestige conveyed by the American Express imprimatur. Those write-offs are also nearly 14 times larger than those on its charge cards, where balances are supposed to be paid within 30 days. Chenault concedes that credit losses will rise higher, but insists AmEx will suffer fewer losses than competitors.
The company's vast and unrelenting expansion of cardholders, who now number 54.3 million, up from 36.6 million in 1991, has dramatically altered the cardholder base at AmEx. To sign up less affluent customers and to coax less-than-tony merchants such as Arby's (TRY
) and Kentucky Fried Chicken (YUM
) to accept its cards, American Express has had to compete directly in the cut-throat mass market. That pits them against card giants like MBNA Corp. (KRB
), which have been slashing interest rates and fees to win market share.
The result: AmEx' average fees from card members and merchants are falling. So is the average amount of money spent by cardholders, who are also more likely to have problems paying their bills. To expand its revolving-credit business, American Express even purchased the credit-card receivables of the Bank of Hawaii (BOH
) last year, paying a premium price. Some Bank of Hawaii customers balked, though, when AmEx forced them to trade in their Visa cards for American Express cards. Since the purchase, the portfolio has shrunk by 20%. "They've grown their loan portfolio rapidly, now they're going through an economic downturn and we're going to see how well they've done," says Ken Feinberg, co-portfolio manager at Davis Financial Fund, the third-largest American Express shareholder.
Chenault concedes the company's fortunes are tied to the economy and that investors will have to ride out the cycle with management. He doesn't foresee a recovery until the second half of next year or perhaps early 2003. "Clearly, we're dealing with a downturn in the economy," he admits, "but we were growing share up until the 11th and afterward, and we're growing share faster than the industry."
Chenault is right---at least by one measure. Although AmEx has been increasing its market share in the basic credit-card business, it has been losing ground in what Chenault calls "total plastic spending." The reason: The company is effectively locked out of the fast-growing market for debit cards. Debit cards are linked to bank checking accounts, and MasterCard and Visa have exclusive arrangements with all the U.S. banks.
The upshot is that American Express' share of the value of all U.S. purchases made by credit and debit cards is expected to fall to 17.7% this year, from 19.7% in 1996, according to The Nilson Report. Visa and MasterCard now have more than 38 million debit cards in circulation, vs. "a few thousand" from AmEx. Chenault hopes a recent court decision clears the way for AmEx to build relationships with U.S. banks, but MasterCard vows to appeal the ruling, and the dispute could take years to resolve.
Even then, many U.S. banks may not want to jeopardize their current deals with Visa and MasterCard or their own efforts to get into financial services. The judge's decision is akin to "letting the fox into the henhouse," says Richard M. Kovacevich, CEO of Wells Fargo & Co. Bankers worry that AmEx will poach their own customers once they become cardholders, flogging the same investment and insurance products that the banks themselves are selling.
More worrisome, however, is how much of a handle Chenault has on the company's bond portfolio problems at American Express Financial Advisors (AEFA), the unit that accounts for roughly 26% of the company's revenues. Asked pointedly why AmEx would put its money into junk bonds so risky they are typically referred to as "toxic waste," Chenault is surprisingly vague, given his reputation for decisiveness and making the tough calls. "I don't know," he says. "This is a strategy that was embarked upon seven or eight years ago. I don't know all the rationale and philosophy."
Some investors are none too pleased. "He didn't say, `I made a mistake,"' grouses Lewis Rabinowitz, who heads up R.Lewis Securities, a money management firm with an AmEx stake. "He basically said, "I didn't understand the risk.' I feel that is something that is sort of unacceptable for a CEO."
To be fair, Chenault did take steps to blunt the risks after the first write-off. He cut the company's junk portfolio to about 8% from 12% and decreased the risk of the remaining investments. "We've hit some bumps in the road, and in some cases, we should have responded quicker," says James M. Cracchiolo, CEO of the financial advisory unit. "But we'll be there tomorrow."
Still, the continuing decline in the economy will likely result in more write-offs, especially because AmEx holds nearly $1 billion in bonds backed by hotels, airlines, insurers, and car rental outfits, which have been hurt by September 11. AmEx owns Royal Caribbean (RCL
) bonds, for example, which are trading at a 25% discount.
Why would AmEx increase its exposure to the same industries its core card and travel businesses depend on? Chenault explains that in the early 1990s, AmEx had a "holding-company mentality" that allowed Financial Advisors to pursue strategies with little regard to the company's core business. "I believe you've got to take a very integrated, holistic approach to risk," he says now. "That clearly was not done in the early to mid-1990s."
AEFA has other, more deeply rooted problems now being addressed by the new leadership dispatched to the division. The mutual funds that the unit manages and sells through its 11,000 financial advisers have been severely outperformed by their peers. AmEx midcap funds, for example, have lost 10% to 22% of their value so far this year and are barely up over a three-year period, according to Lipper Data Feed Services. T.Rowe Price Associates Inc.'s midcap fund, by comparison, is down 13% this year and up 18.5% over the same three-year period. Concedes Chenault: "Our fund performance needs to improve." In August, he hired William F. Truscott, a former Zurich Scudder Investments managing director, as chief investment officer.
Truscott's success is crucial to Chenault's hopes to use AEFA as a major source of growth. The chief executive is placing great stock in AEFA's ability to cross-sell investment and insurance products to the company's 54.3 million cardholders. So far, about one-third of the company's financial-planning clients have been harvested from the American Express cardholder base. But this bear market is likely to turn off a lot of first-time investors who already have a glut of mutual funds to choose from.
Chenault's strategy for managing through the recession is simple. He is reducing costs by using technology to process more paperwork and moving back-office functions overseas to places like India. Meantime, he's trying to maintain high levels of service to customers. He is more aggressively building the company's business with major and midsize corporate clients, running their T&E departments on an outsourced basis. Chenault claims American Express is winning 9 of every 10 shootouts with rivals for new corporate card accounts. He says the company is gaining market share by selling "value" and "service" rather than price.SAD VISIT. It wasn't until two weeks after the terrorist attack that Chenault returned to the American Express Tower, the company's headquarters for 15 years. He toured the eerily dark and vacant structure to get a close-up view of the damage. He took the freight elevator to his 51st-floor office, peered out the window at the Statue of Liberty, and retrieved the photographs of his wife and two sons from his desk and credenza. Other than a light veneer of dust, he says, the upper floors were unscathed. "But on the lower floors," he adds, "you see an open checkbook or a lost pocketbook. From the objects left behind, you see the suddenness of the moment and the shock."
There are no management texts to tell CEOs how to guide companies and employees through such a shock. Chenault, like most of his peers, has been operating mostly on instinct since September 11 as he strives to address the immediate trauma and the more ingrained problems at American Express. Throughout, he evinces great confidence. "I don't feel like we're a dispirited group," he insists in his Jersey City office. "We are going to emerge a stronger and better company." Investors can only hope he's right. By John A. Byrne and Heather Timmons