John Goff is technology editor of CFO.
Tonight’s Forecast: Dark
In an episode of the “Mary Tyler Moore Show,” Lou Grant chews out Gordie the Weatherman because an unexpected snowstorm has scuttled his vacation plans. When Gordie asks the WJM executive producer why he’s blaming him, Grant looks the weatherman square in the eyes and says: “You’re right. It’s not as if anyone could predict the weather.”
Actually, that’s precisely what some companies are trying to do. In a trend that started with the weird weather touched off by El Nino in 1997, a growing number of businesses are purchasing private seasonal weather forecasts. The companies, which run the gamut from manufacturers to tourist operators, use the forecasts to adjust inventory, tweak capacity, or purchase weather-related insurance. Why not just turn on the Weather Channel? Says one meteorologist: “Only a few meteorologists have a background in climate prediction. Most are geared toward short-term forecasts.”
Meanwhile, the weather derivatives market, slowed down by the demise of big player Enron, is regaining steam. According to the Weather Risk Management Association, the notional value of the contracts jumped 10 percent last year, to a record $4.6 billion. Stephen Jewson, director of weather risk at consultancy RMS, believes that in time, weather derivatives will be fairly commonplace on the corporate scene. “Weather risk is a new thing,” he notes, “and it takes time to quantify.”
A host of suppliers have sprung up to fill the demand for private forecasts, including EarthSat, AER, CustomWeather, and Planalytics. Michael Schlacter, chief meteorologist at New Yorkbased Weather 2000, says his firm’s seasonal forecasts are about 80 percent accurate. “Forecasts generally fall apart past a year,” he says.
Some corporations purchase private predictions to augment in-house projections. At FedEx Corp., the company examines longer-term forecasts, looking for weather trends that might affect its fleet of 643 planes. For daily operations, however, the cargo carrier relies on its own team of 16 meteorologists, says John Dunavant, who oversees the company’s 19,000 monthly flights. “Cold weather doesn’t matter much to us,” he says. “The biggest concern is fog.”
Hurricanes and typhoons do create problems, says Dunavant, because of their size and unpredictability. Schlacter concurs. “[Long-term] predictions about hurricanes, especially regarding location, go beyond the realm of science,” he says. “That’s more the realm of magic.”—J.G.
But Could It Happen Here?
If there’s a hell on earth for CFOs, this is surely it. On vacation in the United States this past Christmas, Keat Lee was watching television when he saw a news flash about a killer tsunami that had ripped through parts of southern Asia on December 26. Lee was devastated. As the finance chief at Bank Mandiri, Indonesia’s largest financial institution, he knew that the bank employed 70 people in Aceh, the province in Indonesia that took the brunt of the giant wave. In time, Lee’s worst fears were confirmed: four of Bank Mandiri’s workers in Aceh were dead, another six lost. “We’re providing assistance to their families and other staff there,” says Lee.