Predicting weather economics

SUN JOURNAL

Forecast: Events such as snowstorms can have an important financial impact on businesses, even when the predicted storm goes elsewhere or fails to materialize.

March 13, 2001|By Michael Stroh and Marego Athans | Michael Stroh and Marego Athans,SUN STAFF

With temperatures rising and skies brightening into blue, most people have forgotten about last week's predicted big snowstorm.

Everybody, that is, except the accountants.

As many companies are learning, a snowstorm - even one that misses its predicted target - can have major economic consequences.

Before the first flakes fell last week, major businesses in the Northeast told workers to stay home. Airlines at New York's three major airports grounded more than 2,000 flights, nearly 30 percent of their schedule.

Cities dispatched hundreds of extra workers to salt roads and fire up snowplows, and many of them collected more overtime than snow.

Some companies are trying to do something about severe weather before it affects profits. They are hiring squads of meteorologists to give them custom forecasts and turning to complex financial contracts to cut their risks if the weather turns nasty.

Government researchers are trying to put a price tag on winter storms, much as they have with floods, hurricanes and other disasters, to help organizations make better business decisions.

"There' s been a bit of an awakening in American business with regard to weather," says Mike Smith, chief executive officer of WeatherData, a private forecasting firm in Wichita, Kan. "In the past it was considered an act of God. Today we have the technology and science to both save lives and minimize losses."

Farmers and insurers have kept an eye on the sky for centuries. But as industries ranging from manufacturing to transportation look for ways to wring more profit from their business, weather is becoming a higher priority for them.

By better understanding the economics of snowstorms and other weather events, experts say, businesses can make better decisions.

Studies have shown that issuing a hurricane warning costs local economies roughly $1 million dollars a square mile. In 1999, when residents along nearly 2,000 miles of Florida coastline were warned of Hurricane Floyd's approach, "the impact of the forecast rivaled that of the storm," says Roger Pielke Jr., a researcher at the National Center for Atmospheric Research in Boulder, Colo., who studies the economics of weather.

If companies know the kinds of costs involved in, say, preparing for a hurricane, "they can ask questions like, `How much does it cost for us to prepare for something vs. just taking the loss?'" says David Schultz, a researcher at the National Severe Storms Laboratory in Norman, Okla.

A hurricane or tornado is one thing. Putting a price tag on something as large and complex as a snowstorm is something else.

"If you compare what a winter storm might do," says Schultz, who is embarking on the first serious attempt to ascertain the cost of snowstorms, "it seems like it would dwarf hurricane costs relatively quickly."

Some of the costs are obvious.

Last week, Connecticut Gov. John G. Rowland imposed a 31-hour travel ban on tractor-trailers during the storm, leaving delivery trucks idle, store shelves depleted and gas stations drained of fuel.

A more sophisticated system of estimating the cost of winter storms would enable dealers to adjust prices and budgets, says Michael Fox, executive director of the Connecticut chapter of the Gasoline and Automotive Service Dealers of America. Dealers usually build in emergency costs based on what happened the previous winter. "It's always a guessing game," Fox says.

There are other, hidden costs, says Baxter Vieux, director of the International Center for Natural Hazards and Disaster Research at the University of Oklahoma, which is holding a conference this month on the economic cost of inclement weather.

"A lot of times these losses are never reported," he says. "Rarely do [researchers] ever call up FedEx and ask, `How many packages couldn't you deliver?'"

Inclement weather can be a good thing, too. "Inevitably, when somebody loses," says Schultz, "somebody wins, too."

A Home Depot spokeswoman says that in the Northeast the company sold "every snow shovel we could get in" and was dishing out bags of rock salt by the pallet.

Rentals soared at Blockbuster video stores in the Northeast as people anticipated spending extra days at home.

Some companies are finding novel ways to cut weather-related costs. A growing number of companies - from the insurance industry to the financial industry - are employing meteorologists to provide custom forecasts or turning to for-profit forecasting firms like WeatherData.

Manufacturing companies, says Smith, are especially vulnerable these days because to keep costs down many operate with just a few days' worth - in some cases even a few hours' worth - of inventory on hand.

At Christmas 1998, WeatherData was able to warn its client, Toyota, of an ice storm heading toward the company's plant in Georgetown, Ky. The company stocked up on extra parts to prevent having to shut down its assembly line. A competitor a few miles away didn't and ran out of inventory, costing it thousands of dollars an hour.

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