Aerospace

British Airways places order for 200 Boeing 737 MAX

Nothing like a confidence boosting 200 plane order for the highly criticized Boeing 737 MAX jet at the Paris Airshow. British Airways CEO Willie Walsh said,

We have every confidence in Boeing and expect that the aircraft will make a successful return to service in the coming months.

There is no doubt Boeing offered a competitive price to generate some positive news spin since the crisis erupted. As CM always contended,

Ultimately the market will decide on the 737MAX. The plane has a 4,000+ unit backlog. Even if airlines wanted to change to A320neos, the switching costs would be prohibitively expensive in terms of pilot certification, maintenance and joining the end of an equally long queue. The order book is unlikely to suffer widespread cancellations.”

The mainstream media proves again its proclivity for sensationalist journalism without understanding the industry dynamics or the facts.

Boeing raises 20yr forecast

Boeing reports airlines will need around 44,000 new commercial aircraft worth $6.8 trillion by 2038, vs. 43,000 planes worth $6.49 trillion estimated in 2018. The biggest demand will remain for single-aisle jets. 32,420 narrow-body planes are likely to be built.

So much for the fear of global warming induced by air travel. In total, planes are 2% of human induced CO2. Or 0.00024% of the CO2 in the atmosphere.

Although the International Air Transport Association (IATA) wilted to the gun held to its head by the UN. The IATA has got behind the movement to do its bit for climate change. In a two page flyer, it covered the idea that we reckless passengers must consider our carbon footprint but at the same time help the U.N. raise $40bn in taxes, sorry ‘climate finance,’ between 2021 and 2035.

The reality is if Greta Thunberg receives an invite by the Queensland government to lecture on climate change she can rest easy that the footprint in the air will be so tiny because there isn’t a diesel electric train to get here.

Sustainable air travel will require extra sick bags

Air France-KLM is looking to fund the Dutch Delft University of Technology to explore a flying wing design known as the Flying V, where passengers will sit.

Boeing dabbled with the idea in 2007 but scrapped it as it likely worked out passengers sitting out toward the wingtips would be thrown around like rag dolls in turbulent weather. Anyone who has tried to drink hot coffee during rough weather will know how even sitting toward the centre of the plane causes it to swish about, mostly in the saucer. A wing aisle seat would mean one would wear it.

Better to save shareholders’ funds Air France/KLM. Prototyping this “sustainable aircraft” might do wonders for its CSR signaling but has it considered that it must include the environmental footprint of extra sick bags and all those nasty chemicals required to clean up the mess of those who suffer motion sickness but didn’t make it in time?

Perhaps Mother Nature has given us all tips on air travel. There are many passenger jets shaped like birds. Yet no birds shaped like the Delft University of Technology design…

If Air France/KLM is so worried about the environment the best thing to do would be to close down operations.

The Virgin Group CEO Josh Bayliss said,

“It’s definitely true that right now every one of us should think hard about whether or not we need to take a flight.”

Close the airline if it means so much to save the planet.

IATA caves to the climate change cabal to fill the UN coffers

The International Air Transport Association (IATA) has got behind the movement to do its bit for climate change. In a two page flyer, it covered the idea that we reckless passengers must consider our carbon footprint but at the same time help the U.N. raise $40bn in taxes, sorry ‘climate finance,’ between 2021 and 2035.

The Carbon Offsetting & Reduction Scheme for International Aviation (CORSIA) is the vehicle which the UN’s International Civil Aviation Organization (ICAO) intends to liberate us from our sins and help fund the waste so endemic in the NY based cabal. Wherever the UN is involved expect a sinister agenda behind the virtue.

All airlines have been required to monitor, report and verify their emissions on international flights since Jan 1, 2019. Operators will be required to buy “emissions units” from the UN. If one asked the UN would it prefer emissions to be cut or taxes to be raised, it would select the latter every time.

But why? Passengers don’t seem to demand airlines flight shame them before they board. On the contrary, many carbon offset schemes exist among airlines but hardly any passengers elect to pay them. Note the world’s largest offset program below.

In its 2017 Annual Report, Qantas boasted,

We have the world’s largest airline offset program and have now been carbon offsetting for over 10 years. In 2016/17, we reached three million tonnes offset.”

Carbon calculators tend to work on the assumption of 0.158kg CO2/passenger kilometre.

In the last 10 years, Qantas has flown around 1 trillion revenue passenger kilometres. While the literature in the annual report denotes one passenger offsets every 53 seconds, the mathematical reality is simple – 2% of miles are carbon offset. So that means that 98% of people couldn’t care less.

Perhaps more embarrassing is that The Guardian noted in Jan 2018 that,

Qantas [was the] worst airline operating across Pacific for CO2 emissions

Kind of a massive load of hot air when you do the maths!

Which begs the question, why does the IATA feel compelled to intervene in ramping up the costs of travel when passengers aren’t calling for it? IATA’s job is to keep airlines flying and support the growth where it forecasts a doubling of air travel by 2030. Airlines have been ordering Boeing 737 MAX & Airbus A320neo short-haul jets as well as long-range B787 & A350 in huge numbers to take advantage of fuel efficiency that helps lower operating costs.

By IATA’s own admission, global air travel in totality is only 2% of man-made CO2 emissions. That is to say that all air travel is responsible for 0.00003% of CO2 in the atmosphere. Big deal! What is the point of taxing an industry where the footprint is so minuscule?

Take Josh Bayliss, CEO of Virgin Group. He said,

“It’s definitely true that right now every one of us should think hard about whether or not we need to take a flight.”

Why doesn’t he close down the airlines in the portfolio? Instead of waiting for his customers to grow a conscience via flight shaming and do the right thing why not force their choice? The obvious answer is that it’s hypocritical in the extreme.

Airlines operate on about 70% capacity load factor break even so if Virgin flights end up being half full thanks to flight shaming he’ll only end up having his fleet of jets spewing more or less the same CO2 per flight which will ultimately put the airline out of business.

It is all too stupid. IATA joins the growing list of bodies petrified to talk in hard numbers about true impacts. When the 22,000 pilgrims that fly each year to UN COP summits around the world to kneel at the altar of the IPCC practice what they preach, CM may start to feel concerned Until then, CM will keep calling the climate hoax out. Deeds, not words, IATA!

737 MAX is more Audi TT than Ford Pinto

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The NY Times has come out with a hit piece on Boeing and the ill-fated Boeing 737 MAX. Yet to CM, the problem seems more an Audi TT or Mercedes A-Class than a deliberate case of manufacturing flaw that was the Ford Pinto.

Recall that Ford deliberately placed the fuel tank to save money, knowing that it could spontaneously combust if hit from the rear. Yet the financial boffins deduced that the cost of making the move to a safer position would not be worth the risks of such a scenario playing out. Boeing never designed the 737 MAX to have inherent instability. The computer modelling power now is such that the most extreme scenarios would have passed muster. The FAA felt confident that the plane was airworthy to approve it.

Audi had an issue in 2000 with the TT. The sleek 2-door sports car was built off the VW Golf platform. However, the car was found to be prone to uncontrolled spins which killed 5 drivers. Audi was forced to install a spoiler and more sophisticated driver aids (software) to prevent the problem from occurring again. Same for the Mercedes Benz A-Class which failed the elk test conducted by a Finnish motoring magazine in 1997. It flipped when trying to avoid a dummy elk on a test track. This forced Mercedes back to the design room to install stability software to overcome the problem and restore its reputation for safety.

This is essentially what has happened at Boeing. While the press wishes to point to evil doings, the reality is that poor internal communication on such a big project was to blame, not willful negligence. Planes are pushed well beyond what they would ever be likely to encounter in real life. Take the 787’s wing flex test at 30% more than the plane would ever encounter while flying in the worst conditions.

It makes absolutely no sense for Boeing to take such massive risks on the 737 MAX, its #1 selling aircraft, by making it in such a way that it had a high propensity to crash.

The Boeing 737-400 series had inert fuel tank issues where near empty scenarios could cause the vapor to ignite in the centre tank that could lead to a deadly explosion. Several did. Some in the air. Some on the tarmac. These planes weren’t grounded. World aviation authorities, like Australia, issued advisories on how to mitigate the risk of it happening.

The 737 also had a rudder hard-over fault which led to several crashes. The design flaws were rectified when one pilot was able to recover the near-death experience. It was a faulty rudder actuator which could stick under certain temperatures.

The list of 787 airworthiness directives (from fire issues, wings, flight controls to landing gear) stands at 52. FIFTY-TWO. Sure a 787 has not crashed yet but where have the authorities been trying to ground the type until it has no ailments at all? Do they need a crash to rally into action? Or do they look at the issue on its individual merits? The 737 can fly without this AOA safely, which is why the FAA still allows its operation.

Having been a former aerospace analyst, this is the first time in a very long time CM can remember that a virtual global ban was put on any aircraft type. When Qantas flight QF32 (an Airbus A380) had an uncontained engine failure which ruptured the wing tanks and severing hydraulics, the airlines grounded their own planes as a safety measure, not the authorities. Singapore Airlines suspended its A380 flights for one day before resuming operations.

When AA587 crashed in Queens after the tail and engines sheared off, Airbus A300s weren’t summarily grounded. When AF447 crashed into the ocean off the coast of Brazil, A330s weren’t grounded as a precaution. It was pilots not paying attention to basics protocols, becoming overreliant on systems.

Ultimately the market will decide on the 737MAX. The plane has a 4,000+ unit backlog. Even if airlines wanted to change to A320neos, the switching costs would be prohibitively expensive in terms of pilot certification, maintenance and joining the end of an equally long queue. The order book is unlikely to suffer widespread cancellations.

Airlines run on razor-thin profit margins and the extra efficiency the MAX will offer over the existing fleet is why airlines want them now. The new LEAP-X engine technology is a once in 50-year event. The engines offer more power, 15% better fuel economy and lower emissions. The components are now ceramic matrix composites (CMC) which allows the engine to burn hotter and increase performance without suffering extra fuel burn. Nippon Carbon is the sole supplier of this magic material.

There has undoubtedly been a breakdown in communication with the FAA and Boeing. This engineering flaw can be safely encountered by software. While the NY Times has tried to over-exaggerate the fault in design, the reality is that all aircraft have engineering limitations. The 737 is a 50 years old airframe with over 1 billion passenger miles.

CM has stated many times that pilots have become too reliant on safety systems. AF 447 was a perfect case in point. When these glass cockpits with all manner of electronic trickery go wrong, pilots only need first principles to fly.

CM is sure that Boeing will recover from this incident and 737 MAX deliveries will continue as they had. The press just seems too eager for click bait, not understanding the complexities of developing new aircraft.

Nippon Carbon – hidden black diamond

Nippon Carbon (5302) is a hidden gem. CM stumbled over this company in 2012. A decade prior to this, one of the commercial jet engine makers spoke of a new space age technology on the horizon. He mentioned there was a secret sauce that went in to make ceramic matrix composites (CMC). However, because of the secretive nature of R&D, the supplier wasn’t disclosed. So 12 years after that meeting and years of trying to hunt down this miracle ingredient, CM stumbled into meet Nippon Carbon to discuss its mainline graphite electrodes business. In the lobby, a dusty glass trophy cabinet revealed a mysterious cotton reel with black fibres wrapped around it (pic above).

Needless to say on application, the investor relations director told CM it was Hi-Nicalon which goes into CMC! Bingo. Forget the mainstay graphite electrodes! CM found the missing link. In the process, he told CM that the company had spent 40 (yes, forty) years developing it. Who does that? Only in Japan. What the material does is enable jet engines to burn hotter which means longer life, more efficiency with fewer emissions and lower weight. Win, win, win, win.

CFM International (GE/Safran JV) has 8,000 jets (16,000 engines) in the order book. Nippon Carbon’s JV to make Hi-Nicalon was lifted 10 fold in recent years to 10 tons (full capacity will be hit this year) and GE has licensed another 100% capacity increase from Nippon Carbon to produce locally in the US. It is black gold of another dimension.

What is often underestimated, is that passing new technology in commercial aerospace is way harder than seeking new drug approval in the pharmaceutical world. A new drug might have drowsiness as a side effect. A jet engine can’t have that level of failure risk. So now that this product is already flying in the B737 MAX and A320neo, the technology will be rolled out on all new commercial jets from this point. The next generation Boeing 777x will sport Hi-Nicalon in its GENx engines which will use about 5x the material than a B737. 340 orders for the B777x have already been placed by airlines. Deliveries begin in May 2020. GE will be the only engine choice on 777x.

Nippon Carbon is the sole CMC source ingredient producer for GE, the world’s largest jet-engine/turbine maker. The wonderful part about that is the fact that no substitutes will replace it. There are no competitors because in aerospace, quality of material matters. Only source suppliers get a look in. Nippon Carbon owns 50% of the NGS Advanced Fibers business where Hi Nicalon sits. GE & Safran own 25% each of the remainder. 

Ube Industries (4208) has Tyranno-fiber and is partnered with Rolls-Royce. Yet it is tiny part inside a business dominated by construction cement.

Nippon Carbon shares were hit hard the day before 1Q earnings on the back of a downward revision by competitor Tokai Carbon (5301). This is what happens when stocks have no official stockbroker coverage and get tarred by having “Carbon” in the name.

Nippon Carbon’s 1Q results came out after the close the following day, reporting a 46% increase in sales vs last year and a 168% increase in EPS. Full-year earnings were left unchanged.

Nippon Carbon mentioned tougher pricing position in graphite electrodes like Tokai Carbon, but the volume side appears healthier. It would not disclose customers but said demand was still healthy.

Sadly, disclosure is not a strong point of many Japanese companies and Nippon Carbon is no exception. Yet Japanese retail investors get hysterical over homegrown technology winding its way onto globally famous products. Toray (3402), the massive textile manufacturer, signed an exclusive supply contract with Boeing for the 787’s carbon fibre needs. The share price did the following. The slump came on the back of GFC.

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Toray’s stock trebled. Carbon fibre was only 12% of its earnings at the time. It is around 20% today. The rest of the Toray business was low margin textiles. Buying Toray to get exposure to 787 was like buying a fruitcake to get some raisins.

Osaka Titanium

Osaka Titanium Technologies (5726) had an even more bonkers reaction to the 787 which was loaded with titanium parts. Coupled with a global production shortage of titanium sponge and sharply higher contract prices, OTT shares jumped 28x! From relative obscurity, the stock became the most liquid stock in Japan. This is what happens when the small-cap retail lunatics are running the asylum.

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Based on Nippon Carbon’s FY2019 EPS forecast of ¥1,148 it trades on a 3.6x PE ratio. It trades below replacement cost and invested capital. CM thinks that if it manages to hit 20t of Hi-Nicalon by 2020 its EPS could approach ¥1353. That would put it on 3.05x.  Writing in an Armageddon scenario (literally nuking the core graphite electrode business) of ¥210 EPS the stock would be trading at a trough 19.6x. Normally industrials in a downturn would face losses or 50-100x multiples. 

To be honest its biggest problem is that the Nippon Carbon has such woeful marketing of itself. A visit to its Tokyo HQ reveals a 1950s lobby. It doesn’t spend a lick on itself which is also a relief. No frills. It is a proper engineering company. Unlike Toray and Osaka Titanium (at the time), Nippon Carbon has no official broker coverage meaning it remains in obscurity.

Hi-Nicalon is truly revolutionary. It is a once in half-a-century product. It will become the defacto standard jet engine material. At the moment it stands at around 5% of revenue and minimal profit as it ramps up but by next year it could be as high as 15-16% in a few years, which maybe conservative. Depending on the demand for aircraft, it may head higher. It is worth noting at the time of GFC, airlines many upgraded to more efficient aircraft to lower operating costs. Leasing companies obliged. That isn’t to say that Nippon Carbon is isolated by any means but the product itself is unique which provides relative stability.

Worth taking a long hard look at the story. This is a game changer material. We only need for the retail investor to cotton on to this story and let the Pride of Nippon push it to absurd valuations. We have the history of Toray and Osaka Titanium. At 3.6x it is already at absurd valuations (just at the opposite end).

Parker Hannifin order book sets worrying tone

Parker Hannifin is a fantastic barometer to measure the health of global industrials. It is a leader in pneumatics, pumps, hoses, hydraulics, drives, valves, filters, separators, refrigeration, seals etc. It’s products find their way into almost every conceivable part of the manufacturing chain. Think of it as a massive hardware store for corporations. From Caterpillar earthmovers to automation in food factories. When Parker announces orders, we get a good window on how the state of the economy is doing. The Q3 numbers released today showed:

• Orders decreased 4% for total Parker

• Orders decreased 6% in the Diversified Industrial North America businesses

• Orders decreased 4% in the Diversified Industrial International businesses

• Orders increased 2% in the Aerospace Systems Segment on a rolling 12-month average basis

Because aerospace is such a long lead time business, orders can buck trends. Having said that, orders for North America and International were soft.

Forget that Parker beat on EPS print. It’s guidance is the same. The orders are a worry. Q4 hurdles look tough.