Airlines

Alitalia – what is it with airlines and government support?

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Last Friday Italy extended a bridge loan for Alitalia, which is in special administration as plans for it are determined by the state.  Italy’s cabinet has  passed an emergency decree to add a further 300 million euros on top of the 600 million euros it made to the ailing airline in May. It has extended the deadline for the repayment of the loan from November 2017 to Sept. 30, 2018.

Airlines are perhaps one of the worst industries as an investment one can find. High fixed costs, variable fuel prices, volatile economic cycles and intense competition. Yet with all of this, governments see them as national icons. Losing the flag carrier is viewed by some governments as a sign of economic impotence.

Several years ago, Japan Airlines went through a state-funded rehabilitation where the airline was able to overhaul its fleet while its legitimately profitable and unassisted competitor All Nippon Airways (ANA) got nothing. In the reverse poor old ANA was effectively taxed as its biggest rival got free kick after free kick from the government.

Qantas reported a $235 million loss in the last half of 2013 and cut 5000 employees to save the company $2 billion. The government was pressured to give state aid to prop up the airline but then PM Tony Abbott said, “because we do not want to be in the business of subsidising any single enterprise. It’s not sustainable in the long term”. So Qantas didn’t get help in 2014 and the airline has since rebounded and recently compensated its CEO Alan Joyce over $24mn as the shares have stormed 6x since the lows of 3 years ago. Most of the 5,000 let go have been recovered.

Which begs the question of state subsidies. When looking at Australia once again the state spent billions over decades to defend a bloated, inefficient and uncompetitive car industry. Nissan, Mitsubishi Motors, Toyota, GM Holden and Ford all closed local auto making opps. When businesses are subsidized, the necessity to reform is numbed. There is less need to get fit and look for efficiencies to get off the taxpayers’ teat. So even after 20 years and $12 billion spent to protect 45,000 jobs, all makers packed up and went home. Would have been better to write each worker a $250,000 cheque.

Of course some will argue that protecting jobs is a noble quest. Nobody likes seeing people unemployed. However if the rest of the world can make the same products cheaper and more efficiently why should consumers and taxpayers be forced to prop up those who won’t make the effort to reform.

Alitalia is yet another one of these businesses that is in the citizen’s pockets. If KLM and Air France can pair, Lufthansa and Swissair can join why shouldn’t Etihad back the initial investment it made in Italy’s national carrier. Another Loan is Time-warped, All Logic Is Abandoned.

Kobe Steel’s White Samurai – who might be forced into national service?

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While we are some way off understanding the extent of damage to Kobe Steel, we shouldn’t rule out the inevitable action which could involve a structured rescue of it, a white samurai if you will. Japan’s largest steel company NSSMC (5401) owns 2.95% of the outstanding shares of Kobe Steel. Will we see a motion in several months time as more facts become known for a consortium like the INCJ to team up with NSSMC to turn it into another Hinomaru sunset business? We saw the dying semiconductor industry in Japan get rolled into Elpida (which went bust) and cell phone screen players get merged into Japan Display (still listed) so why would anyone doubt a Hinomaru Steel consortium which would be a forced sense of national duty. While still way too early to surmise we should not ignore such a scenario should Kobe really find itself hoisted by its own petard. Corporate harakiri is the last thing Nippon Sumitomo Steel holders want from a governance perspective

Kobe ‘Steal’ – why this scandal could get much uglier

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Kobe Steel is the next in a growing list of Japanese corporates embroiled in data falsification. Kobe Steel has been supplying lower spec material to customers than advertised. In a sense stealing. Sure VW is no better in lying about its emissions but Kobe Steel has the potential to be more like Takata than Mitsubishi Motors in terms of impact. The issue here has to do with Kobe Steel products being in structures of aircraft, trains (including bullet trains) and cars. While much is being made of ‘little risk’ attached to these slightly lower spec products the reality is that ‘metal fatigue’ is calculated in the resesearch, development, testing and evaluation of such products.

For instance when planes are in the development phase FAA certification depends on making sure products can meet certain tolerances, cycles and stress tests. Once certification is granted, if subsequent production is met by sub-standard intermediate products unbeknownst to the manufacturer of the part then the trail becomes a much more serious matter. It is easy enough to determine which Honda’s had defective airbags as it is a specific part on specific models. Yet Kobe Steel steel products shipped all over the globe may have been used in different parts. Then those discrete parts would need to be traced to the next intermediate stage and then on to the finished part to which may be fixed to an airline on the other side of the world. Boeing is naturally not raising any alarms until they can assess the issue.

JR has already noted 310 sub standard parts in wheel bearings in its bullet trains which will be replaced at the next scheduled service. It is likely that the JR parts are over spec for the extra margin of safety.

None-the-less aircraft could turn into a much bigger problem. There is only one spec that is supposed to be met. Failure to meet it could cause planes to be grounded until parts are replaced. This could be massively costly as planes not in the air earning money cost millions on the ground. Not to mention the risk of the US government fining the company for reckless behaviour.

Kobe Steel has seen revenues track sideways for the better part of a decade. Profits have been all over the shop. Much like Toshiba tried to fiddle the books with one division in the hope that in time it would be able to put the money back and no one would notice. As for Kobe Steel, there was obviously a plan to try to boost profitability by lowering specs and charging prices for superior spec. Even then the contribution has been poor. Hardly surprising when the cash conversion cycle has exploded from 38 days a decade ago to around 82 today. To be faker most of the big steel companies have a similar CCC which hasn’t changed much over the last decade.

What we can be pretty sure of will be the soft touch of the local authorities. Even with such willful deceit, it is unlikely anyone will see inside of a jail cell or pay multi million dollar fines in Japan. However the tail risk here is the likes of Boeing who will extract every pound of flesh with the help of its authorities to rent seek from Kobe Steel if certain parts are found to be ultimately faulty because of negligence. This is not a staged Nissan-Mitsubishi Motors leak to force a cheap entry into the latter. Still, 37,000 employees at Kobe Steel will be seen as a sizable number to protect at a national level hence a limp wristed response to follow.

One final point. Do we honestly think that Kobe Steel can conduct an honest audit of its deceit? Surely flagrant data fiddling will be milled down to more acceptable cheating.  It is a time honored tradition to leak a bit, then a bit more so as to minimize the shame.

Until Japanese listed corporates face far harsher penalties for such malfeasance, it will be hard to shake off the cynicism that the corporate governance code has introduced anything more than mere lip service. That is OK if that is what Japan wants to project to the world that shareholders are not a priority.

Flake News

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Fake news, very fake news or in many cases it is just flake news. Flake news? The lack of context and perspective and trying to draw parallels with irrelevance. Take this piece from Robert Reich taking a trademark swipe at Trump rationalizing it with a very poor understanding of the industry he seeks to convince his audience he is an expert in:

“I just watched Trump give a speech at South Carolina’s Boeing facility where the new 787 “Dreamliner” is being unveiled. Trump said it was “built right here” in South Carolina, and that “our goal as a nation must be to rely less on imports and more on products made here in the U.S.A.” He also called for “a very substantial penalty to be paid when they fire their people and move to another country, make the product, and think that they are going to sell it back.” And said he’ll lower taxes and get rid of regulations that send our jobs to those other countries. “We want products made by our workers in our factories stamped by those four magnificent words, ‘Made in the U.S.A.'”

All fantasy. In fact, almost a third of Boeing’s Dreamliner comes from abroad — from countries with high taxes and high regulations, good wages, strong unions, excellent schools including technical education, and universally-available health care.

1.The Italian firm Alenia Aeronautica makes the center fuselage.

2. French firm Messier-Dowty makes the aircraft’s landing-gear system.

3. German firm Diehl Luftfahrt Elektronik supplies the main cabin lighting.

4. Swedish firm Saab Aerostructures manufactures the access doors.

5. Japanese company Jamco makes parts for the lavatories, flight deck interiors and galleys.

6. French firm Thales makes its electrical power conversion system.

7. Thales selected GS Yuasa, a Japanese firm, in 2005 to supply it with the system’s lithium-ion batteries.

Oh, and the first delivery of the Dreamliner is scheduled to take place next year – to Singapore Airlines. Currently there are 149 orders for it from worldwide customers including British Airways and Air France.

In other words, contrary to Trump, the Boeing Dreamliner is made all over the world and will be sold all over the world.

His “America First” economics is total demagoguery. We get a first-class workforce by investing in their education, training, infrastructure, and healthcare — not xenophobic grandstanding.

What do you think?

Well Mr Reich. Here is what I think.

The Boeing 787 Dreamliner has been one of the biggest program failures in the company’s history. While a technical marvel it was three years late, largely exposed by Boeing’s disintermediated supply chain, a break with decades of practice.

Aircraft production is a precise business. It requires that all parts arrive on time and to achieve that all suppliers must be on board. The 3-month delay of a $1 plastic fastener can mean a plane can’t be fully completed let alone delivered. So multi million dollar wing set production gets impacted. So do landing gears, engines and stabilizers. Everything is affected. Boeing’s delays sent many suppliers into financial distress. In some cases it was so bad Boeing had to step in to buy out suppliers (e.g. Spirit) to prevent further delays and cost overruns.

The second big flaw in Mr Reich’s article is that Boeing is a multi-nation aircraft for a reason. It is what is known as risk and revenue sharing partnerships (RRSPs). Companies bid to be on the project and pay a part share in it. It is an investment. They are shareholders to all intents and purposes. Companies like Mitsubishi Heavy and Kawasaki Heavy bought a stake in the project. Boeing was the project manager and designer. In short international companies bought themselves a ticket to be on the 787 with the hope if it was a success they’d be higher up the technology curve when 777 or 737-Max went to similar production materials and processes.

Boeing enthusiastically embraced this outsourcing, both locally and internationally, as a way of lowering costs and accelerating development. The approach was intended to cut the 787’s development time by 30% and with it, development cost from $10 to $6 billion. Estimates show that cost ended up being $20bn and 3 years late and is expected to break even in its 10th year. It is far from the success it was meant to be.

Another thing with aircraft suppliers is their scarcity. Aircraft manufacture comes at huge fixed costs and low lot volume. Around 120 Dreamliners are made a year and the reason the supply chain is like it is makes perfect sense. Suppliers need guarantees to ensure production levels meet their financial objectives. Parts certification is a tricky business.

Boeing needs to be sure suppliers meet certification requirements. If people think pharmaceutical companies going through the FDA process to sell a new drug is a nightmare, they should try to get a new aircraft past FAA regulations. While a drug might have minor side effects like drowsiness, a plane has to fly safely every time in almost any condition. Therefore the quality, durability and safety aspects for a plane that flies for up to 40 years is second to none. There are no short cuts.

The Boeing 787 was also made with all new production processes and materials not used before on this scale. The wings were carbon fibre composite. Mitsubishi Heavy not only agreed to be a RRSP but was willing to invest to meet Boeing’s production goals. Toray, the maker of the composite material was seen as the most reliable and stable supplier. These were cold hard facts and when building a new aircraft, airline customers want to minimize risk. Boeing needs to guarantee risk minimization and made rational decisions based on that. Had those suppliers been all in the USA you can be assured US suppliers would have been picked. Sadly many have lost competitiveness. An unknown fact is that Lockheed Martin called in Toyota to help it finesse its production processes for its disastrous F-35 programme.

So while Reich points to the ‘social’ qualities (education, healthcare, strong unions and good wages) of what goes to make an airliner they are generalizations to say the least. Japanese unions are far from strong and definitely not militant. Mitsubishi Heavy wing workers would be paid the same as their elevator assembly brothers across the hall. They wouldn’t necessarily be on high wages. I would imagine that many of Boeing’s designers have Ivy League or similar pedigrees. Assemblers would also possess serious qualifications.

In any event the point Trump was making was the same jawboning at election time. Make America First and keep jobs at home. Ideally he would be saying to Boeing that following Airbus’ example of assembling a portion of A320s in China is not his wish. In fact Boeing now has a joint venture with a Chinese entity that installs interiors and paint exteriors on 737 airliners. Is he a criminal for requesting companies stay at home?

Yes Mr Reich, President Trump is not perfect but he is doing his level best to turn around the fortunes of a country sold out by the establishment over many decades. Indeed if he cuts corporate taxes and incentivizes companies to stay at home because of a rational reason to do so that will be key. Instead of sticking it to him Mr Reich, try look beyond your prejudice to see why 64mn Americans put him in charge of their future. He may well fail but voters took that risk when they put him in office. They care not for the petty issues you raise in your articles.

This article seeks to take pot shots without assessing the full facts of an industry. What you wrote wasn’t fake news but flake news.

Crash survivor wins $1mn lottery

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Despite the tragic loss of a firefighter post the crash of an Emirates 777 in Dubai, a 62yo Indian passenger, Mohammad Basheer Abdul Khadar,who resides in Dubai bought a $1mn lottery ticket at Dubai Airport before his out leg to India. On his return to Dubai he escaped the crashed plane to find out the following week he’d won the prize.

Khadar said he was planning to return to Kerala to retire and would use the money to help children in Kerala who need financial support.He said he earns around $2,200a month, and would continue to work as long as he could.“Nothing else can give you the satisfaction of your hard-earned money!” 

The old adage goes that one should buy a lottery ticket after escaping adversity. It seems one needs to buy one before it.

The real cost of engine failure on QANTAS

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Don’t get me wrong, if I’m flying, having the best pilots always trumps lousy flight service which to be fair on QF25 was pretty good. So as I say back to watch Air Crash Investigations on my iPad while sipping Pinot Noir I’m told we’re diverting to Brisbane because of engine failure. I thought something was wrong when the #2 engine was wailing. It’s what happens on the ground that matters where you win or lose customers.

What do I mean? Not for a second do I think setting up hotel rooms, buses and other logistic bits and bobs in short order at 11:30 on a Friday night in Brisbane is a snap.  To that end things kind of worked as well as could be expected.

As 300 odd (mostly Japanese) passengers waited an hour for bags from a carousel where all the baggage handlers had gone home  because the airport was technically closed, the flight steward(esse)s walked past stranded passengers with their wheelie bags to get on their crew escape pod to their hotel. Now no one has issues with pilots getting needed kip before they resume (regulations or not) the coming afternoon. But the inflight crew can’t just baton touch to the ground crew in front of passengers. Now most Japanese people (including 75 school kids) were grumpy, confused and concerned.  I appointed myself a quasi translator to those around me because buggered if most of them understand how Quoinslenders talk when handing out info. I happily did it to be courteous but if this had been JAL  or ANA the flight crew would have been the last to leave the scene of the crime scurrying around keeping passengers informed. Here is the cultural bit – even if the people that served them on board didn’t speak a lick of Japanese the mere gesture in and of itself would have curried great favour and they’d feel deeply appreciated.

By the time we get to the hotel its 1:30am. Our hotel was in Brisbane Square and that area at 1:30am on a Saturday morning is full of drunkards working out how to return those rented pints to the sidewalk. At check the hotel stupidly ask for a credit card for security. I ask why? “Qantas is footing your bill. In all seriousness even if I pillaged the minibar I doubt all 300 passengers in aggregate are likely to abuse the airline. 99.9% want a bed to sleep in and a breakfast when they wake up. Taking a credit card delays the check in of over 300 people lining up and adds to a bad situation.

When one declines a meal service on board they put a small sticker on the seat so you won’t be disturbed. Simple. So at check-in at the hotel why don’t they instruct the front desk to ask if you wish to have a meal? Instead I get a call at 3:50am asking if I want a meal?  I decline to which the night porter says “but it’s free”. I said “mate I couldn’t care less if it was Michelin 3-star and Gordon Ramsay was cooking it.”

While I might sound ungrateful (I’m really not) it would be so simple for Qantas it other airlines to make these “inconveniences” into long term “folklore.” Social media, blogs and word of mouth can instantly undo years of slog in advertising dollars appealing to virtues. Because it is the handling of disasters that truly show a corporate’s true colours. On board is rate them 8/10. On the ground 3/10. Sadly it’s the bad stuff people remember. Had the aircrew (ex-pilots) stayed behind and showed good old fashioned Aussie self-deprecation and humility on the ground the glass of the majority of the Japanese would have switched from half empty to half full. It shouldn’t just be for the Japanese mind you but cultural awareness in s global business should be 101 in the training manuals.

It’s always the little stuff that matters in the end. So while the accountants look at the cost of engine repair, dumped fuel and 300 hotel beds the real cost ends up being the risk of viral media pointing to bad experiences. That is what is called an “uncontained failure”