Travel

Air India seconds from disaster?

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Typical to see the press try to link the tragic accident caused by engine failure on a Southwest flight and a poorly fitted window frame on an Air India 787. The press once again went for clickbait talking about “smashed window…three rushed to hospital” instead of trying to search fact that this was a cosmetic folly and nothing more.

The main difference was in the Southwest accident, engine parts flying at 3,000rpm punctured the EXTERIOR window causing rapid decompression. In Air India’s case a poorly mounted interior window which has the functions of sound deadening and aesthetics popped out of a mount which would cause zero risk of compromising the plane’s structural integrity. If you look at the picture the oxygen masks haven’t deployed which would occur automatically if it did.

The sad truth of the Southwest uncontained failure is that the engine casing is supposed to catch any debris that breaks off. Such metal fatigue is more likely on such aircraft types (737) is that the short haul nature puts more stress on components. Such aircraft make more than half a dozen cycles (takeoff/landing) a day meaning wear and tear is higher. Tyres make a good reference- a 737 gets new tyres on average every 20 days. A long haul aircraft despite being heavier gets tyres every 40-60 days.

So typical press phooey to connect two completely unrelated accidents.

Qantas – do you think this might work better?

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Qantas is training it’s staff not to use words like “honey”, “darling” or ”husband & wife” to avoid offending minorities onboard. Here’s a better idea Qantas. Instead of blanket removing words from the new speak dictionary why not improve your service to a level where customers at or before check-in can elect to let you know what they’re happy with being called? That way everyone can praise the airline for “attention to detail”, an accolade that is generally not bestowed on Qantas. If CM is called darling or honey I won’t be offended.

Qantas would probably find 99% of passengers couldn’t care less. Presumably all 63 genders will need to be cited ahead of the safety briefing. What about if a 7yo child feels offended that the parent/adult/guardian puts on their oxygen mask first is inappropriately ignoring that he/she/xie identifies as a 19yo? Maybe Qantas should install 63 toilets onboard to really make sure all levels are catered for? Or prayer rooms for all faiths? PC nonsense going too far.

World government – why it would never work and why you shouldn’t want it to

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World government. Some criticise the US move to hobble the UN via funding cuts as justification for it. Some argue that international laws cramp the style of just about every government under the sun so those with power go out of their way to prevent it. The same people argue that the UN should be democratized and nation states should submit to international law and independent institutions set up to enforce it.

Presumably within this Marxist manifesto there should be no borders and total freedom of movement. However within this socialist dogma not one has put forward how it might work economically which is probably the best signal that it would fail to be a sustainable form of government. We’ve had multiple attempts at socialism and in every case it has failed. Oh how the left championed Chavez as a model of successful socialism. How quiet they are now. Still it doesn’t prevent them extolling the virtues of ‘equality’ even if some pigs are more equal than others.

Still suppose we entertain the prospect of a world government. We have to start somewhere. Regardless of whether we like it or not, a world government would need to address economic status to sign up willing participants. The US economy is 24% of world GDP with less than 5% of the world’s population. In order for the US to agree to join a world government they would rightly demand that they get 24% of the seats in a world parliament? Why would they join at 5%? What is the incentive? Virtue? Australia has a disproportionately large raw materials base relative to the population. Should the Aussies have just one vote if it ends up benefitting others more than itself?

We have a living working example of how fusing completely different economic systems doesn’t work, even when the population speaks the same language – German reunification. From Der SPIEGEL,

Today, the eastern German economy is still in a sorry state, and there are no indications that the situation will change. An estimated €1.3 trillion ($1.6 trillion) have flowed from the former West Germany to the former East Germany over the last 20 years. But what has that money achieved? Historic neighborhoods have been restored, new autobahns built and the telephone network brought up to date, but most of the money was spent on social benefits such as welfare payments. The anticipated economic upswing failed to materialize…Most of eastern Germany has turned into an economically depressed region that lags behind the west in all respects:

The per capita economic output in the east is only at 71 percent of the western level, with a disproportionately high share of economic output attributable to the public sector. The economic output generated by the private economy is only at 66 percent of the western level.

To close the gap, the eastern German economy would have to grow more rapidly than in western Germany, but precisely the opposite is the case. Germany’s leading economic research institutes expect the economy in eastern Germany to grow by 1.1 percent this year, compared with 1.5 percent in the west.

Since the fall of the Berlin Wall, the population of eastern Germany has declined by almost 2 million people, a trend that is continuing unabated.

The proportion of household income derived from welfare payments is 20 percent higher in the east than in the west.

Of Germany’s 100 largest industrial companies and 100 largest service providers, not one has its headquarters in eastern Germany.

The lesson is clear. When given a choice, the citizens of the former socialist state stampeded to the capitalist state because they knew ‘opportunities’ were far more abundant and desirable. The power of the free market. What better indication of a repudiation of socialism than those that have actually lived under it. Many ‘socialists’ today (who ironically have never experienced it) are envious. Indeed former PM Baroness Margaret Thatcher put it best, “the Labour Party would prefer the poor were poorer provided the rich were less rich” Instead of enterprise and looking for ways to get ahead, many sit back and complain why it isn’t handed to them on a platter.

So in the case of world government without borders, it would make complete sense for people from say Africa or the Middle East to move to NY, London or Berlin. As they left their homes in the millions, sheer logistical issues would come into play – housing, food, healthcare and sanitation. The only way to ration scarce resources would be to let the free market decide it. World government wouldn’t allow it. Shouldn’t a Congolese family have a claim to live in a penthouse on 5th Avenue or Mayfair in the interests of equality? Maybe the owners of the 5th Avenue apartment should have the property repossessed to promote equality. Surely a noble gesture for the other 99%.

What about filling the world parliament? How do we look to address balance? The Indians and Chinese represent 35% of the global population. Should they not occupy 35% of the seats? Is there a global vote? As an Australian do I get a say on the Chinese candidates? Do they mine? Assuming we had global votes, language barriers would be a problem. How would an English speaker be able to work out the depth in abilities of a Chinese candidate from Harbin who only speaks Mandarin? Even if we could translate his every word, what hope would we have of delving deep into his or her history or the subtleties of cultural ‘meanings’ hidden within language to be able to cast a ballot on as fully informed a basis as possible?

Or should we cut the pie of global government candidates based on religious grounds? Muslims represent 24% of the population. Should all countries submit to having 24% of the laws made by a global government Sharia compliant? Christians represent 31% of the globe. Should they have the right to enforce the world to take Christmas as a public holiday? If the international parliament votes to repeal Ramadan should it stand? Afterall that is the result of a properly functioning global democracy!

Some in favour of the UN being the ‘social democracy’ that binds us honestly believe that it would not fall foul of greed, corruption or poor governance. Do we seriously wish to put power in the hands of the UN as our global government if one of its groups thought the murderous dictator Robert Mugabe was a worthy ambassador for WHO? Do we think the UN to date has shown exemplary governance and ethics to provide a comfort level for we minions to hand over our regulatory frameworks? Take the former UNIPCC chair who directed UN procured funds toward his own ‘scientific research body’. Conflicts of interest anyone? The UN argues it is independent but how could it be if it is so self serving? To think there was a strong suggestion that the UN deploy blue helmets in Chicago to help quell gun violence. The question one should ask is why wasn’t such action taken when Obama was president? So much for a guarantee of independence if the UN so blatantly takes sides because they want to retaliate against Trump.

We already have a preview of world government policy looks like. Many Western governments are already pandering to political correctness in ways which are causing growing backlash among constituents.

Some on the left believe that nationalism is a “backward, regressive, half-baked ideology which is used by ruling elites to control their populations” Wasn’t the open minded Labour heartland in the Midlands one that leaned to Brexit? Wasn’t it in France where Marine Le Pen’s Front National doubled the number of voters ever seen for her party? Was it not Hungary that voted 99.4% in favour of a referendum to reject forced migration quotas? The surge in the AfD in Germany to 14%. The huge landslide in Austria where the young PM has given his immigration portfolio to the FPO? The surge in the eurosceptic 5 Star Movement in Italy…the list goes on. Even Switzerland handed back its free pass to join the EU (which is about as close as one gets to a world government) because it puts sovereignty and the wish to preserve culture and customs ahead of ‘socialist’ ideals. Isn’t that patriotism rather than nationalism? Lukas Reimann of the Swiss People’s Party, said:

It is hardly surprising that the EU looks like an ever less attractive club to join. What, after all, is the appeal of joining a club into which the entire world can apparently move?”

So what would a world government do to combat nationalism? Regulate against it! Restrict freedom of speech. Incarcerate those that protest against what they perceive as injustice. Of course it would be easy to simplify these people as racists or bigots for not conforming. The price of progressivism is to muzzle dissent. Identity politics and the victimhood it breeds are so pervasive that it creates the exact division it seeks to stop. For  those pushing for world government make no mistake that the elites among the commissars will still be more equal than others.

What is wrong with celebrating differences?  Isn’t visiting a foreign country to immerse oneself in a different culture half the fun of an overseas vacation? Learning about how civilization developed over millennia. Experiencing foreign cuisine, learning a foreign language or respecting local customs (e.g. wearing long sleeves and pants into a Buddhist temple) are not things to be frowned upon. They are exactly the reason why all of the tribes of the world can’t be homogenized into the one box. Yet the world government wouldn’t tolerate such thinking.

Tesla – 30 reasons it will likely end up a bug on a windshield

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Contrarian Marketplace ー Tesla – 30 Reasons it will likely be a bug on a windshield

Contrarian Marketplace Research (CMR) provides 30 valid reasons to show Tesla (TSLA) is richly valued. Institutional investors have heard many of the financial arguments of its debt position, subsidies, cash burn and other conventional metrics. What CMR does is give Tesla all the benefits of the doubt. Even when extended every courtesy based on Tesla’s own 2020 production target of 1,000,000 vehicles and ascribing the margins of luxury makers BMW Group (BMW GR) & Daimler (DAI GR) the shares are worth 42% less than they are today. When stacked up against the lower margin volume manufacturers, the shares are worth 83% less. There is no fuzzy math involved. It is merely looking through a different lens. We do not deny Tesla’s projected growth rates are superior to BMW or DAI but the risks appear to be amplifying in a way that exposes the weak flank of the cult that defines the EV maker- ‘production hell’.

Follow social media feeds and Tesla’s fans bathe in the cognitive dissonance of ownership and their charismatic visionary, CEO Elon Musk. No-one can fault Musk’s entrepreneurial sales skills yet his business is at the pointy end of playing in the major leagues of mass production, which he himself admitted 18 months ago was a ‘new’ challenge. Let us not kid ourselves. This is a skill that even Toyota, the undisputed king of manufacturing, a company that has coined pretty much every industrial efficiency jargon (JIT, Kanban, Kaizen) has taken 70 years to hone. It might have escaped most investors’ attention but Lockheed Martin called on Toyota to help refine the manufacturing processes of the over budget F-35 Joint Strike Fighter. If that is not a testament to the Japanese manufacturer’s brilliance Tesla is effectively Conor McGregor taking on Aichi’s version of Floyd Mayweather.

Yet Tesla’s stock has all the hallmarks of the pattern we have seen so many times – the hype and promise of disruptors like Ballard Power, GoPro and Blackberry which sadly ended up in the dustbin of history as reality dawned. Can investors honestly convince themselves that Tesla is worth 25x more than Fiat Chrysler (a company transformed) on a price to sales ratio? 10x Mercedes, which is in the sweet spot of its model cycle?

Conventional wisdom tells us this time is different for Tesla. Investors have been blinded by virtue signalling governments who are making bold claims about hard targets for EVs even though those making the promises are highly unlikely to even be in office by 2040. What has not dawned on many governments is that 4-5% of the tax revenue in most major economies comes from fuel excise. Fiscal budgets around the world make for far from pleasant viewing. Are they about to burn (no pun intended) such a constant tax source? Do investors forget how overly eager governments made such recklessly uncosted subsidies causing the private sector to over invest in renewable energy sending countless companies to the wall?

Let us not forget the subsidies directed at EVs. The irony of Tesla is that it is the EV of the well-heeled. So the taxes of the lawnmower man with a pick-up truck are going to pay for the Tesla owned by the client who pays his wages to cut the lawn. Then we need look no further than the hard evidence of virtue signalling owners who run the other way when the subsidies disappear.

To prove the theory of the recent thought bubbles made by policy makers, they are already getting urgent emails from energy suppliers on how the projections of EV sales will require huge investment in the grid. The UK electricity network is currently connected to systems in France, the Netherlands and Ireland through cables called interconnectors. The UK uses these to import or export electricity when it is most economical. Will this source be curtailed as nations are forced into self-imposed energy security?

So haphazard is the drive for EV legislation there are over 200 cities in Europe with different regulations. In the rush for cities to outdo one another this problem will only get worse. Getting two city councils to compromise is one thing but 200 or more across country lines? Without consistent regulations, it is hard to build EVs that can accommodate all the variance without boosting production costs. On top of that charging infrastructure is an issue. Japan is a good example. Its EV growth will be limited by elevator parking and in some suburban areas, where car lots are little more than a patch of dirt where owners are unlikely to install charging points. Charging and battery technology will keep improving but infrastructure harmonisation and ultimately who pays for the cost is far from decided. With governments making emotional rather than rational decisions, the only conclusion to be drawn is unchecked virtuous bingo which will end up having to be heavily compromised from the initial promises as always.

Then there are the auto makers. While they are all making politically correct statements about their commitments to go full EV, they do recognise that ultimately customers will decide their fate. A universal truth is that car makers do their best to promote their drivetrains as a performance differentiator to rivals. Moving to full EV removes that unique selling property. Volkswagen went out of its way to cheat the system which not only expressed their true feelings about man-made climate change but hidden within the $80bn investment is the 3 million EVs in 2042 would only be c.30% of VW’s total output today. Even Toyota said it would phase out internal combustion in the 2040s. Dec 31st, 2049 perhaps?

Speaking to the engineers of the auto suppliers at the 2017 Tokyo Motor Show, they do not share the fervour of policy makers either. It is not merely the roll out of infrastructure, sourcing battery materials from countries that have appalling human rights records (blood-cobalt?) but they know they must bet on the future. Signs are that the roll out will be way under baked.

While mean reversion is an obvious trade, the reality is that for all the auto makers kneeling at the altar of the EV gods, they are still atheists at heart. The best plays on the long side are those companies that happily play in either pond – EV or ICE. The best positioned makers are those who focus on cost effective weight reduction – the expansion of plastics replacing metal has already started and as autonomous vehicles take hold, the enhanced safety from that should drive its usage further. Daikyo Nishikawa (4246) and Toyoda Gosei (7282) are two plastics makers that should be best positioned to exploit those forking billions to outdo each other on tech widgets by providing low cost, effective solutions for OEMs. Amazing that for all of the high tech hits investors pray to discover, the dumb, analogue solution ends up being the true diamond in the rough!

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.