Workplace

Mitsubishi Jet facing cancellations

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In 2009 CM argued (in a former life) that the Mitsubishi Regional Jet (MRJ) was doomed to failure. It was answering a question that no one was asking. It seems that one of its customers, Eastern Airlines, which originally placed 40 orders found itself in receivership and its new owners do not seem to have any intention honouring Eastern’s order book. With a total order book (including options) of 447 MRJ aircraft, this would be a big dent. The plane has been beset with delays, material changes (it was to have carbon composite wings but it was deemed too expensive so switched back to alloys, increasing weight hence hurting economics) and the realities of the industry.

1. Demand – Both Boeing & Airbus publish detailed long range fleet forecasts every year. They are both in agreement that regional jets (50-100 seats) have little future forecasting they’ll represent a total of 3,000 orders in the next two decades. Around 8 years ago that forecast was 5,000.

2. Incumbents – Embraer and Bombardier dominate the regional jet market with some 80% share. Mitsubishi is looking to beat the door down in an industry where risk is not wanted. The Chinese are entering the market with the C-919 and the Russians with the Sukhoi Superjet. Mitsubishi wanted a 20% share. Of 5,000 units that’s 1000 units they banked on. At 3,000 that’s only 600 units their share target would hit. Boeing and Airbus are offering slightly smaller versions of the 737 and A320 series to cater to the market that would normally buy an RJ.

3. Pilots – well most pilots are certified to fly only one type of commercial plane at any given time so Mitsubishi needs to make sure it’s planes can have a supply of pilots to fly them and airlines need to take a bet on expansion. Same goes for ground crew training.

4. Existing fleet – if a regional airline wanted to expand, if they used Embraer ERJ-145s it is better to get more of the same as the economics are well understood. Also the pool of pilots is likely more accessible. Route gaps need to be filed as soon as possible so waiting 12 months to get an MRJ may not work for an airline.

5. Residual values – when airlines get into financial turbulence, sometimes fleets need to be trimmed. Having a ‘liquid’ fleet which is easily placed at another airline helps balance sheet (relatively speaking). The best example was the GE engined 747 (60% of market) which sold at a premium to the Rolls-Royce engined 747 (15% of  market) in the used market because very few airlines used RR. A fleet of MRJs may have few homes to go if airlines need to part with them quickly. Airlines know this so it is likely that Mitsubishi is providing such residual value guarantees to bank in the orders.

However if Mitsubishi keep losing orders then the airlines that intend to use them may switch away on the basis that the risks down the line are too great. Regional airline budgets are thin. Risks are avoided at all costs.

The MRJ will likely fall foul of the Mitsubishi YS-11 of the 1970s. Great concept but poor execution on the basis of not having a big enough grasp of the industry dynamics. JAL and ANA will likely he asked to do national service on top of the initial tour of duty to support the plane.

The ground’s the limit.

Healthcare in America – more hospitals going bankrupt

The Affordable Care Act (Obamacare) is often lauded by some as noble legislation. Yet according to bankruptcy lawyers, Polsinelli, the changes made to reimbursements that used to help cover hospitals who treated uninsured patients were pulled under ACA and have sent many hospitals to the bankruptcy A&E ward. The law firm said in its report,

The Health Care Services Distress Research Index was 223.33 for the third quarter of 2017. The Health Care Distress Index increased 15 points from last quarter. The index has experienced record or near-record highs in 5 of the last 6 quarters. Compared with the same period one year ago, which was a record high at that time, the index has increased 60 points. Compared with the benchmark period of the fourth quarter of 2010, the index is up over 123 percent…Unlike the public markets, the Polsinelli/TrBK Distress Indices include both public and private companies, creating a broader economic view and one which may show developing trends on Main Street before they appear on Wall Street….Health care distress is high and it seems to be getting worse…

…The business of health care is unlike other industries, such as manufacturing, real estate, or retail. Health care faces all the traditional business challenges, such as competition, the impact of technology on services, and increasing wages. But more, the health care industry is needing to adapt to increasing regulations, changes in reimbursement rates from government or private payors, and a shift from traditional fee-for-service to value-based models that impact profitability…There is unprecedented pressure of major systemic changes to the existing health care system, particularly the implementation of the Affordable Care Act over the last several years and the current status of the program, which is alternately being repealed, repealed and replaced, phased out, or simply defunded…The administration’s recent decision to terminate cost sharing reduction payments will also directly impact the health care market. Insurance companies may continue to provide insurance at a higher premium or decide to exit the markets. Eliminating these payments and the resulting premium increases may increase the cost to the government through premium subsidies.”

In short many Americans saw a doubling of premiums (an average increase of 113%) under Obamacare inside of 4 years causing many to forgo the insurance. The reimbursements under the old system (which helped compensate hospitals administering emergency treatment for the uninsured) that were stopped on the proviso people would take up ACA plans backfired. Not enough people signed up and more hospitals running on a days cashflow have been forced to close because the reimbursements designed to protect them against uninsured patients disappeared. When Jonathan Gruber, the architect of Obamacare, testified to Congress he candidly said,

The Affordable Healthcare bill was written in a tortured way to make sure the (Congressional Budget Office) did not score the mandate as taxes…If CBO scored the mandate as taxes, the bill dies, OK? Lack of transparency is a huge political advantage … call it the stupidity of the American voter or whatever … that was really, really critical to get the thing to pass … I wish … we could make it transparent, but I’d rather have the law than not.”

ABC gives yet more reasons to be defunded

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The Australian Broadcasting Corporation (ABC) has a charter to be politically unbiased. The public knows it is unashamedly partisan. Yet its overseers (aka the Government) still give funding north of $1bn to the state owned media group without calling it up for what it gets away with. What it passes for ‘free speech’ usually ends up in the climate change, asylum seekers or any other social justice cause it feels strongly about. Yet the charter is not supposed to act as a platform for disgruntled public servants to broadcast their own views on the taxpayer’s purse. The latest saga is the ABC’s JJJ station which broadcasts alternative music. It has decided it won’t be playing the Hottest 100 Countdown on Australia Day because of its political views that it is in reality ‘invasion day.’ There is no problem for each and everyone of those JJJ employees who thinks of Australia Day that way to believe that. It is another to provide a tax payer funded platform to express it.

To put it in perspective, given several Victorian local councils decided several months ago not to host naturalisation ceremonies on Australia Day, one would hope that JJJ has just woken up from the marijuana smoke haze in the studio to realize this fact. Otherwise, why has it taken them so long? Surely if the producers  were savvy enough at JJJ they could have announced their political stunt the week all of the social justice governments were announcing it.

However it is a serious issue. Why is there a need for four taxpayer funded stations in Melbourne? It is a similar story in the other states. The original purpose of the ABC was to fill in for a lack of a commercial alternative, especially for those in the countryside. Now we can all choose to stream Australian radio stations while we’re in Berlin or Caracas if we feel like it. When you look through the stats, JJJ key demographic is 25-39yo but across all time segments except ‘Afternoon’ it struggles for better than 5%. ABC Melbourne caters to pensioners. Is there a need to provide the infrastructure to supply four stations. Surely the rational argument is that a similar number of bodies must be employed to fill the same roles – the producer, technician, the script writer, the news gatherer….even the guard at the front door. Run many of these stations on commercial terms and most wouldn’t pay the cost of operating.

If one believes we must have a public broadcaster then the number of stations should be cut to one, not four. If the private sector can’t see a ‘commercial’ justification for filling the gap it would leave then it is odds on that advertisers aren’t prepared to either. On the flip side if the ABC radio presenters are desired by particular audiences then the private stations will gladly snap them up.

This is not to undermine the efforts of some quarters of the ABC. Some documentaries such as ‘The Killing Season’ or Foreign Correspondent’s expose of the Fukushima reactor were extremely well done. However it is the fact that some in the ABC think they have a right to dispense the billion plus funding on their own political and social causes. Yet who can blame them when the former Communications Minister (now the Prime Minister) is desperate to avoid courting negative media coverage? When a conservative (by name plate) PM is afraid to go on private radio stations with conservative audiences you know this problem of bias at the ABC won’t be going away for a long time, especially after the drubbing the conservatives will get at the coming election.

With a $500bn and rising debt in Australia, we can ill afford frivolous public spending, especially on broadcasting where the ABC ignores its charter so brazenly. We can chose to listen to left leaning or conservative radio stations in the commercial space. We can consume on line any form of media we choose from around the globe. With media now so ubiquitous, what is the ABC offering that is remotely ‘differentiated’ to warrant its existence? None that can be seen.

Tesla is trucking kidding itself

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Tesla has bagged 55 orders for the semi so far. Although it is no surprise that no major truck hauling companies have signed up. Funny that. To expect trucking companies who operate under strict cashflow constraints (afterall they’re businesses not wealthy consumers) to give Musk a $200,000 upfront deposit (aka interest free loan) per ‘founder series’ truck is to put in Tesla lexicon – ludicrous. Truck companies, as CM wrote in its 30 reasons why Tesla is likely to be a bug on a windshield, are conservative. They want to see the technology proven in the field before just forking over $150-200,000 and hoping for the best. Were the technology or charging infrastructure to come up short then the whole economic proposition would come unstuck.

The Tesla trucks are roughly 30% to 70% more expensive than diesel trucks which have up to triple the range on full tanks. Many new 2018 diesel models are available now at $120k vs Tesla’s $150k (300mi range) and $180k (500mi range).

If we used the $60,000 more expensive Tesla Semi can to recoup the difference then it will need to be driven 240,000 miles using the $.25/saving per mile vs diesel Tesla number. Some estimates suggest payback in 3-4 years.

One former trucking company planner wrote,

I was surprised when I saw this “two-year” payback period quoted by Musk last week and repeated on the website. Two years? Really? He had just gotten through showing us an operational cost savings of $.25 per mile over diesel.

Well if I am going to pay back the truck I need those savings to equal the purchase price in two years. Well $180,000 divided by $.25 is 720,000 miles or 360,000 miles per year. That is not even physically possible. A truck would have to drive non-stop for 24 hours a day, 365 days a year at an average speed of 41 mph. Subtract out recharging time of 30 minutes every six hours or two hours per day and four hours per day for loading and unloading and the truck must average 54.7 miles per hour for every mile driven. It is impossible to do.

My big trucks ran long trips moving from coast to coast or north to south. I pulled out my records just for the fun of it and my trucks averaged 13,000 miles per month in summer months and under 10,000 in winter months because of weather and tougher loading and unloading conditions. Most trucks ran about 120,000 miles per year maximum even with driver teams. This was due in many cases to operational time limits of over-sized loads (half hour before sunrise until half hour after sunset is mandatory in many states for safety reasons).“

Whether the new Tesla Roadster or Tesla Semi this new deposit scheme is actually more telling than the vehicles themselves. This can be none other than a cash grab interest free loans to keep the thing alive. I salute Musk for his pioneering spirit but playing with the big boys is never easier done than said. Can’t wait to see the cashflow numbers in Q4 reporting early next year. If we get a worsening of this chart beware.

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Perhaps we can also find some amusement in Tesla’s competitor (Nikola) tweets

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Houston we have a housing problem

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Yes, Australian banks are the most levered to the Home mortgage market. Over 61%. Daylight comes second followed by Norway and Canada. US banks are half the Aussies. Of course any snapshot will tell us that prices are supported by immigration and a robust economy. However when Aussie banks are c.40% exposed to wholesale markets for credit (Japanese banks are around 95% funded by domestic depositors) any turn around in global interest rates means Aussie banks will pay more and eventually be forced to pass it on to tapped out borrowers. The Reserve Bank of Australia kept interest rates flat while tacitly admitting its stuck

A study back in March showed that in Western Australia almost 50% of people with a home loan would be in stress/severe stress if rates jumped 3%. Victoria 42% and bubbly NSW at 38%. I can’t remember bubble Japan property (as dizzy as it got) experienced such stress. A recent ME Bank survey in Australia found only 46 per cent of households were able to save each month. Just 32 per cent could raise $3000 in an emergency and 50 per cent aren’t confident of meeting their obligations if unemployed for three months.

The Weekend AFR reported that according to Digital Finance Analytics, “ there are around 650,000 households in Australia experiencing some form of mortgage stress. If rates were to rise 150 basis points the number of Australians in mortgage stress would rise to approximately 930,000 and if rates rose 300 basis points the number would rise to 1.1 million – or more than a third of all mortgages. A 300 basis point rise would take the cash rate to 4.5 per cent, still lower than the 4.75 per cent for most of 2011.”

The problem for Aussie banks is having so many mortgage loans on their books backed against lofty housing prices means that we could face a situation of zombie lending. The risk is that once the banks mark-to-market the real value of one house that is foreclosed upon the rest of the portfolio then starts to look shady and all of a sudden the loss ratios blow out to unsustainable levels. So for all the negative news flow the banks cop for laying off staff while making billions, note net interest margins continue to fall and when confidence falls out of the housing market, the wholesale finance market will require sizable jumps in risk premiums to compensate. Indulge yourself with the chart pack from the RBA on pages 29 & 30 where net margins are 50% lower than they were in 2000, profitability under pressure, non performing loans starting to rise back toward post GFC levels…call me pessimistic but housing prices to income is at 13x now vs only 7x when GFC bit, how is that safety net working for you?

Some may mock, but there is every chance we see a semi or total nationalization of the Aussie banks at some point in the future. Nobody will love the smell of napalm in the morning but then again when the Vic government is handing out interest free loans to the value of 25% of the house price for first home buyers you know you’re at the wrong point in the cycle. Maybe TARP is just short for tarpaulin.

When feminism goes too far

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Any “person” who is rightfully comvicted of sexual assault should have the book thrown at them with full force. No arguments. However when Teen Vogue journalist and feminist Emily Lindin wrote that there is no problem throwing innocent men out of jobs and destroying their lives through false allegations that takes some beating. Indeed CM warned that the #METOO campaign might indeed turn into a witch hunt ruining the futures of innocent men forced to defend themselves.

Lindin justified her stance by saying “First, false allegations VERY rarely happen, so even bringing it up borders on a derailment tactic. It’s a microscopic risk in comparison to the issue at hand (worldwide, systemic oppression of half the population),

The benefit of all of us getting to finally tell the truth + the impact on victims FAR outweigh the loss of any one man’s reputation…If some innocent men’s reputations have to take a hit in the process of undoing the patriarchy, that is a price I am absolutely willing to pay.

Indeed “what” price are you actually paying Emily when it is those innocent men who will actually pay it on your behalf? That’s right she is paying zero. In the process perhaps the innocent man ( and sole breadwinner) who is jailed for sexual assault loses the family house, wife and 3 daughters. That’s right Ms Lindin, you’ve scored 4 own goals in the process.

Perhaps Lindin could have written that she will visit these innocent men and thank them personally for doing jail time all the while she celebrates her feminist buddies committing perjury.

Any person that willingly makes a false allegation should equally have the book thrown at them. Indeed perhaps she should read up on sexual violence committed against men (hugely underreported) but that would run against her loony narrative.

We should be glad she has said this though. Free speech is wonderful in that she expresses such a stupid position that the exposure to sunlight becomes the best disinfectant. Way to go Emily. May more people like you expose how stupid victimhood becomes when you go actively searching for it. To that end there can be no doubt you’ve never been a true victim of sexual assault to say something so preposterous. No real victim of such a crime would ever back what you wrote. After all why would any innocent person who had that stolen from them want anyone else to experience what they did?

EU pushes for 40% female representation on company boards

The EU in its infinite wisdom said that it wishes to mandate that company boards achieve a quota of 40% women. Even Germany considers this an overreach (even though its own goal by 2018 is 30%). This EU’s socialist charter to push for affirmative action was challenged in 1981 by Dr Thomas Sowell who completely debunked the myths put forward about the gender pay gap, discrimination and other stereotypes of minimum wage and income inequality. It is truly worth watching the 50 minutes or so of Sowell dispose of lawyer Mrs Pilpell whose weak liberal agenda gets ripped to shreds because is based on a lack of understanding and being loose with facts.

Don’t mistake the position of CM. If based on merit then have 100% female boards should they outqualify men. So assume that boards hit 40% women then what next? Should we hire a minimum percentage of LGBT, minorities, religious groups or disabled people to run companies? Since when should gender, sexual orientation, race, religion or disability be a bigger factor than capability  in running company boards? Shareholders expect one thing – returns. The Sydney Morning Herald wrote a puff piece on those boards without women on them underperforming. CM proved the hypothesis false.

CM wrote with respect to the SMH’s false assertion, “Note that the twenty companies listed in the article have the following 1yr and 3yr relative performance (i.e. vs. ASX 200). Note on an unweighted average over these 1 & 3 year periods, these chauvinistic men’s clubs outperformed the broader index by 22.7% and 89.9% respectively.”

Once again, gender ought to have nothing to do with it. Every ambitious, hard working female that has become truly successful in a man’s world never complained at any disadvantages they may or may not have had. They never played the woman card and I absolutely admire them to this day. One is a mentor some 18 years after we first met. So shouldn’t it be an insult to industrious women like her to see less hungry females given unfair advantages that weren’t earned through individual merit and effort like she had to endure to get there?

Yet such diversity programs designed to remove inherent biases in the system actually create the very discrimination it is designed to stop. All that matters is diversity of thought and if that happens to be women that provide that wisdom sign me up as a shareholder of every corporation that does so on merit. Listen to Dr Sowell – it is truly intelligent stuff. Poor Mrs Pilpell.