#airbus

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!

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).

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.

Mitsubishi (Two) Zero

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The Mitsubishi Regional Jet (MRJ) will see first deliveries pushed from 2018 to 2020. Two Zero Two Zero. This is a classic case of a project built on dreams rather than the reality of the regional jet market. Mitsubishi was answering questions nobody was asking. Don’t get me wrong, Mitsubishi Heavy Industries is a wonderful supplier of aerospace parts (787 wings for example) but it should never have chosen to get involved in the retail of its own commercial jets. When the plane was introduced as a concept in 2007 at the Paris Airshow I believed it was destined to failure from the beginning. It had nothing to do with the technical abilities but it was playing in a market dominated by two makers (Embraer & Bombardier) who held 70% share. MRJ wanted 20% of the supposed 5,000 regional jet market. The problems are/were many:

1) Boeing & Airbus‘ 20-year commercial aircraft forecasts scaled back the exact market that MRJ was shooting for from 5,000 to 2,500. The market was no longer looking at 70-90 seats but 110-120 which is exactly where Embraer and Bombardier were aiming. Airbus notes its sales of the smaller A319 have fallen from 44% of the A320 family to 5% in 2015 while the larger A321 has gone from 10% to 38% over the same period. In essence larger planes are becoming much more efficient so the place for regional jets is shrinking. So MRJ was targeted at the wrong space and the market is expected to be 50% smaller. So even if   MRJ managed to hit 20%, 500 planes would unlikely be a breakeven point. MRJ has 243 orders so far and 200 options with fairly shaky customers outside JAL & ANA. It has had one customer cancel. On top of this China is entering with the COMAC C919 and the Russians with the Sukhoi Superjet 100.

2) Regional airlines tend to run on shoestring budgets and downturns can cause them to trim back routes and fleet numbers. Part of the reason of owning potentially slightly less efficient aircraft which have high market shares is the resale market. When times get tough, leasing companies have a much easier time placing more popular types in the market for other customers because with such high shares, potential demand is global. The residual values are important in downturns. I won’t be the least bit surprised if MAC is having to guarantee them to sell the planes they have. The biggest purchasers of MRJs are smaller US regional airlines. More delays risk order cancellations or penalty payments for MAC.

3) Pilots. In general most pilots are only certified to fly one type of aircraft. If an airline has a lot of Embraer, they are likely to grow with the same plane so their pilot pool is more flexible. Pilots also train to fly planes which offer them flexibility with careers. If planes like the MRJ are unlikely to sell well, then fewer pilots want to spend years learning to fly for an aircraft type with low prospects.

4) Service crews. The ground technicians have to be trained. If airlines have one type of plane, training costs are reduced and replacements, spares and service networks are more commonplace. If 3 MRJs are sold in Brazil, then the supply networks need to be on the ground but serving such a small fleet size just impacts cost and riding on the back of a 3rd party vendor only emphasizes they aren’t a serious player.

5) Airlines hate risk. Buying a brand new airframe is risky. Launch customers are making judgements based on computer models and without launch customers, aircraft manufacturers don’t commit. Buying a new airframe with a brand new engine makes the proposition even riskier. The 787 was a new airframe but the engine architecture from Rolls-Royce and GE was based on existing designs.

6) Materials. MRJ tried to go the state of the art composite route but had to scrap plans and go back to traditional alloys because the cost was too high, killing off one of the key selling points.

Sadly delays are part and parcel of modern aircraft design. MRJ can little afford more delays. Aircraft orders for Airbus and Boeing have slowed in recent years, some 20-30% off the peak of 1500 a piece. Regional jets are at the rump end. A sluggish global economy and airlines that have expanded too quickly are backing off the throttle. This two year delay could lead to cancellations. Any global downturn could see those orders and options get trimmed or cancelled sending earnings into a tailspin.