Blain’s Morning Porridge – April 30th 2019 – Boeing? Please…

Blain’s Morning Porridge  – April 30th  2019

“To invent an airplane is nothing. To build one is something. But to fly is everything.”

In the headlines this morning:

In 1942 the very forward-looking wartime UK government determined the UK was going to lead the post war aviation industry. The Brabazon committee came out with a whole series of proposals for commercial aviation. One of these was the first jet airliner, the Comet, built by de Havilland and designed by the same team as the iconic Mosquito fighter bomber. It first flew in 1949 and underwent extremely rigorous testing – the Brits had learnt all about metal fatigue, build problems, g-forces and airframe stress through the war. It entered commercial service in 1952.

The first Comet crashed in a tropical storm – killing 11 crew and passengers. Rigorous analysis determined there was a problem with the leading edge of the wing causing a lift issue at high angles of attack. Experience gained during the war meant it was quickly addressed and weather radar was also fitted to the fleet so they could avoid storms.

Then another Comet crashed in clear conditions over the Med. The whole fleet was immediately grounded and checked. An early conclusion was there had been an onboard fire and flights resumed. Then, two months later, a third Comet crashed into the Med and the whole fleet was grounded – this time for good. The Royal Navy recovered most of both planes from the bottom of the sea and they were meticulously reconstructed. A Comet from BOAC airline service was placed in a purpose built water tank where it was subjected to repeated flight cycles and tested to destruction. It eventually broke.

The tank testing and investigation revealed some critical flaws in the Comet design the rigorous design and testing process had not foreseen. It’s often reported that the square windows on the plane fractured because of metal fatigue and repeated pressure cycles, but it was a number of issues – stress concentrations the careful design work hadn’t uncovered, and bonding using rivets and glue that hadn’t been perfect. The Brits shared the results with everyone.

It was 4 years before a completely redesigned and safe Comet flew again, by which time the American’s were introducing the Boeing 707 and Douglas DC8. Both Boeing and Douglas praised the British for their thorough investigation and admitted if it hadn’t happened to the Comet it would have happened to their aircraft. Britain’s early lead in commercial jet aviation was lost for ever. Even though the Comet, the VC 10 and Concorde were superb aircraft, they were all commercial failures.

The aircraft builder (de Havilland), the designers of the plane, and the aviation authorities acknowledged the problems straight away and acted – swiftly to identify and remedy them. They didn’t baulk at the commercial implications – I doubt they thought about them for more than a millisecond. They identified the causes of the crashes, shared them, and made flying safer for everyone. While its sad the UK lost its early lead in aviation, the world is safer because of the thorough investigations.

To the best of my knowledge, no-one from the Brabazon Committee, the Design Team or the Air Ministry ever fell on their swords, or felt forced to resign over the 66 deaths the three Comet crashes cost.

But none of them stood in front of shareholders and tried to pin the blame on the pilots.

Last night’s Boeing Annual Meeting was a corporate communications nightmare. While some 30% of shareholders showed some remorse at the deaths of over 346 passengers due to “problems” with the MCAS anti-stall system by voting against the board, the biggest issue for the bulk of shareholders seems to be the fact Boeing is suspending stock buybacks because it might need the money (!).

CEO and Chairman Dennis Muilenburg tried to tell us how focused Boeing is on safety and “ensuring tragedies like this never happen again.” But he didn’t answer the questions. He came across like a man trying to hide unpalatable truths. He never answered the questions – why was MCAS so flawed, and why was it so effectively hidden.

Sadly the Max-8 crashes will be remembered more for what it tells us about corporate evasion rather than learning from multiple mistakes Boeing made introducing the type, and the process by which the superb B-737 thoroughbred of the Skies was over-tweaked, overstretched and financially compromised into the lumbering make-do nag of a carthorse. Ultimately the B-737 Max will be safe and a successful transport vector – but Muilenburg isn’t helping.

Before someone accuses me of shorting Boeing stock – Disclosure: I hold US Stock Market ETFs which makes me a Boeing holder.

What I am shorting is Muilenburg’s future at the helm of Boeing.

I would not be overly concerned at threats from airlines to switch orders from Boeing to Airbus A320/321 neos. Already Airbus deliveries are running late and it will take them years to ramp up production if they were suddenly to receive over 5000 cancelled B-737 Max orders. My immediate read is its great news for owners of short/medium haul aircraft assets; a) we don’t know how long till Boeing create and MCAS fix, meaning 100s of Max aircraft are sitting unused and replacements are needed, b) passengers are nervous of the Max aircraft and airlines are likely to find pushback on Max services, c) slowing deliveries means greater demand for aircraft in service.

Trade idea: buy aviation linked bonds based on single aisle aircraft in service! (Not A-380s!)

Meanwhile… The hypocrisy of Investment banking never ceases to amaze. Last year everyone pulled out of Saudi Arabia in revulsion. This year Jamal Khashoggi – whose body has vanished – is apparently forgotten. The CEO of HSBC is on record expressing lots of “confidence” in Prince MBS. Blackrock’s Larry Fink says reforms have been “pretty amazing”. Goldmans Sachs is hosting the Saudi investment fund around its big swinging media clients – including a couple of names of who ostentatiously handed back cash to Saudi last year in disgust with the nation.

It’s a dirty world out there..

Normal Porridge Service tomorrow..

Bill Blain

Shard Capital