Blain’s Morning Porridge – Feb 19 2020 – Supply and Planes..

Blain’s Morning Porridge – Feb 19th 2020

“And what does the big red button with the Do Not Touch sign do?” 

The news the morning continues the theme of “just how bad are the economic consequences going to be?” Jaguar Land Rover has been reduced to smuggling car key fobs in suitcases out of China to keep its European factories open! You can understand why – 150 million Chinese citizens are effectively in lockdown, and workers returning from the Lunar New Year family trips are only now coming out of post-holiday quarantine. The consequences for the just-in-time supply chains are rapidly surfacing… I can just imagine the scene in a dodgy pub near Solihull: “Psst! Want to score some crankshafts?”

I wonder how central banks will react the massive supply chain shock? Monetary policy has been so abused over the last 10years that a cut in interest rates will do diddly squat – and why would it? On Friday I hope to get time to look at some alternative policy ideas, including some thoughts on my recent debate in Edinburgh about Helicopter Money as a way to address the business cycle.

However this morning, its all about tsk tsking over HSBC. I was thinking I should write something about HSBC, but seal-clubbing the bank and its dismal leadership would simply put me in a bad mood for the rest of the day. Or I could be mulling how analysts have concluded that  merging bad Italian will create a good one, and just how good the last run of lacklustre Q4 US corporate earnings is going to look when Q1 numbers come in. We might also worry about what’s about to happen in Yoorp, as countries like Luxemblurg propose someone else pays the UK’s contributions.

(Memo to Europe: It’s easy – strip away all the bias and noise, the real reason the UK left Europe is because we don’t like French politicians. The answer, therefore, to Europe’s budget crisis is simple: make France pay. Their fault.)

Instead… lets worry about…

Aircraft engines… 

The other big news this morning is a curiously pragmatic Donald Trump telling China hawks its hardly worth banning sales of GE areo engines to China. “We don’t want to make it impossible to do business with us”.. “I’ve been very touch on Huawei. But that doesn’t mean we have to be tough on everybody… we want to be able to sell all this incredible technology – we’re number one in the world”…  is a surprisingly grown up and considered thing to hear from Donald…

The fear is the engines will be reversed engineered to power the “new” Chinese aviation industry. The Comac 917 regional jet-liner – a project already many years late and a generation or two behind Western types – has garnered some 300 orders in China. It’s likely Boeing Maxes will have flown and been retired before any of these Comac’s seriously darken Chinese skies.

As for “re-engineering” the GR engines, the Chinese have no shortage of the same engine type to strip down and re-engineer. A variation of the same GE engine is used on B-737 Max aircraft and there are plenty of them cluttering up airport aprons around the globe! However, the desire to limit tech exports is understandable when the recipient has only a passing respect for contract law and intellectual property. It worth remembering a classic engineering mistake…..

Relax while I tell you a story… (fade to dream sequence in black and white and test pilots wearing business suits and smoking pipes..)

Back in 1946 the British aviation industry led the world in engine and aircraft design technology. British Jet engines were powerful, reliable and the metallurgical tech was streets ahead of anyone else. German jet fighters had got all the headlines, but’s that’s only because there wasn’t actually that much for the better British designs to actually bomb or shoot down from 1944 onwards. The German planes were pretty and more “imaginative” with swept back wings, but the classic Me262 was as manoeuvrable as a brick isn’t, useless in a dog-fight, easy to shoot down when landing, and had engines that were lucky to last 10 hours before exploding. The Komet 163 rocket plane’s fuel literally melted as many German pilots as it shot down American bombers.

In contrast the British Meteor was fast and damn good at tipping V1s. It wasn’t sexy – but that’s what Spitfires were for. The British had a post war plan based around Military and Civil aviation. The prospects for UK aviation – which had been the number one priority industry through the war – looked excellent. Reliable engines and sturdy solid performance aircraft.

But, the government was broke. The first mistake was Chancellor of the Exchequer Stafford Cripps did a deal to sell state of the art Rolls Royce Neme engines to the Soviet Union. No surprise, the Russians reverse engineered them, put them into a swept back fighter design they’d looted from the Germans, and a few years later the Russian Neme derivative was powering the plane shooting allied aircraft out the Korean skies by the dozen – the Russians made or licenced over 17000 Mig 15s. It’s still a beautiful looking plane..

The Second mistake was to give UK tech secrets to the Yanks. To this day many aviation experts still believe British pilots broke the sound barrier well before Chuck Yeager… (it was a short and glorious life being a test pilot in these days…) British boffins solved the uncontrollable shaking and break up of aircraft transitioning to supersonic flight. They understood the need for the whole tail surface to move. They were instructed to give it to the Americans. Which they did, ceding leadership of military design.

In civil aviation, the Brits were the first to get a fully functional Jet airliner in the air years before the Americans. Sadly, metal fatigue caused a number of crashes. Unlike Boeing’s obstification through the MAX debacle, de Havilland immediately bit their stuff upper lip, withdrew all Comets from service, painstakingly rebuilt the lost aircraft and discovered the then little understood danger of metal fatigue. They solved it and got the aircraft back in service, but by then the American’s had the B-707 traversing the Atlantic.

Within 20 years the UK’s Aviation leadership had gone.

Recently a Porridge reader suggested that in the wake of the crisis at Boeing (the B-737 Max and the B-777x no airline particularly wants, and orders are falling for B-787 Dreamliners), and problems at Airbus (a lack of skilled engineers, and a tired model range), perhaps we should relaunch De Havilland to break into the aviation duopoly? The UK still leads tech design in wings, composite materials, and engines.

Sure… we could spend 10 years and £200 bln designing the best, more fuel efficient, lightweight composite airliner in the world. We could build out global support networks, new logistics and infrastructure, and support sales through government back financing services. It would be the most comfortable, quietest, environmentally friendly aircraft ever… and we’d be lucky to sell any of them, even at deeply discounted prices. Airlines value commonality and familiarity.. But.. it would be… glorious.

It’s a grand idea… but unlikely to fly.. (boom boom, see what I did there?)

Five things to read this morning

BBerg – Expat Families Flee Hong Kong After Double Whammy of Virus, Protests

BBerg Troubled German Economy Likely to Tread Water Throughout 2020

FT – Questions of leadership overshadow HSBC’s Shake-up

FT – Cost of corporate debt protection sinks to post-crisis low

WSJ – Bloomberg Will Sell Bloomberg LP if Elected President

Out of time and off to sell a deal..

Bill Blain

Shard Capital