Blain’s Morning Porridge, submitted by Bill Blain
Damn these Americans… I was woken late last night by an American client asking for my thoughts on the deal Theresa May struck with Old Man Junker late last night. Having “no idea” isn’t normally a hinderance to Blain expressing an opinion, but I was rather caught unaware. I gave an answer along the lines of… “er, not really sure, haven’t seen any details, but it sounds likes she’s waving a blank piece of paper from the aircraft steps in Munich, and claiming the invisible signatures on it represent peace in her time.. but I better go check”. I called my chap up at 6 am this morning – 2 am NY time.. Heh heh..! (He will forgive me.. eventually.)
The emerging consensus this morning (from reading the comments on news sites and listening to the office banter), does seem to conclude the new deal could prove a dollar short and late… But a number of ardent Leavers are saying they could support it. It’s going to be an interesting day. Sterling steady this morning.
There are problems with Theresa’s blank piece of paper. It allows the UK to make a unilateral declaration it can exit the backstop… but, its just that.. Unilateral! Critically, the EU has not agreed the UK has a unilateral right to exit, but lays out how an arbitration process would work. Also, the EU has not agreed any time limit on the Backstop.
Essentially, Theresa May will be taking yet another “promise” from the EU that the backstop is meant to be Temporary and the UK will not be forced to remain in the customs union for ever. The new agreement allows the UK to instigate measures to “disapply” the backstop if all other measures (including independent arbitration) fail. However, if the arbitration process says the EU is being reasonable, then Britain has to remain subject to the Backstop’s rules – which sounds like the UK being forced to toe the EU line… but…
Personally, what’s the problem? If we don’t reach a solution on the Irish border in the near future, walk away. If the Attorney General wants an absolute tight and clear legal agreement the UK can, then… he’s failing to acknowledge the reality that international agreements do get watered down, eased and forgotten. (I believe there is still a treaty in force between England and Wales that allows the citizens of Shrewsbury to shoot any Welshman in the town after dark… It’s not much enforced these days..)
Most sensible course of action for this morning is to wait and see what the UK parliament makes of the New Agreement in today’s vote. My own guess is May will still be defeated, but by a smaller majority. Even a small chance of a win. I think a defeat today means an extension to the Brexit deadline… PLEASE MAKE IT STOP!
Last night’s victory in Brussels was a piece of political theatre, and like all things involving Ms May, it was unconvincing.
Let’s move on… please?
Yesterday, I got a number of calls and emails asking how the tragic crash of a second B-737 Max 8 might affect the aviation finance sector. Predictably, Boeing took a spanking. Following on from the crash of a Lion Air B-737 Max 8 five months ago in very similar circumstances, the Ethiopian Airlines crash immediately set the market on edge. Both were new aircraft, experienced crews, fine weather, and the last crash established a potential flaw in a new stall management system that the pilots were apparently unaware of. I should stress; that until the crash investigation is complete, then any comment on the reasons for the crash is pure speculation.
I suspect that once we get the investigation report the picture and implications for Boeing and aviation deals linked to B-737 Max 8’s will become much clearer. If there has been a major fault in the Stall Prevention Systems, it will be rectified, but Boeing will take a major reputational damage hit if it’s a system problem the pilots weren’t aware of. The fact that Chinese, Australian, and Singapore authorities have now grounded the aircraft type is significant. I saw a tweet saying the ban affects 23 airlines and over 150 aircraft that will not be sitting on airport aprons not earning money to pay the leasing companies that own them.
The Boeing 737 has been a massively successful aircraft with a great safety record. It first entered service in 1967 – so its older than most of the porridge readership. Boeing has built over 10,000 of them, and is currently delivering nearly 2 aircraft every day such is the ongoing demand for the type. The current B-737 Max series are vastly more efficient, larger and more economical than the original planes – imagine how much aviation has advanced: just 49 years after the Wright Brothers first flight at Kitty Hawk, the first Jet airliner, the Comet, was being introduced into service. (That’s a whole other story in itself..)
The airline industry has changed massively during that period – passenger numbers are expanding exponentially, and prices have fallen making air travel accessible by everyone. The main issues for airlines have always been about fuel costs and efficiency, but now a major concern is crew. There is a global shortage of pilots pushing up wages. Training is an important crew cost. One of the attractions of the B-737 Max 8 was Boeing selling it on the basis crews from earlier models could make a swift, simple and easy transition to the newer type without the need for extensive retraining.
Because the new B-737 Max is longer than earlier models (meaning the engines are further back), Boeing introduced a new stall control system which was designed to compensate if the aircraft’s nose was too high as it was climbing by dipping the nose and causing the aircraft to gain more speed and avoid a stall – where the aircraft would fly too slow to generate lift. It would appear Boeing didn’t put that info in the aircraft manuals, and there have been comments that was done deliberately so that Boeing could sell the aircraft to Asian markets on the basis of no need for additional crew training. Boeing quickly issued a bulletin after the Lion Air crash to make sure all operators of the Max 8 were aware of the new system.
There are over 900 737 Max aircraft in service or on order to Asian airlines. It’s the biggest market after Europe (700) and USA (800).