When on October 29, 2018 Lion Air’s Flight 610 crashed into the sea shortly after take-off from Jakarta, killing all passengers and crew on board, it did not resonate with us investors. Planes crash rarely, but they do crash sometimes, particularly in far-away places where we are happy to assume that safety standards are probably not as high as in Europe or the US. It’s a form of racism which flies under the radar.

What we did not know at the time was that the plane was not even two months old, a brand-new Boeing 737 Max 8, and that the pilot had 6,000 flight hours under the belt, flying a big throng of government officials.

When less than six months later Ethiopian Airlines Flight 302 crashed under the same circumstances, killing 157, alarm bells went off. Again it was a brand-new 737 Max 8. Again the plane unexplainably nosedived to annihilation.

When the flight recorders were recovered it recounted the desperate fight of man against machine. No matter how hard the pilots tried, the plane, or rather its powerful computer, insisted on destruction. Boeing, trying to blame pilots first and then admitting to some minor software flaws, was in trouble. Shares began to oscillate south, hesitantly but surely.

Airplane manufacturers and particularly the two biggest of them, Airbus and Boeing, are quite peculiar companies to invest in. They are not just ordinary businesses. They have a leg in the defence industry, are considered ‘national champions’ by their stake-holding governments, and are a matter of nationalistic pride and meddling.

For more than 15 years both companies launched complaints against each other at the WTO, the supranational body tasked with ruling on trade fairness. As it always turns out and we all know, they both behave in an uncompetitive manner helped by cheating, cavalier governments.

The EU grants ‘loans’ to Airbus for the development of new models, on such flexible terms that we might as well call them gifts. The US is unashamedly exempting Boeing from all tax obligations and directly funds research and development.

The WTO slowly but firmly always rules against both, allowing each side to levy punitive tariffs for noncompliance against the other. Probably a field day for Trump, the tariff man but in truth nonsensically stupid. Other countries build aeroplanes too. And they cheat equally determinedly, as we can see in China or even Canada.

Since the 1990s Boeing and Airbus have dominated the aviation market. Between them they sell nearly 90 per cent of all aircraft bought, in virtually equal parts. What put Boeing under pressure was the advent of the Airbus 320 Neo, a revamp which helped to save fuel by a quarter and reduce noise to almost acceptable levels.

This was achieved by larger, more powerful and more fuel-efficient engines fitted without much ado to the old design. The same plane, but better. A brilliant idea, alas not easy to copy and paste for Boeing: the 737 was built so low that to mount larger engines on the old plane proved difficult. The new engines had to be extended further forward and higher up, protruding over the wings, which completely altered the aerodynamics of the aeroplane.

To sell it as the ‘same plane but better’ and making it unnecessary to retrain pilots and therefore easy to boost the order books, Boeing engineers concocted an automatic flight programme counteracting worsened aerodynamics.

More important than marketing on company level is marketing in the corridors of power

When you hold out your hand through the window of a driving car and tilt your hand slightly upwards, the hand will lift. If you overdo it and tilt it too much, the hand will plummet. This is how planes take off and land. It is a gentle play with the ‘angle of attack’ as aeronautics call it. Angle too small – no lift; angle to steep – no lift either. In both cases you don’t want to be a passenger.

Boeing’s new engines increased the tendency to pitch up so dangerously that a computer was tasked to override the unsuspecting pilot under any circumstances. Sensors and AI would do the job without making a big fuss about it.

These sensors, like anything, can of course malfunction. But the pilot would not know it unless he’d ordered, as a paid extra, a small monitor showing the malfunction. And even if he did, the Manoeuvring Characteristics Augmentation System (ACAS) would not allow him to take over. Stanley Kubrick’s HAL was flying, not the pilot.

To call this a ‘software problem’ is lackadaisical. It is like Volkswagen’s engineers tasked with making a diesel engine both powerful and harmless with a bit of software. Harmless when tested, satisfyingly powerful when on the road again. And like Volkswagen stubbornly betting on a suboptimal diesel engine, Boeing was far down the road with its 737 Max 8. It had already sold 400 of these planes and contracted a further 5,000 costing $121 million each.

The aviation market has tripled between 1998 and now. If the world is not coming to a Trump-induced standstill, growth rates of 3.5 per cent per annum can be expected. To go back to the drawing board would be ruinous. And Airbus would win.

Costs are already rising for Boeing. It is difficult to estimate how much it will have to pay out to the crash victims and how much to the airlines, which have had to keep their brand new planes grounded since March. It may take until the end of the year until flight safety authorities from Canada to China are mollified. Suppliers forced to stockpile will seek compensation. Class lawsuits beckon. Refitting the planes free of charge and perhaps retraining the pilots will add to the bill. Massive damage is done to the brand.

As retail investors we should ask ourselves if Boeing, like Volkswagen, will wiggle through and if the company’s mishaps may perhaps offer a buying opportunity. Counterintuitively, the shares of Boeing have not dramatically tanked, and neither have Airbus shares markedly gained.

On March 11, 2019, a day after the second crash, shares of Boeing were priced at $400 and they have come down to $341.61 at the time of writing. No drama here, when compared to Boeing’s share price 20 years ago when it stood at $37.68. Airbus cost $112.96 per share on March 11 and is now valued $114.86. Its shares did not move at all. Both companies’ shares are expensive: Boeing has a P/E of 22 and Airbus a P/E of 32.

The seeming indifference of the markets has a lot to do with the order backlog. Both the 320 Neo and the 737 Max 8 are sold out for years in advance and both manufacturers could not deliver more even if they wanted to. If for a year or two orders for Boeing dwindle, it will not alter production. And neither can Airbus steal a march on their arch rivals.

But the indifference speaks even more of the politicisation of the aviation market. More important than marketing on company level is marketing in the corridors of power. Tariffs, embargoes, geopolitical rivalry and bootlicking will overwhelm any considerations of product quality. Will Saudi Arabia ever buy large numbers of Airbuses? Will China buy Boeing now? Will Iran be able to buy anything? Will any aircraft manufacturing country ever again accept a US Federal Aviation Agency’s clean bill of health for Boeing when they so utterly failed to see a problem?

My gut feeling is – and sadly there’s never more in analysing aviation business than a hunch – that the US as always will come out on top. Trump, Lighthizer and Navarro will make sure everyone obliges. Otherwise tariffs, embargo or gunships. No matter how often Boeing’s planes will crash.

To call this a buying opportunity is perhaps far-fetched. At the end of the day even a lot of bullying cannot make the world economy grow. Quite the contrary. And for more planes to sell, people and goods will have to move more, not less.

What could however turbo-boost the fortunes of either Boeing or Airbus, or none of them, would be the advent of the first battery-powered passenger plane. Hopefully still manned by pilots.

Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.

andreas.weitzer@timesofmalta.com

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