Three days ago I noted Boeing Will Suspend 737 Max Production: Thousands of Jobs at Risk.
On the surface the story does not seem to add up.
There were only a few hundred cancellations. And the backlog is over 4,500. To top it off, Boeing insists the 737 certification is on schedule.
Boeing 737 Max Order Backlog and Deliveries
Boeing makes at most 50 planes a month. In December it was down to 42. Thus, there is over a year’s worth of backlogs.
The lead times on orders at Boeing and Airbus stretch out for for years. It’s not as if an airline can cancel a Max and pick up the phone and get an Airbus a month later.
What’s Going On?
Several industry insiders and analysts privately emailed me in response to the article.
It a combination of new certification rules and a shortage of skilled workers on top of storage issues and foreign uncertainty.
1: Shortage of Skilled Labour
The Seattle labor market, especially for aircraft skills, is very tight. The skills needed to fix and deliver the 400 already stored aircraft is not there.
This work requires special FAA licences. Boeing just hired over 200 mechanics and has called back retirees.
What is unusual is that they did so in early December before a 2 week paid holiday. Typically Boeing hires in January. We have not seen December hiring like this this in 50 years. Thus, Boeing is locking down skilled labor.
Boeing’s production worker demographics is such that there is a very high number of older workers who could retire anytime.
2: FAA Certification Delayed
Boeing expected FAA certification of the fix in December. It now looks like April.
3: Individual Certification
The FAA announced it will certify each plane individually.
This takes a huge amount of time compared to mass certification of whatever fix the FAA ultimately accepts. Prior to the crashes, Boeing self-certified and the FAA blessed the process.
4: Storage Issues
Most of the new planes are at Plaine Field, Renton airport, Boeing Field and Moses Lake, WA. All are Boeing facilities. The key is to have aircraft stored as close as possible to Boeing facilities because that is where the skilled labor is. They could store the aircraft in Arizona and elsewhere, but remote storage is already an issue.
Besides the 400 aircraft produced since the crash, there are about 380 MAX aircraft owned by various airlines and stored all over the world. Those aircraft will be fixed on location. Boeing will send mechanics to each remote location when Boeing is already short of skilled labor.
Trump is in a huge tariff dispute with the EU. The WTO ruled against Airbus, but in a separate ruling the WTO is expected to rule against Boeing.
The EU will be in no rush to certify planes if and when the FAA does. And the EU will no longer accept Boeing’s or the FAA certification process. This adds to the uncertainty and the delays.
Ripple Through Impact
The Wall Street Journal reports GE’s 737 MAX Problem Just Got Bigger.
General Electric Co. will likely take a significant hit to its cash flow from Boeing Co. decision to halt production of the 737 MAX jetliner, which has already dented the conglomerate’s finances.
GE makes all of the MAX’s engines through a joint venture with France’s Safran SA . When Boeing in April cut monthly production of the plane to 42 from 52, it reduced GE’s quarterly cash flow by $400 million. The suspension of production Boeing announced Monday, if prolonged, could reduce cash flow by much more as analysts warn that GE won’t receive payments made as the planes are being built.
“It is going to create a significant cash drag for GE,” said John Inch, an analyst at Gordon Haskett. He added, though, that “one engine program cannot make or break the fortunes of this company.”
Southwest Airlines Co. earlier Tuesday said it was removing the 737 MAX from its flight schedule through April 13 as the airline sees uncertainty around the timing of the aircraft’s return to service.
The extended grounding has already strained GE finances, cutting cash flow by as much as $1.4 billion this year as factories produce fewer engines and GE can’t get fully paid for them. The LEAP engine is a major growth driver for the company’s aviation unit, which accounted for $4.8 billion of GE’s roughly $7 billion in industrial profits in the first nine months of 2019. GE has more than 17,000 orders for the engine.
That engine is also used on the Airbus . That is one heck of a lot of orders.
Industrial Production Rebounds after GM Strike Ends
On December 17, I commented Industrial Production Rebounds after GM Strike Ends
The current rebound is artificial, but so is the strike that preceded it. Looking ahead, Boeing is going to have a significant impact in the first quarter.
Thousands of jobs and possibly as much as 1/3 of a point of GDP as Boeing Will Suspend 737 Max Production in January.
Mike “Mish” Shedlock
Is global inflation nearing a peak? – Al Jazeera English
Calling the top of the current wave of inflation has been a painful exercise for economists and central bankers, who have been proven wrong time and again during the past year.
But data on Wednesday, which showed that some measures of inflation had cooled in the world’s two largest economies, was likely to rekindle a debate about whether the worst might be over after a year of torrid price growth.
United States consumer prices did not rise in July compared with June due to a sharp drop in the cost of petrol, delivering much-needed relief to American consumers on edge after steady prices climbs during the past two years.
And China’s factory-gate inflation slowed to a 17-month low on an annual basis while consumer prices rose less than expected.
After wrongly predicting last year that high inflation would be transitory, most central bankers, including the US Federal Reserve, have stopped trying to put an exact date on when they expect current price growth to peak.
US central bank officials see inflation decelerating through the second half of the year, the European Central Bank puts the peak in the third quarter and the Bank of England sees it in October.
Here are some of the key data shaping the inflation debate:
Raw materials are getting cheaper…
The main culprit for the surge in consumer prices last winter – energy and other raw materials – may be the harbinger of lower inflation this time around.
Prices of critical commodities such as oil, wheat and copper have fallen in recent months after spiking earlier this year. Oil and food items soared after Russia invaded Ukraine.
The fall in prices came amid weaker global demand and economic slowdowns in China, the US and Europe, where consumers are dealing with high prices.
Some indices of inflation are already being affected: fewer firms are reporting increased input costs, and wholesale price rise is decreasing in many parts of the world
…But European energy bills won’t
With winter approaching on the continent, European households are unlikely to see their energy bills come down anytime soon. Recently, there have been talks of rationing in eurozone countries, including in Germany.
This is because gas prices in Europe – which, for years, has relied on Russia for a large portion of its imports – are still four times higher now than a year ago and close to record highs. There has been much uncertainty surrounding gas flow via the Nord Stream pipeline.
Even in the United Kingdom, which has its own gas but very little storage capacity, consumers are set to see their power bills jump in October when the current price cap expires.
There is bad news for German drivers, too, who will see a subsidy at the petrol pump expire at the end of August.
Expectations are (mostly) under control
Some central bankers can take comfort in the fact that investors have not lost faith in them.
Market-based measures of inflation expectations in the US and the eurozone are only just above the central banks’ 2 percent target, while they remain uncomfortably high in the UK.
After the Federal Reserve’s meeting last month, the central bank’s Chair Jerome Powell stressed that the Fed is ready to use all of its tools “to bring demand into better balance with supply in order to bring inflation back down to our 2 percent goal”.
Consumers in the US, eurozone and UK, expect to see inflation stay above the 2 percent target for years to come.
According to a survey conducted by the Reuters news agency, a vast majority of the economists polled said that inflation would stay elevated for at least another year before receding significantly. About 39 percent of economists asked said that they expect inflation to stay high past 2023.
Core prices may be trending down…
Core inflation, the number that measures inflation while excluding the price of volatile components like food and fuel, has started to cool in the US and UK. Some economists predict Japan and the eurozone will follow suit.
Nevertheless, core inflation remains higher than most central banks’ comfort zone both in developed and developing economies. That means that central banks will continue to increase borrowing costs. The US Federal Reserve last month raised rates by 75 basis points for the second consecutive time. The bank meets again in September to consider further tightening.
And an artificial intelligence model used by Oxford Economics suggests core inflation will also peak in Japan and the eurozone in the second half of the year.
The Long Short-Term Memory network, originally developed to help machines learn human languages, parses detailed inflation data to spot patterns that helps it predict the Consumer Price Index in the future.
…But wages are pointing up
Workers’ wages have increased in the last year due to a tight labour market but not as fast as inflation.
The US Employment Cost Index also recently revealed that higher wages also resulted in a significant increase in US labour expenses in the second quarter of 2022.
According to figures released earlier this week, the cost of labour per unit of production increased by about 10 percent for non-farm firms in the US in the second quarter of this year.
One of the main factors influencing pricing over the long term is wages, and if they climb too quickly, a spiral of price rises may start.
“If that happens, we end up with an almost self-fulfilling type prophecy, where firms will start to push price increases onto their customers,” Brent Meyer, policy adviser and economist at Atlanta’s Federal Reserve, recently told Al Jazeera.
Outside of the US, the economic recovery has been more muted, and the impending recession may make it harder for labour to negotiate lower wages.
Steep price drops will bring ‘sanity’ back to housing market in 2023: Desjardins – Global News
Desjardins is forecasting the average home price in Canada will decline by nearly 25 per cent by the end of 2023 from the peak reached in February of this year.
In its latest residential real estate outlook published on Thursday, Desjardins says it’s expecting a sharp correction in the housing market, adjusting its previous forecast that predicted a 15-per-cent drop in the average home price over that same period.
Desjardins says the worsened outlook stems from both weaker housing data and more aggressive monetary policy than previously anticipated.
The Bank of Canada raised its key interest rate by a full percentage point in July, pushing up the borrowing rates linked to mortgages, and further increases are expected this year.
The report also notes housing prices have dropped by more than four per cent in each of the three months that followed February, when the national average home price hit a record $816,720.
Despite the adjustment in the forecast, prices are still expected to be above the pre-pandemic level at the end of 2023.
Regionally, the report says the largest price corrections are most likely to occur in New Brunswick, Nova Scotia and Prince Edward Island, where prices skyrocketed during the pandemic.
“While we don’t want to diminish the difficulties some Canadians are facing, this adjustment is helping to bring some sanity back to Canadian real estate,” the report said.
The authors also note that the upcoming economic slowdown will ease inflationary pressures enough for the Bank of Canada to begin reversing interest rate hikes. Desjardins expects the Canadian housing market to stabilize late next year.
Bidding wars a thing of the past in Calgary’s once hot housing market
© 2022 The Canadian Press
Canada Pension Plan reports $23-billion loss in June quarter as markets churn – The Globe and Mail
The Canada Pension Plan Investment Board said it lost 4.2 per cent in its most recent quarter, subtracting $23-billion from the fund’s assets.
It could have been worse: The three months ended June 30 were awful for most investors. According to Royal Bank of Canada’s RBC I&TS All Plan Universe, defined benefit pension plan assets decreased by 8.6 per cent, tied with the third quarter of 2008 for the biggest decline in the 28 years RBC has been began tracking Canadian plan performance.
The S&P Global LargeMidCap Index, a measure of stocks CPPIB uses as 85 per cent of its benchmark reference portfolio, fell nearly 13.5 per cent in the quarter. The FTSE Canada Universe All Government Bond Index, the remaining 15 per cent of the benchmark, fell nearly 6 per cent. Blended, that means CPPIB beat a benchmark of negative 12.4 per cent by more than eight percentage points.
CPPIB closed the quarter with assets of $523-billion, compared to $539-billion at the end of the previous quarter. The investment losses were offset by $7-billion in contributions from the Canada pension Plan.
In the early days of the COVID-19 pandemic, when global markets tumbled, the CPPIB asset mix blunted the pain, and the pension fund manager lost much less money than an ordinary investor in the stock market. However, CPPIB often trails when public stock markets rise rapidly, as they did in several recent quarters when investors shook off their pandemic fears.
Now, we have returned to falling markets, and CPPIB is outperforming them.
“Financial markets experienced the most challenging first six months of the year in the last half century, and the fund’s first fiscal quarter was not immune to such widespread decline,” John Graham, CPPIB chief executive officer, said in a statement accompanying the returns. “The uncertain business and investment conditions we noted in the previous quarter continue, and we expect to see this turbulence persist throughout the fiscal year.”
CPPIB said its loss was driven by declines in public stock markets, but investments in private equity, credit and real estate also contributed “modestly.” CPPIB also lost money in fixed income investments, such as bonds, due to higher interest rates imposed by central banks to fight inflation.
Gains by external portfolio managers, quantitative trading strategies and investments in energy and infrastructure contributed positively. CPPIB also recorded foreign exchange gains of $3.1-billion as the Canadian dollar weakened against the U.S. dollar. (Most of CPPIB’s investments are held outside Canada, but it reports results in Loonies.)
The Canada Pension Plan, founded in 1966, is the primary national retirement program for working Canadians. The government created CPPIB in 1999 to professionally manage the plan’s money. Over time, CPPIB has embraced active management and its blend of stocks, bonds, real estate, infrastructure, private equity and other specialized investments has outperformed public markets and its reference portfolio.
While CPPIB reports quarterly, it points to its multigenerational mandate and likes to emphasize its long-term returns. The plan’s five-year net return, net of investment costs, was 8.7 per cent through June 30; the 10-year net return was 10.3 per cent.
CPPIB’s annualized return for the 10 years ended last Sept. 30 was, at 11.6 per cent, the highest 10-year performance figure in its history.
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