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Boeing’s 737 Max prepares for long haul to recovery

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Ryanair chief executive Michael O’Leary is fond of superlatives, so there was no shortage of them when he placed a $7bn order for 75 of Boeing’s 737 Max aircraft last week.

“This is not just a safe aircraft . . . It is the safest, most audited, most regulated aircraft that has ever been delivered in the history of civil aviation,” he declared, as he signed the biggest firm order for the ill-starred passenger jet since it was grounded after two fatal crashes 20 months ago.

The deal was not the only good news for Boeing, whose credibility is on the line after failures in the Max programme led to the deaths of 346 people. 

Safety regulators in the US have begun to issue the first airworthiness certificates to individual aircraft, launching what is expected to be a steady return to service of more than 800 passenger jets that had been parked since authorities banned the Max from the skies in March 2019. 

Gol, the Brazilian airline, told the Financial Times that “a very important milestone” had been passed, as it became the first airline to resume commercial 737 Max flights on Wednesday.

Chart showing that Boeing clinches first firm order for 737 Max since aircraft’s ungrounding

The return of the Max not only begins to close a dire chapter in Boeing’s history, it reignites competition in the hottest segment of the aviation market. Boeing’s European rival Airbus has been virtually unchallenged in the market for single-aisle aircraft since the Max was grounded.

“That is important for the industry,” said Aengus Kelly, chief executive of one of the world’s biggest purchasers of aircraft, the leasing company, AerCap. “We have to have competition. We can’t have a situation where one manufacturer has so much market share that the other one is irrelevant.”

The aerospace supply chain, too, is hoping for a boost from the rehabilitation of the Max, an important cash generator for many companies. 

Clouds on the horizon

But the return to service of the Max and Ryanair’s order is only the start of a long haul for Boeing and for the wider industry, which is struggling to pull through one of the worst aviation crises of modern times. 

While big carriers such as American Airlines are also expected to start flying passengers on the Max this month, it will be some time before this translates into a flood of new orders from a global airline industry braced for net losses of $118bn this year and nearly $40bn in 2021. 

Since the Max was grounded, orders for about 1,000 of the passenger jets have either been cancelled or deemed too risky to include in Boeing’s backlog of roughly 3,300 aircraft.

Brazilian airline Gol resumed flights of the Boeing 737 Max on Wednesday © Nelson Almeida/AFP/Getty

Even if passenger traffic begins to recover next year after vaccine breakthroughs, airlines will have to deal with the debt taken on during the crisis before they begin buying in bulk. 

Moreover, there is little incentive for leasing companies, which accounted for roughly 40 per cent of all aircraft purchases before the crisis, to buy the Max direct from Boeing when airlines are desperate to raise cash by selling and then leasing back jets.

“We are paying less to airlines than we would have done for the aircraft we cancelled. It’s the airline that is taking the haircut,” a senior executive from a top 10 lessor told the Financial Times.

A faultless re-entry

In the meantime, Boeing’s priority is rebuilding passenger confidence through a faultless re-entry into service of the Max. The pace of return will be measured and Boeing employees will be on hand to prepare even those aircraft owned by airlines for commercial service. 

“Boeing will want to be very much a part of that process because they can’t afford to have any issues,” said Phil Seymour, president of IBA, the aviation advisory. “Even something that is not tragic will get on to social media.”

Boeing expects it will take roughly two years just to clear the 450 single-aisle aircraft that it could not deliver over the past 20 months. A further 387 sit in airline hangars and they, too, will have to go through extensive work. 

Each one of those jets will have to be pulled out of storage, updated with new software to address the malfunction that caused the crashes, and checked for any deterioration caused by months of standing still.

Components in aircraft that were stored in coastal areas may have suffered from corrosion as a result of sea air, for example, while aircraft housed in dry climates such as deserts may have problems with sand or grit.

Aeroplane fuselages bound for Boeing’s 737 Max production facility sit in storage © Nick Oxford/Reuters

United Airlines, which has 15 Max aircraft in its fleet, estimates it takes more than 1,000 hours of work to prep a single jet for commercial operation. 

Finally, every aircraft will have to be inspected by safety regulators as Boeing has lost the right to self-certification after revelations that it misled regulators on the Max. This right may eventually be reinstated, if regulators are confident about Boeing’s processes.

Playing catch-up with Airbus

The return of the Max will affect Airbus too, which has seen its share of the popular single-aisle segment nudge 60 per cent.

Even before the Max was grounded, Airbus was scooping up orders for its A320neo and A321 family of narrow-body aircraft at a faster pace than the 737 Max. 

Now the shadow of a price war hangs over the industry as Boeing seeks to find homes for the orphan aircraft sitting in its hangars and to avert further cancellations.

Boeing and Airbus insist they will not be dragged into one. But industry executives talk of hearing about a deal at just $35m for a 737 Max, against a list price of $121.6m and a more normal average selling price of about $60m. 

Industry executives say Boeing must try to close the chasm that has emerged with Airbus. It is not just about the success of the Max programme — the company’s reputation and future as a commercial aircraft maker are at stake. 

“At the absolute minimum they have to hold their own and have to do whatever it takes to hold their own because Airbus has had no competition in the last couple of years,” said Mr Kelly.

“Airlines take a decision on a narrow-body plane every 20 years. That makes it very hard to regain market share. If you lose a customer, the next opportunity to flip that customer is 15 to 20 years away.”

Column chart of Net income, trailing 12 months ($bn) showing Boeing's earnings hit by 737 Max fallout

Some analysts are pessimistic that Boeing will be able to close the gap. Customers are not only seeking more capacity in their single-aisle aircraft but they want narrow-body aircraft with the range of more costly wide-bodies to help bring down operating costs. Airbus’s A321 — a larger, longer-range derivative of the A320neo — fits the bill better than the Max, say analysts. 

“Will Boeing ever catch up? No,” said Ron Epstein, aerospace analyst at Bank of America. “While they were fixing the Max, their competitor was putting finishing touches on the 321XLR, a very capable long-range narrow-body aircraft. It is more capable than anything Boeing has.” 

Boeing’s response to the A321 is the larger Max 10 — due to enter service in 2022. But with a shorter range than the latest A321 variants it is regarded by many as less capable. 

As for the core of Boeing’s short-haul offering, the 170-190 seater Max 8 jet is “a wonderful plane for what it does, but it is one plane”, said Mr Epstein.

The danger of doing nothing

Boeing has no illusions about the challenges but remains steadfastly loyal to its Max family. “We have the utmost faith in this product,” said Boeing president and chief executive Dave Calhoun last week at the signing of the Ryanair order. 

The US company is betting that even before any significant recovery in passenger traffic, airlines already operating older 737s will want to replace them with the greener Max 8.

“You can take any airline in the world and they have retired their older 737s earlier than they planned,” said Boeing spokesman Gordon Johndroe. “These airlines will need aircraft to replace the retired jets and for eventual growth. They want the Max because it is cheaper to operate and helps airlines meet their sustainability targets.”

But there are those who believe there will be no change in the competitive landscape without a new single-aisle aircraft to take on the A321.

“We are tackling a tectonic shift in market share if Boeing does nothing,” said Richard Aboulafia, vice-president at Teal Group, the aerospace consultancy. “The A321 is not the optimal version. Its main virtue is that it is alone.” 

Yet with more than $60bn in debt and any sustainable cash boost from the Max likely to be two years away, Boeing executives are wary of taking another gamble that could cost the company dear.

The site of the Ethiopian Airlines Boeing 737 Max jet crash in March 2019 © Michael Tewelde/AFP/Getty

Engine technology is not at a stage to allow a new aircraft to claim a step-change in fuel savings. And there are concerns that any talk of a new aircraft could scupper the success of the Max, now intricately tied to that of Boeing. “If Boeing were to announce a new single aisle plane in the next two or three years, no one would buy the Max,” said one Boeing customer.

Boeing is expected to try to delay a new aircraft for as long as possible, to allow technology and time to erase the memories of the Max crisis. In the meantime, it will be sounding out customers for what their needs might be when the market eventually recovers from the pandemic.

“If anyone thinks they know what the market will be like and what airline customers will want in a couple years from now, they don’t know what they are talking about,” said a Boeing executive. “Research continues, but we really have to get through the pandemic before we make any definitive statements.”

Additional reporting by Bryan Harris in São Paulo and Claire Bushey in Chicago



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Analysis

Signs of inflation emerge as Chinese producer prices leap

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For investors and governments eager to spot any sign of inflation as the global economy recovers from the coronavirus pandemic, Chinese factories are a good place to look.

The country this week released figures showing that the price of raw materials and goods leaving its factories rose 6.8 per cent year on year in April, its fastest pace of growth in more than three years.

For almost all of 2020, China’s producer price index was in negative territory as Covid-19 suppressed demand. The recent and sudden rise was partly driven by the comparison with a year earlier and, with consumer price rises still below 1 per cent, the overall inflation picture remained mixed.

But the data was nonetheless a sign of pockets of price increases emerging across China’s rapid recovery, where higher overall inflation is expected this year. It also reflected a global rally in commodity prices that has been supported by China’s voracious demand as well as hopes that other big economies will bounce back, too.

“A combination of China and external factors led to this PPI surge,” said Robin Xing, chief China economist at Morgan Stanley. “It’s like a perfect storm.”

Line chart of Producer Price index showing Producer prices in China rise at the fastest year-on-year pace since 2017

China’s PPI index is made up of prices of producer goods, such as wardrobes or washing machines, that factories sell to shops before they are sold on to consumers.

It also includes the prices of raw materials and commodities, such as coal, when they are sold from extraction companies to businesses that use them to make goods.

It was the latter that drove the recent surge in Chinese producer prices. Global commodity prices, which collapsed last year in the early stages of the pandemic, have since rebounded. Iron ore this week hit its highest level on record, while oil prices have recovered sharply from last year.

Xing estimated that 70 per cent of the April PPI increase was driven by commodities. That rally was also tied to China’s recovery, which has been backed by strong industrial growth and a construction boom that led to record output of steel last year.

As such, the data reflected both the pace of China’s recovery as well as a global commodity rally that it helped fuel and now extends beyond it.

For policymakers, one crucial question is whether higher producer prices will feed through to consumer prices. China’s consumer price index was just 0.9 per cent in April — its highest level in seven months, but far from a level that would generate immediate fears of broader inflation within China.

While economists expect a rise in CPI inflation in China this year, they suggested that any reaction from the People’s Bank of China to this week’s data was unlikely. The portion of the producer price index that represents the prices at which businesses buy consumer goods, as opposed to raw materials, was up only 0.3 per cent year on year.

Analysts at HSBC said transmission from PPI to CPI would be “limited”, allowing policymakers to remain “accommodative”.

Ting Lu, chief China economist at Nomura, forecast CPI inflation to rise to 2.8 per cent by the end of the year, with “pass-through” effects from PPI. But he suggested that the PBoC was unlikely to tighten in response to PPI, and that higher raw material prices instead posed a risk to Chinese demand and the wider recovery given controls on credit availability.

“For a typical borrower, $1bn six months ago may be enough to buy steel and cement to finish one project, but today it’s [maybe] not,” he said.

While the PBoC has not increased official rates since lowering them last year, the Chinese government has nonetheless tightened credit conditions over recent months.

It has also taken measures to rein in both its property sector, on concerns that easier money would encourage asset bubbles, and its steel sector, which has churned out the metal at a rate that threatens Beijing’s environmental commitments.

China’s gradual decarbonisation ambitions — and any production cuts they lead to within the country — are seen as constraints on supply, buoying the price of commodities further. 

Beyond raw materials, economists are closely watching other shortages. Iris Pang, chief economist for greater China at ING, said producer price inflation would be followed by chip inflation. A shortage of semiconductors, she said, was already beginning to drive price increases for consumer products such as washing machines and laptops.

Line chart of Per cent  showing Producer prices for consumer durables are gathering momentum this year

While the PPI index showed a much weaker increase in consumer goods than for raw materials, on a month-on-month basis there were notable rises. Durable consumer goods were up 0.4 per cent month on month in April, the fastest pace of growth since at least 2011, according to CEIC, a data company.

Apart from domestic construction, part of the demand for raw materials has been to drive the production of goods for export to western countries.

Data on Friday showed Chinese exports leapt 32.3 per cent year on year in April. But even when compared with April 2019, before the pandemic, the rise was about 16 per cent on an annualised basis, Morgan Stanley estimated.

Competition between producers in China meant this did not necessarily imply inflation for consumers overseas. Instead, China’s recent PPI jump hinted at just one of the global effects of western responses to the pandemic.

“If you try to figure out what is the end demand here for this PPI recovery, it is global stimulus,” said Xing. “External demand led to China’s export recovery, [and] now it’s far beyond its potential growth”.



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Covid batters India’s aspiring middle classes

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When Ram Prakash died after a feverish and breathless week, his wife and 16-year-old daughter’s heartbreak was compounded by fear that the modest middle-class safety net he had knitted together might be ripped apart.

The 53-year-old, a tax adviser to local businesses, was one of the millions who had joined India’s fast-growing middle class in recent decades. Their rising incomes, better education and consumption powered one of the great global economic success stories.

But the calamitous second wave that claimed the life of Ram, the family’s breadwinner, has shattered the Prakashes’ hopes for the future. “Our life was going good but now it’s all over,” said Uma, his widow.

Economists warned that the latest outbreak could have long-term ramifications for middle-class Indians, whose rising consumption was expected to be the country’s growth engine for many years.

“India, at the end of the day, is a consumption story,” said Tanvee Gupta Jain, UBS chief India economist. “If you never recovered from the 2020 wave and then you go into the 2021 wave, then it’s a concern.”

India reported more than 320,000 Covid-19 infections and 3,800 deaths on Monday. Experts maintain that both figures are vastly undercounted.

The disease has heaped suffering on Indians irrespective of background. Yet this time, it has also hit hard an aspirational middle class whose newfound privilege previously helped shield them.

A lack of oxygen has been blamed for thousands of deaths © Sanjeev Verma/Hindustan Times via Getty

Public-health experts pointed to signs that after widespread infection among the urban poor last year, sectors of society including the comparatively affluent were more vulnerable this time round. This was compounded by the near-collapse of private health services on which they relied.

“You’re affluent but you can’t get a hospital bed. You’re affluent but you can’t get oxygen,” said Saurabh Mukherjea, founder of Marcellus Investment Managers. “That’s deeply disorientating.”

India’s middle class was already severely weakened by the recession that followed last year’s lockdown, even if they were better protected from the virus.

The Pew Research Center found that 32m people fell out of India’s middle class — defined as those earning between $10 and $20 a day — in 2020. That represented more than half of those added to the category since 2011.

Bar chart of Estimated change in number of people in each income tier due to the global recession (m) showing India’s poor grew while middle class shrank in 2020

India’s economy was expected to roar back before the second wave struck. For middle-class Indians on the brink, such as the Prakash family, this second shock may prove too much.

Ram, the tax consultant, had moved his family to a one-bedroom house in a humble New Delhi neighbourhood, bought a car and sent his daughter to a low-cost private school, hoping she could become a chartered accountant.

“He gave us so much when he was alive,” said Vasundhara, his daughter. “I only hope I will be able to continue my studies.”

Experts have debated what drove the high caseloads among middle class and rich Indians during the second wave.

Anup Malani, a professor at the University of Chicago, suggested that those populations proved more susceptible, especially as new variants spread.

In Mumbai, for example, studies last year found that about 50 per cent of slum residents had Covid-19 antibodies, compared with less than 20 per cent in more affluent surrounding neighbourhoods.

This is believed to have left the middle and upper classes more vulnerable, particularly to severe disease, researchers said. Doctors have reported similar trends elsewhere in India.

“The first wave largely infected poorer populations,” Malani and two co-authors wrote this month. The second wave “is disproportionately composed of individuals who are from non-slums”.

Bar chart of Estimated number of people in each income tier in 2020 before and after the global recession (m) showing The pandemic sets back growth of India’s middle class

Researchers said more data were needed but other susceptible populations could include those outside cities, such as in poor rural areas with shoddy healthcare where the virus was wreaking havoc.

The outbreak was so sudden that it overwhelmed even India’s best hospitals, including private facilities in cities such as Delhi or Bangalore.

Fewer than 1 per cent of Delhi’s 5,800 Covid-19 ICU beds are available, while crippling shortages of oxygen have contributed to countless deaths.

After Ram Prakash’s oxygen levels dropped, his family spent two frantic days ferrying him to six separate hospitals — both private and public — in a desperate bid to find treatment.

In the end, they brought him home. Ram died on April 27.

Uma and Vasundhara fear economic ruin. They have a shortfall of Rs30,000 ($408) to meet immediate expenses, including school fees and the mortgage on a neighbouring unit that Ram bought as an office.

“Right now our worry is just to survive, to get food and meet our daily expenses. But there won’t be enough,” said Vasundhara.

They plan to sell their car and Uma, a former Sanskrit teacher, wants to find work again. But they worry hopes of a better life are over.

“We had never imagined this could happen to us,” Vasundhara said. “We just can’t get our head around this.”



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Reeves promotion underlines Labour shift to centre ground under Starmer

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When Sir Keir Starmer promoted Rachel Reeves to shadow chancellor late on Sunday night it emphasised his determination to defy the left of the Labour party and move in a more “centrist” direction after a series of disappointing local election results.

Reeves is unpopular with many “Corbynista” members — supporters of the party’s former hard left leader Jeremy Corbyn — because of comments she made in 2013 when she was shadow work and pensions secretary. That controversial moment saw her promise to be “tougher” than the ruling Tories on benefit costs.

Her role as vice-chair of Labour Friends of Israel is also contentious among many Corbyn supporters who oppose the actions of the Israeli government. And while other MPs agreed to serve on the Labour front bench under the Corbyn leadership in 2015, Reeves was one of a handful who refused to do so.

Starmer first considered making Reeves shadow chancellor when he became leader in April last year — only to drop the idea, fearing that it would prompt a backlash from left-wingers.

Yet it would be wrong to characterise the 42-year-old MP for Leeds West — a former junior chess champion — as a “Blairite” or “rightwinger” even in Labour terms.

Sir Keir Starmer promoted Rachel Reeves in a reshuffle of his front bench on Sunday © Stefan Rosseau/PA

During the last parliament she chaired the business select committee, a position she used to interrogate corporate failure by Carillion, the collapsed contractor. She meanwhile struck out as a writer, penning two books about female MPs.

In 2018, she used a speech in London’s East End to call for a new series of wealth taxes to raise more than £20bn a year — shifting the fiscal system from income to property. The then shadow chancellor John McDonnell resisted the idea, amid concerns over a backlash from middle class Labour voters.

Indeed, there was a moment in 2019 when some of Corbyn’s aides — including policy adviser Andrew Fisher — advocated bringing Reeves into the shadow cabinet.

Sharper edge but no shift in strategy

In the short-term her promotion to one of the most important roles in the shadow cabinet may give a sharper edge to Labour’s top team but not necessarily bring a shift in strategy.

That is because the party creates its election manifestos through a drawn-out process called the “national policy forum” over several years.

Starmer has eschewed creating new policies on the hoof in favour of a focus on rebranding, telling voters Labour is “under new management” after the electorally disastrous Corbyn, who lost two general elections in 2017 and 2019 — the latter by the biggest margin in nearly a century.

The opposition leader’s popularity rose last year as he forensically attacked the ruling Conservative government over pandemic failures. But with the Tories enjoying a bounce from the vaccine rollout, he was criticised during the local elections for a lack of a positive policy vision. Some Labour insiders blame that for the setback at the polls — in which the party lost 326 council seats and was defeated in the Hartlepool by-election.

On Monday, many colleagues were positive about the promotion of Reeves after a year in which she has been one of the most high-profile figures on the front bench.

As shadow Cabinet Office minister, she took the fight to the Conservative government over its spending on personal protective equipment — expressing anger at the many contracts given to Tory contacts. She has also kept up the pressure on the Conservatives over the Greensill scandal.

Colleagues said as shadow chancellor she will emphasise the need for Labour to show it can be trusted to run the economy — an area of traditional political weakness for the party.

‘Competent and sensible on the economy’

That would continue the theme set by Dodds, who said in a speech in January — using the word “responsible” 23 times — that Labour would offer “responsible economic, fiscal and monetary policy”. The Starmer team has already distanced itself entirely from Corbyn’s 2019 election manifesto, with £83bn of annual public spending increases.

In an interview with the Financial Times last year Reeves struck a similar tone, saying the party needed to be “competent and sensible” on economic matters.

Yet she is not expected to return the party to the “austerity lite” approach of Ed Balls, shadow chancellor under former leader Ed Miliband, who promised not to increase borrowing even for capital expenditure.

One ally said Reeves could be expected to draw up a “transformative” programme — involving changes to the tax system and the decarbonisation of the economy — while also reassuring the public that Labour would spend people’s taxes wisely.

The decision to shift Angela Rayner, deputy leader, from her job as party chair plunged the reshuffle into chaos at the weekend © Jacob King/PA

Starmer’s reshuffle at the weekend was thrown into chaos after allies of Angela Rayner, the deputy leader, leaked she was being demoted from her job as party chair after the local election failures. The ensuing political storm overshadowed some more positive electoral results on Saturday in cities such as Manchester, London and Bristol.

Rayner turned down the job of shadow health secretary and instead took Reeves’s old job as shadow Cabinet Office minister as well as “shadow secretary of state for the future of work”.

Deep discontent

On Monday, after a two-hour shadow cabinet meeting, Starmer was seen buying a coffee at Westminster with Rayner in an attempt to put on a public show of unity after a weekend of acrimony.

Starmer’s bungled reshuffle has sown deep discontent among senior Labour MPs. “You can’t understand how angry people are,” said one. Allies of Rayner said she felt a “deep sense of betrayal”.

The reshuffle saw Dodds move to party chair and Alan Campbell promoted to chief whip with the departure of 70-year-old Nick Brown.

Lisa Nandy, shadow foreign secretary and MP for Wigan, told colleagues she was convinced Starmer was planning to sack her and it was only a rearguard action by her supporters that persuaded him to drop the plan.

Nandy warned Starmer that she would quit the Labour front bench, rather than be demoted to another role.

Referring to the plans to demote first Rayner and then Nandy, one Labour MP said: “What genius would think it a good idea to demote not one but two women representing northern seats?”

 



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