Blain: Investors Will Be Asking Themselves: “How Could We Have Been So Stupid?”

Blain’s morning porridge, submitted by Bill Blain of Shard Capital

“Don’t just book it.. Thomas Cook it.. Perhaps not..”

It’s the Autumn equinox… Winter is coming…

Interesting week in prospect with the great and the good hobnobbing in New York for the UN Climate Action gab-fest.  Which global leader will win the prize for the greatest display of overdone sycophancy to a) Greta Thunberg, b) Donald Trump (who won’t be there..), or for snubbing Brazil’s Jair Bolsonaro. I know which ones I wouldn’t vote for.  Whatever happens in NY, it’s clear Greta has changed the global agenda on Climate chance – putting it at the top of every politicians to-do list.  Germany has clearly been listening – the new black-zero Carbon programme trumps anything else in Europe.

Elsewhere I can only giggle that its all coming apart at WeWork – exactly as predicted months ago. The sparkling consciousness changing Tech company that is really just a property letting agency looks on the edge of self-implosion following the pulled IPO.  Its possible the frankly weird CEO could be ousted this week. Its going to trigger some serious reassessment of the unicorn sector/model – lots of comment about 2000 dot.com boom all over again.  Yet again global investors will be asking themselves: “how could we have been so stupid??”  There is always another charlatan selling the deeds to a snake oil mine waiting somewhere in the wings.

It’s time to look again at the real world..

And talking of the real world and real assets…   I can only assume Scotland’s poor showing at the World Cup on Sunday was due to worry about how they get home. There travels plans are sponsored by Thomas Cook.  Aircraft are one of my favourite real assets….

Its sad day for holidaymakers as 178 year old Thomas Cook goes to the wall. The authorities were expecting it, and a massive repatriation programme has gone into motion.

What killed Thomas Cook?  Liquidity will be listed on the death certificate, but the many issues it failed to address were all about its changing competitive landscape in terms of competition from the collapse in Sterling, Low Cost Carriers, destinations like Egypt, Turkey and Tunisa becoming politically unattractive, new holidays formats like AirBnB, staycations and increasing passenger independence.  The sad fact is the days of the package holiday were over years ago, and Thomas Cook never realised it – which is why it’s been in trouble so long.

What does the collapse do to Aircraft financing deals? Thomas Cook leased most of its 116 Airbus and Boeing aircraft from 38 different leasing companies, who will have financed these aircraft though a mix of sources, including debt, securitisations and private placements.  I understand at least one of its larger Airbuses is also a reserve tanker for the RAF! 

Although it sounds like a huge number of aircraft are suddenly hitting the aircraft used-plane lot, it should not be too destabilising. In fact, if you get shown and cheap aviation finance offers, this may be an opportunity to buy deals cheap on any panic. 

What may trigger a bout of selling is general fear about aviation as a whole.  Airlines go broke with monotonous regularity, and Thomas Cook will certainly rank among the larger collapses.  The potential problem is rentals from the Aircraft Thomas Cook was using will dry up until the aircraft can be released or sold – meaning any deals financing these planes will likely underperform. 

How quickly the planes are re-let or sold depends on a number of factors.

The leasing companies would have been watching the company’s death throes very carefully and will have been prepared. They will have already sent crews to fly out the aircraft to sites where they fix them up and rebadge them.  (Planes from the collapse of Monarch were up and flying in new colours very swiftly just a few years ago.) The lessors will already have taken control of their assets, which includes all the documentation on each plane to prove their maintenance and service records are up to date.  More to the point they will already have earmarked potential purchasers/users. 

For popular aircraft types – particularly the Airbus A320/321s, there will be ready demand from airlines suffering as a result of the grounding of the Boeing 737 Max series.  With over 400 Maxes grounded across the world, airlines have big airplane shaped holes in the flight schedules. The larger Airbus A300s and the Boeing 757 and 767’s might prove slower to shift – so check any deals to see if they include these types. I’ll be talking with industry experts today to identify which deals to worry about – if any!

A number of investors have told me they are concerns the aviation industry is looking toppy – quoting concerns about what will have to aviation values in a general recession, how the growing demand from China can be sustained if the Chinese economy is slowing to more “normal” rates and what the effects of climate change protests will be on the long-term future of air-travel.  I’d balance these all with growing middles classes across the globe, especially in Asia, and the fact Aviation contributes a fraction of the Co2 of the fashion industry.

More generally the Aviation market is moving towards smaller regional aircraft, and the demise of the Airbus superjumbo A380 programme demonstrates it’s the smaller more versatile aircraft that are in demand.  The lack of significant new orders for larger types like the Boeing Dreamliner and its Airbus competitor the A350 is a concern – but long-haul travel is not going to vanish!

Sticking on the Aviation theme this morning, there is some very peculiar stuff going on re the Boeing B737 Max story.  Last week there was a very well-informed article in the NYT that effectively put the blame for the Lion Air and Ethiopian crashes back onto the airlines and crews – suggesting the companies lacked basic safety and maintenance competence, while the crews were poorly trained and not proper airmen. The story highlighted conflict between the investigating authorities in Indonesia and Ethiopia with Boeing, stopping just short of accusing both countries of corruption.  It was very well briefed.   (Check the website for links to the story.)

It looks likely the Indonesian crash report (probably to be released in November) will blame design and oversight failures at Boeing – and accept there were maintenance and pilot errors. It does sound like something of a distraction – the basic problem is Boeing kept on modernising the B-737 until it became and unstable Frankenstein of a plane, where Boeing put in systems and software pilots were unaware of.  It’s raising all kinds of questions about just how close Boeing is to its regulator, the FAA, and did it push through approvals for a flawed plane.  Its also hit passenger and pilot confidence in Boeing – yet such is the demand for new aircraft, Boeing stock remains hardly touched!