The End of An Era in Aviation: Was the Jumbo the Best Plane Ever?

Blain’s Morning Porridge Feb 2^nd 2023 – The End of An Era in Aviation: Was the Jumbo the Best Plane Ever?

“I was listening. Listening to the rain. I was hearing. I was hearing something else.”

This morning: The last baby Jumbo has fledged the nest. In their day, 747s were simply stunning. Today’s aviation markets are very different and challenging – but potentially offer fantastic value as markets change and adapt, and new entrants set to revolutionise the way we fly.

Before I start on this Morning’s Porridge about aviation assets – quick work of warning to the wise: Don’t Fight the Fed. (Or Central Banks in general…)

Yesterday the Fed hiked a modest 25 bps, and said the decision on inflation and interest rates has a “long way to go”. The market heard something else – “disinflation” and rallied. Today the Bank of England will have a split decision and will hike 50 bp. This is not over yet. I will go with Jerome Powell saying “ongoing in increases in the [Fed Funds] target range will be appropriate in order to … return inflation to 2% over time.”

This is a space I will definitely be returning to next week.. Tomorrow… Adani!

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Goodbye Jumbo

Yesterday was the end of an era in Aviation as the very last Jumbo, an 8F freighter, flew off from Seattle. It’s 54 years since the first Boeing 747 appeared at the Paris Airshow in 1969. One circled the Turnhouse Airshow in Edinburgh a few years later. I thought it as stunning as Concorde. Dad helped me with the Airfix model – in Pan Am livery. My first work trip to New York was on a Pan Am jumbo. If anything shrank the World.. then it was the Jumbo Jet. I spent 20 years as a Gold-Carded regular on the top deck of BA 747-400s as I flew round the world as a banker. I aged with them.. They are retired.. I’m still working..

I am a plane nerd.

I can tell you which Spitfire that tiny dot way over there is just by the sound of the engine (Merlin or Gryphon)… I’m spending time now jet-setting around the Middle East in connection with a large deal we’re putting together – wearing my Shard Head of Alternatives hat. It’s fascinating – A380s are flying palaces (but horribly unsuccessful as a plane type), while relatively new aircraft like the B-787 Dreamliner and the superb A-350 Airbus are genuinely quiet, comfortable and make flying easy. Flying luxury on Emirates, Etihad and Qatar makes the best airlines of the last century feel like prison hulks.

I was brought back to earth with a bump flying British Airways for meetings in Cairo this week.

Cairo is a long flight.. so naturally B(loody) A(wful) puts the smallest plane in the fleet on the route – a A-320. They think it’s just a European regional flight. It’s a bus. No entertainment, not even a fly-map, no working internet, miserable inflight catering, lovely but embarrassed cabin staff. The thing is – sitting for 7 hours (for that is what it took coming back Wednesday due to headwinds and Heathrow delays) in a seat designed for a 1 hour short-hop from London to Frankfurt has left me with back pain.

It says something about how the World has changed that I’ll be flying Egyptian Air next week for follow up meetings. Egyptian is a dry airline (!!!), but they fly Dreamliners and have proper seats. It’s more expensive, but I can’t afford to compromise cost over a broken back and sleeplessness. (I’ve written to BA about it before – but never got a response. I now advocate taking their right to the Union Flag logo away. Give it to Beardy Boll*x Branson instead – he at least pretends to care….)

Regular readers will know I also have a particular interest in aviation finance..

We’ve got a number of really interesting ideas and deals underway.. and if anyone wants to spend time talking about why Aviation is a valid part of an alternative investment strategy – let’s chat. I’ll also be speaking at the Ishka Investing in Aviation Conference on March 28^th in London, and I’m delighted the hosts, Ishka, are letting me invite my institutional investor clients to the event – for free! Email me if interested.

Whatever your investment sector, Ishka is a must attend event. I’d recommend learning about the returns and risks in aviation as a timely exercise. The market is getting busy again, and there are some superb opportunities emerging right now! (Sorry, but I can’t invite retail investors – but genuine institutional fund managers, UHNW and family offices will be very welcome.)

There is a very interesting outlook for aviation in prospect – but it’s important to strip out the myths from the reality. The current economic background, the issues around climate change, challenges and mistakes by the two big manufacturers means there is massive value out there… if you know where to look. Planes have value – each month the airline pays its rent for the plane (a credit risk), and when they replace it still has second hand value (what we call “metal risk”). Get these right.. and the returns are attractive. Myself and some chums have an idea on how to do it right!

For a start – there is something a hiatus is aircraft development.

• Boeing squandered the revenues from the Jumbo and B-737 programmes, plus hefty debt financing, on a massive stock buy-back programme – which ultimately benefited no-one except the senior management. They stretched the venerable 737 too far – resulting in the killer 737 Max, and are now trying to weasel out of their liability for murdering 346 passengers. They don’t have the $35 bln plus it will cost to develop a new fuel efficient, ultra light carbon saving regional jet to replace the aging 737 fleet.
• Airbus – I am told – are running out of qualified aviation engineers. The current crop are reaching retirement, and too few young technical engineers were attracted into the business. (One of my chums is very successful race-yacht designer – he qualified in aircraft design, but came to the conclusion the highlight of a 40 year career might be leading the design team for Airbus’ next inflight toilet system.) If Airbus develops a new plane then the American’s will declare Gov Subsidy foul and launch a tradewar.

Boeing have made the requisite noises about new demonstrator models designed with Nasa support, featuring ultra-low-aspect thin-chord high wings to increase aerodynamic efficiency, while Airbus are muttering about hydrogen powered flying bomb wing designs by the 2030s.

The reality is brutal – a new climate friendly, ultra-efficient regional jet is decades away. The result is the order books for Boeing 737 and Airbus 320 series remain full – over 10,000 still to be delivered. They are going to remain the only game in town for longer than we expect – the work horses of the air, raising a host of consequences, not least for airline schedules, cost scenarios, and customers becoming concerned about their flying and climate change.

These regional types are also the most liquid aviation markets. As my flights to Cairo demonstrate, you can do anything in a 737 or 320. They won’t be obsolete for decades.

My bet is simple. People will not stop flying. They will not stop going on holiday, and business folk will still want to meet face-to-face. 90 mins face-to-face in Cairo y’day achieved far more than 20 zooms ever will. If folk are concerned about their air-mile carbon footprint, they will join an offset programme (an area I see as a real consumer business opportunity). I would much rather fly an efficient less carbon-unfriendly plane – but it’s not going to happen, tomorrow or the day after.

Nor will every consumer think the same way. It’s increasingly clear ESG, Wokeness, and Greenwashing have stirred up a counter-reaction, and many folk are just bored of being told to be better. We all care about baby polar bears – but we all want to fly. Let the airlines take care of it in the Scope 3 offsets.

More prosaically.. Airlines exist in a competitive environment. If there is no rush to replace planes that aren’t about to become obsolete, they will keep flying older aircraft as long as they can – as cheaply as they can, until more efficient aircraft emerge at prices that make commercial sense. That’s going to mean we may still see older wider-bodies on the long-hauls for longer. I was chatting to one firm recently about how to use the simply too-big A380s as more than Haj-Buses to Mecca – they have an idea..

I could fly you round the planet today on an electric plane, but it will have one single seat, be double the size of a Jumbo, and basically be batteries powering themselves… Tomorrow that may be different… but tomorrow is always tomorrow.

All of the above means the value of current aircraft is likely to remain higher for longer in the face of nothing new.. Changing global demographics mean its new airlines emerging in Africa, India and Latin America who will be buying the older planes. The whole structure of the market is changing. It’s worth taking a look at..

Five Things to Read This Morning

WSJ                 Airbus Revives Order From Qatar Airways Following Pain-Dispute Settlement

BBerg              Adani in Crisis as Bonds Hit Distressed Levels, Stock Sale Axed

FT                    Economists detect dovish undertones from “more optimistic” Jay Powell

FT                    How the US fell out of love with flying

CNN                 Boeing says farewell to “Queen of the Skies” with last 747 delivery

Out of time, and back to the day job..

(NB – this morning’s quote: Marquee Moon by Television: simply the most stunning piece of music from the Punk era. I had to buy a vinyl repressing because I’d worn out the groves on the original over 45 years. RIP Tom Verlaine.)

Bill Blain

Strategist and Head of Alternatives, Shard Capital