Recently in Global Economy Category

These two stories had to be placed side-by-side, because while they are unrelated in subject matter, they are very related. Access to China is tops on the minds of every aerospace company on Earth and with the Comac ARJ21 coming online and the C919 not far behind, what happens to joint ventures with Chinese companies once domestically made competing products are available is anyone's guess, but this episode may serve as a guide for the future.

Shot:

"Very few customers today are willing to purchase aerospace products or services without expecting some form of industrial partnership, through global supply chains".

-Boeing CEO Jim McNerney
McNerney tells unions Boeing's global supply chain is crucial
Seattle Times
October 7, 2010

Chaser:

Brazil Doesn't Expect China To Approve Embraer Plans To Stay
Wall Street Journal
October 7, 2010

SAO PAULO (Dow Jones)--Brazil's Empresa Brasileira de Aeronautica SA (ERJ, EMBR3.BR) likely won't get authorization from China to change over production lines, meaning the company will probably close its factory in the Asian country in 2011, a person in the Brazilian government said Friday.

Embraer, as the world's fourth-largest plane maker is known, is phasing out construction of its 50-seat ERJ-145 plane after it delivers the last of its orders in March. Embraer sees no demand in the region for the smaller airplane and is seeking authorization from China's government to begin production on larger, 120-seat planes, the company's press office said Thursday.

Dusting off 747-400s after their stay in the desert is a good sign of a recovering global economy. The long-range, high capacity jumbo's return to service with airlines like Cathay Pacific, British Airways and United Airlines signals a resurgence of strong demand on a diverse array of routes. While it is no longer the most efficient aircraft in its class with the larger A380 or slightly smaller 777-300ER filling its previous role, the need for capacity growth is outweighing the reintroduction of the less efficient type.

Though, with each individual carrier making decisions based on increases in demand, Bloomberg's report on capacity increases introduces this variable:

"Everybody is getting very excited about passenger and cargo volumes coming back, but there's a great temptation to add too much capacity," said Chris Tarry, an independent airline analyst and strategy consultant in London who has followed the industry for almost three decades. "What may be rational fleet decisions for individual airlines can add up to a problem for the industry when taken together."

This trend of bringing aircraft out of the desert along with production output rising on nearly every commercial assembly line at Boeing and Airbus, commercial aerospace, by all outward appearances, is a solid barometer of the way toward a global economic recovery. Yet, like all good cause and effect equations, is commercial aviation a leading or trailing indicator of global growth? It's like dividing by zero, it will make you cross eyed if you think about it too long.

Unleashed pent up demand from lessors came to the fore at Farnborough with lessors signing up for billions of dollars worth of aircraft, but for Richard Aboulafia - who has a pesky habit of hitting the nail on the head - the order bonanza may be shortsighted. Here's reason two of six the parade might be premature:

2. There's a degree of separation between the air travel market and the economy. Passenger and cargo traffic are doing great, and airlines are making money. Yet today's traffic numbers are now completely disconnected from, and way better than, the economic indicators that typically drive them. Stock prices, GDP growth, inflation (or even deflation), bond rates, retail sales, housing inventories, employment, and consumer confidence numbers in the US and Europe all show continuing uncertainty.

The numbers across the world's largest economies are decidedly uneven: Germany is growing like gangbusters, but the US and Japan are sputtering and Chinese factory output slowed for the fifth month straight. Economic indicators are all going in different directions, so what's an airline to do? Too many aircraft in the marketplace could wreak long-term havoc on airlines, lessors and manufacturers alike. Let's just hope the painful lessons in capacity discipline didn't get parked in the desert too.

When it first announced orders for 200 jets at the 2007 Dubai Air Show, Dubai Aerospace Enterprise (DAE) grabbed headlines with its ambitious goal of becoming a massive Middle Eastern aerospace node, supplying aircraft to the region's rapidly growing fleets. The $27.2 billion deal was one of the largest in aviation history and embodied the seemingly endless demand from the region for commercial aircraft.

This week brought the realities of a shaky global economy to the forefront with the cancellation by DAE of 50 aircraft spread across four aircraft types from Boeing and Airbus. While Boeing and Airbus remain mum on the cancellations, the numbers tell the story. Airbus, reduced its DAE orders for the A350 XWB by seven to 23, and its A320 orders by 18 to 52, a $3 billion backlog hit.

Boeing's DAE listing on its order and deliveries website no longer show the 777-300ER and 787 orders booked in by the carrier, along with the airframer's undisclosed cancellation for 10 777-300ERs and 15 787s. Additionally, the listing also shows the sale/leaseback of 747-8Fs and 777Fs shifted from Emirates Sky Cargo to the DAE. Overall, DAE has slashed that 200 aircraft order by 25% amid its shaky financial status.
Scott Hamilton at Leeham Co. has a fascinating chart mapping DAE's deliveries over the next decade using data from Ascend. DAE's deliveries grow steadily, rising toward 2017, peaking at 55 then come down sharply by 2019. Yet that anticipated steady growth leading up to that peak is what really matters.

What happens to the remaining orders in its near term backlog is somewhat unclear, but with production rates rising on virtually every Boeing and Airbus assembly line in the years to come and any sign of cracking in demand from the Middle East could trouble the waters for commercial aircraft manufacturers. 

Flight International penned a commentary shortly after the DAE order was announced in November 2007, asking some less-than-popular questions about the rapid regional growth and whether or not its grand ambition was truly sustainable. While the fleet and traffic growth of the region's airlines has continued unabated, nearly three years later, the comments ring eerily prophetic:

As more and more prospectors join this latter-day gold rush, the question few dare to ask is: can it all be sustainable? What would the effect be of a major Islamist terrorist attack on Dubai's image as the anything-goes, safe and prosperous Switzerland of the Middle East - and thus the growth trajectory of Emirates? What happens if the US credit crisis causes a slowdown in Asian economies - the expansion of which is driving much Gulf-based cargo traffic? Despite all the new airlines emerging the wider region, are there really enough takers for yet another leasing company with a fleet in the hundreds of aircraft? And, if the business is there, why are the likes of GECAS and ILFC not already plugging that gap?

These did not seem to be matters troubling the Dubai air show's big spenders last week, who are so bullish about their market predictions and their abilities to meet them that sceptics seem like wild-eyed prophets in the wilderness.

Not long ago, a Forbes.com article titled The iPad and Dreamliner Economy discussed the innovation that was taking place inside the US and why domestic technological innovation was far from a standstill.

While the article reads like a litany of US brands the author's firm likely holds an interest in, the article's title is what grabbed my attention. It suggests something far beyond domestic technological innovation, which, I should add, is a monopoly held by no one country.

What the latest analysis shows is that the smallest part of Apple's costs are here in Shenzhen, where assembly-line workers snap together things like microchips from Germany and Korea, American-made chips that pull in Wi-Fi or cellphone signals, a touch-screen module from Taiwan and more than 100 other components.

But what it does not reveal is that manufacturing in China is about to get far more expensive. Soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising housing costs are all threatening to sharply increase the cost of making devices like notebook computers, digital cameras and smartphones.

Airframers are perpetually jockeying for position in China's rapidly growing market; moving component and structural assembly to achieve significant cost savings with lower labor rates while cultivating market access for state controlled airlines to select their fleets accordingly. Even homegrown final assembly lines set up by Airbus (Tianjin) and Embraer (Harbin) avoid high import tariffs while delivering directly to Chinese fleets.

But how will this shift to higher wages and inflation impact the aerospace industry at large?

The list of Chinese content on western jetliners is continually growing and will, for example, eventually include 5% of the A350, the center fuselage of the CSeries, the rudder, vertical stabilizer leading edge and outer wing-to-body fairing panels of the 787, as well as the horizontal stabilizer, inboard flaps, ailerons and spoilers of the 747-8.

The rising labor rates for consumer electronics production may or may not translate to higher wages for higher skilled manufacturing jobs in China, though the increased costs of doing business could shift the dynamic for increasing workshare.

The tilted playing field toward low labor costs, driven by an undervalued currency, and strategic market access made the shift East a virtual necessity. Though if rising labor costs, which still may be competitive against western wage rates, significantly increase the cost of doing business in China, how will this impact the shape of aerospace supply chains in the future?

This will be a trend to watch.

In September of 2008, Mitsubishi announced that Boeing would be a technical consulting partner on the development of its new 78-92 seat MRJ. The move by Boeing was an unsurprising, if not unsubtle step, to provide a major technical boost to one its largest strategic supply partners in its bid to build its own indigenous aircraft. The move was a shot across the bow of Embraer and Bombardier whose E-170/190 and CRJ700/900 are the mainstays of the sub-100-seat market. 

On my very first assignment for Flight, I was sent to cover the Dubai Air Show. It was November 2007 in the midst of one of the most extraordinary expansion years commercial aviation had ever seen. The A380 successfully had entered service with Singapore Airlines a few weeks before and the 787 was accumulating orders after a spectacular rollout ceremony preparing for a first flight that was intended for March of 2008. The industry looked virtually unstoppable.

One particular memory still stands out in my mind from that show that had Emirates spending $38 billion for firm orders on 82 aircraft (70 A350s, 12 777-300ERs).

I was heading to a press conference on the upper level catwalk that surrounded the show floor when something completely out of place caught my eye. As I reached the top of the stairs, I noticed about a dozen workers, all men, who appeared to be of South Asian descent sleeping behind two skillfully crafted artificial walls.

From the upper level on the catwalk I could look down into the space they were using to sleep. They were piled on top of one another, using each other as pillows. Feet from where these men were sleeping, billion dollar deals were being done. A person could easily walk by and have no awareness of what was going on just behind the wall.

That, in essence, was the global economy in 2007: Growing at such an astonishing pace that no one stopped to realize that just behind the artificial walls was a world without real foundation.

And so, what we face today is the end of Globalization 1.0; a world built upon the principles that made the Field of Dreams: If you build it, they will come. The only problem was that the 'it' was always open for debate.

It was the reason for the housing bubble and the overleveraged credit markets that supported them, it was the reason for Dubai. It was unsustainable.

There was always trepidation in the voices of the Airbus and Boeing executives who constantly stressed that they weren't overleveraged in any one region of the world, always cognizant that a region, or regions, could collapse. In many ways the disclaimer they provided was more intended for self reassurance than for others. It felt too good to be true.

Airlines have already begun adjusting to the dynamics of the new economy with cuts in capacity, aircraft deferrals and cancellations. The only major airline, it appears, that is attempting to buck the trend is Emirates, with 14% capacity growth planned for the coming year. Emirates' proposition, which is based in some well founded airline dynamics, intended Dubai to be a hub to the world. But a hub is only as strong as the people traveling through it: if they aren't coming, you can't built it.

IATA General Director Giovanni Bisignani said that January figures for international travel will be even worse than the 5% plunge that came the month before.

We've seen this in the not so distant past. Just eight years ago, Web 1.0 was crumbling under not entirely dissimilar circumstances.  The justifications that inflated that bubble were the same then as they are now. Just because you have a business based online, success was far from guaranteed, even if the artificial IPOs told a different story. Businesses like Kozmo.com and Pets.com all saw the web as a tool, but the product they were selling wasn't fast delivery or pet supplies, it was the novelty of the internet itself. The fad then was the web, today it is buy now, pay later.

Though the fall of Web 1.0 gave way to an organic, and fundamentally more sustainable internet in Web 2.0: bottom up, not top down, driven by genuine growth that saw the web as a vehicle for product growth, not the product itself.

I don't suggest that Globalization 2.0 will be much different than 1.0. The free flow of ideas, people and capital will always be the underlying drivers for the global economy, but the foundations upon which the 2.0 economy is sustained must be different.

Aircraft have been the centerpiece of globalization before 'globalization' was a coined term. A search of the New York Times archive reveals its first reference to globalization found its way into the paper in February of 1981, more than a decade after aircraft like the 747 was flattening the world and connecting points on the globe 5,000 miles apart.

Perhaps ironically, the first reference came in an article titled OUTLOOK: Toughening attitudes on world trade.

Aviation finds itself in a particularly precarious situation, as the industry has always been both driven by, and a driver of, the global economy as both leading and trailing indicator of its health. Aviation will ultimately play a vital role in its recovery as the United States highest value export.

Though the challenge to both Airbus and Boeing is found in having charted different paths as the global economy ballooned in the last decade. Each thrived on the premise that twice as many people will be flying in 2020. Yet, slower growth of the once hot, but small, global markets may give large hub-to-hub travel the leg up or a global economy in recession means operating higher load factors on once high traffic routes with smaller long range aircraft. Each can find a way to thrive, but the interconnectedness that each manufacturer helped to create will also be our salvation in creating a 2.0 global economy.

With the economy spiraling further and further into a hole, Microsoft announced yesterday it was laying of 5000 employees. We learned today, though still officially unconfirmed by Microsoft, that the cuts include the disbanding of the ACES Studio team which is responsible for Flight Simulator. It appears as though the venerable flight simulator, which has been around since 1982, is no more.

When mega businesses like Boeing or Microsoft eliminate jobs, the impact reverberates throughout the economy. The loss of 5000 Microsoft jobs is a huge blow in its own right, but the Flight Simulator community, which is truly global, will feel the loss as well. Many developers make their living creating addons for the program. The impact is far from localized.

As many of you know, I am an avid user of Flight Sim as well, having flown one version or another since 1995. In no uncertain terms, Flight Sim cultivated my love of aviation and helped me get to where I am today. I joke with my mother that all those times she was yelling at me during High School to do my homework and stop shooting ILS approaches to Kai Tai, I was really just getting job training for the future.

Microsoft Flight Simulator was an institution both personally and for the aviation community and its loss will be strongly felt.

Earlier this week, FedEx exercised options on an 15 additional 777 freighters just three weeks after a regulatory filing stated that the cargo company was deferring delivery of its first 777F until FY2010. Though this simultaneous deferral and expansion of the order provides an illuminating glimpse into the thinking of the cargo giant. International air cargo traffic fell 13.5% in the month of November last year. Giovanni Bisignani, IATA's general director called the drop, "Shocking."

Air cargo, it appears, is a canary in a coal mine, setting off alarm bells for the rest of the global economy. Put simply, if people aren't buying, good aren't moving. This, of course, prompts a larger discussion as to whether or not air cargo traffic is a leading or trailing indicator of global economic health. Either way, it's dropping...fast.

Though if we assume that air cargo is an indicator of the health of the global economy, then the FedEx order might just shed some light on where the world's economic future lies. The initial deferral of FedEx's first four 777Fs in FY2009 is an unsurprising move, but adding 15 more for delivery between FY2011 and FY2019 is a clue to what the company sees as a decade of robust global air cargo growth. Whether this happens or not is just reading tea leaves, but FedEx has put its money where its mouth is. Maybe we should listen.

FedEx 777F Delivery Calendar FY2009-FY2019

	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019	Total
Original 15	4	10	1									15
Deferred		4	10	1								15
Deferred+15		4	4	3	3	3	3	3	3	3	1	30

*Source - Seattle Post-Intelligencer & Flightglobal.com

Permit me this a brief detour from covering aircraft and allow me to introduce you to my friend Jake Brewer. Jake's Dad work's for GM in Tennessee. GM has been a part of his life for as long as he can remember, and now GM is staring down the spectre of a bankruptcy that has the potential to take an entire US state down with it. I, like Jake, am torn over what to do. What is the role of government? Can a business really be too big to fail? Or just too big? I'll let Jake speak for himself and what GM has meant for his family and this country, I think you'll appreciate Jake's thoughts on innovation and technology in this tumultuous time.

Originally posted at huffingtonpost.com.

GM Goes Grassroots. A son is torn.
On November 12, Tom Brewer received an "URGENT call to action..." along with all other General Motors employees in the United States from GM North American President Troy Clarke. The return email address was "grassroots@gm.com." The urgent task at hand: Call your members of Congress to request that the American auto industry receive a government "loan" of at least $25 billion.

Employees were then directed to a website through which to take action:

www.gmfactsandfiction.com

As a grassroots clean energy advocate and strategic communications professional, it's a type of request I know intimately. I've written and received countless emails just like it. Two this week. Tom, however, has not.

Tom has been an employee of General Motors since he graduated from Evansville University in 1974. At the time, for a Midwestern kid from "stonecutter" Bedford, Indiana, it was kind of like going to work for Google today.

As you can imagine, Tom's seen a lot happen in the energy and auto industries in the last 34 years, but before this year he never considered that his retirement, his health care, and indeed his professional future would be in such dramatic jeopardy. In fact, without ever changing careers, he once worked for the largest and arguably the most influential corporation in the world; now he's getting these emails. He never dreamed that he'd need to be calling his congressmen to save the company to which he's always been loyal, and upon which he and his family's livelihood has depended. I can speak with such certainty about Tom's past because I've known him for 27 of the 34 years he's been with General Motors, and we're very close.

Tom is my dad.