Written by Juan Palenzuela
Today, Juan Palenzuela contemplates Boeing's reputation crisis as the plane-maker faces great scrutiny from governments, airlines and the general public.
"All I could think about was the 737 Max struggling to gain height and eventually diving to the ground, killing my whole family and 152 others”. Paul Njoroge’s testimony before the US Congress on Wednesday was a powerful account of the experience lived by thousands of people that lost family members in the two plane crashes involving Boeing’s 737 Max aircraft over the past year, the product of a design flaw that caused the planes to dive. It has been a reputational disaster for the plane maker: in a poll by Business Insider, 53% of respondents said that they would avoid boarding the 737 Max if regulators and airlines clear it for flying again. Reputational disasters of such magnitude often decimate companies. Malaysia Airlines, for example, had to undergo substantial restructuring and rebranding efforts after two plane accidents in 2014 left the company “technically bankrupt” according to its Chief Executive. But this is not the case of Boeing. Earnings and revenues of the company’s commercial airplane sector dropped 17% and 9% respectively in Q1 and are expected to do so again in the Q2 release due next week; but its stock is doing relatively well. It is up over 14% in the year to date, not so bad relative to the 16% return of the Dow Jones index in which the manufacturer is included. To understand why this is the case, you should ask yourself when was the last time that you boarded a large plane that isn’t manufactured by either Boeing or Airbus. Unless you’re extremely old or a North Korean official, you probably never have. By means of organic expansion, acquisitions and predatory pricing, the two companies have managed to eliminate all competitors and consolidate what is perhaps one of the purest examples of a duopoly. While Boeing’s reputation might be heavily damaged, it still is, after all, the only manufacturer capable of producing big planes at scale together with Airbus. As the two 737 Max accidents have proven, it can be dangerous to leave the technological advancement of an entire industry in the hand of just two players. This is a clear market failure. So then, where are antitrust regulators, defenders of consumer choice? Big geopolitical considerations obstruct their duties. The hubs of Airbus and Boeing are located in France and the US, and each company is championed by their government at home. They provide high-skilled labour as well as being a strategically critical industry that no one wants to erode. It is unlikely that this will change in the foreseeable future. Nonetheless, the reputational crisis that has unfolded might change the attitude of governments and airlines to make them face the manufacturers with greater scrutiny.
Iran’s Islamic Revolutionary Guard Corps claimed that it seized a “foreign” vessel and detained its crew for allegedly transporting smuggled fuel near the Strait of Hormuz. Despite the apparent escalation, the country offered a new deal to the US in which it would accept permanent enhanced nuclear inspections in exchange for the permanent lifting of sanctions. Two million public sector workers are to be given the biggest pay rise in six years. Police officers will receive a 2.5% rise across the board, soldiers 2.9% and teachers and other school staff 2.75%. The government is expected to make the announcement on Monday. Four cabinet ministers, led by the chancellor Philip Hammond, defied a three-line government whip today as MPs voted for an amendment to the Northern Ireland Bill that could stop Boris Johnson from suspending parliament to push through a no-deal Brexit. The amendment was passed by 41 votes, of which 17 were from rebel MPs.
Business & Economy
Air France is set to announce an important order of Bombardier C-Series planes, also known as Airbus A220, on July 31; which could result in revenues of £100m for the companies’ (now part of Airbus) Belfast manufacturing plant. The order comes as the airline needs to replace its short and medium-haul 114-strong fleet. Netflix announced the introduction of a low-price mobile subscription tier, which will cost the equivalent of £2.91 per month and will launch first in India. The company also announced that, for the first time, it lost subscribers in the last quarter. Netflix’s shares dropped over 10%, a loss of nearly $17 billion in market capitalisation. Microsoft fulfilled revenue and earnings expectations for the final quarter of its fiscal year, boosting its shares by 1.5% on Thursday after-hours. The company’s cloud business once again fuelled its growth, but for the first time it has generated more revenue than the Windows or Office segments.
Stocks in the LSE finished slightly lower on Thursday amid ongoing worries about Sino-US trade relations, while the Pound moved higher after the European Union's chief trade negotiator, Michel Barnier, told the BBC he was open to alternative solutions for the Irish border. The FTSE 100 was down 0.56% at 7,493.09, partly due to a Wall Street Journal article suggesting that US-China trade talks have stalled due to Huawei. US Treasury Secretary Steve Mnuchin tried to reassure markets, questioning the article’s accuracy. Nonetheless, solid retail sales figures helped to boost the Pound. Sterling rose 0.39% against the dollar and 0.4% against the euro. Judging by these figures, consumers aren't too concerned by the possibility of a no-deal Brexit.
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Columns of Note
Writing for the FT, Gillian Tett argues that the current slowdown in trade and investment started well before the recent eruption of protectionism, and that this suggests trade wars alone are not the only thing to blame. Since the 2008 financial crisis, gross exports have failed to recover into anything like the pre-2007 levels; and they have in fact declined relative to GDP. The explanation, argues Lett, may be post-crisis regulations, which have made it costlier for banks to supply funding. In the New York Times, Charlie Warzel warns of the terms and conditions of FaceApp, a popular mobile app that lets users see how they look as older, wrinklier people. While the reaction of some advocacy groups and privacy champions has been overblown, it is important that users understand the terms and conditions attached to using the application: An “irrevocable, nonexclusive, royalty-free, worldwide, fully-paid, transferable sub-licensable license” for the photos of the user’s faces.
Did you know?
Kiwifruits were originally called Chinese gooseberries. They were rebranded by New Zealand farmers for marketing reasons in the 1960s.
House of Commons
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House of Lords
Legislation Extension of Franchise Bill - Lord Naseby
EEA Nationals (Indefinite Leave to Remain) Bill - Lord Oates
Victims of Crime (Rights, Entitlements, and Notification of Child Sexual Abuse) Bill - Baroness Brinton
On recess until Monday 1 September.