Pontifications: Odds and Ends to end the summer

Hamilton ATR

By Scott Hamilton

Sept. 5, 2016, © Leeham Co.: August was unusually slow, so today is sort of an Odds and Ends clean-up of the summer.

There was the Southwest Airlines engine incident and the reports that ANA’s Boeing 787s have engine issues, but I wrote about these last week.

Today, the Odds and Ends include more on the Mitsubishi MRJ; Airbus deliveries; sales campaigns and other stuff.

Mitsubishi setback

Mitsubishi suffered another setback with its MRJ90 flight test program after there were two failures in the air conditioning system on two ferry flights from Japan to Washington State.

Both flights returned to Japan, where the OEM and supplier, United Technologies’ UTC Aerospace Systems try to figure out what went wrong.

The MRJ was en route to Moses Lake (WA), where four aircraft are to be based for flight testing. Mitsubishi scheduled an all-day media event Sept. 9, which now has been cancelled. No new date has been set.

Airbus deliveries

I’m picking up solid signs that Airbus may miss its delivery targets this year.

Given the well-publicized problems Airbus has with suppliers for the A320neo and A350 and the impact on deliveries, this is hardly surprising. Aerospace analysts have speculated all year that delivery targets may not be met.

But as we enter September, it looks like the suppliers won’t be able to catch up on their deliveries and therefore neither will Airbus.

I’m not talking about a major shortfall, perhaps not even a dozen airplanes. But it will be noticeable.

Emirates Airlines

I keep getting conflicting signals whether Emirates will make a decision this year on the big order for either the Boeing 787-9/10 or the Airbus A350-900. It was supposed to be last year, but was put over to this year. Now I’m hearing it might be next year. Stay tuned on this one.

In the meantime, Boeing still is pursuing EK for 777-300ERs.

Boeing Commercial Aviation Services

Ken Herbert, the aerospace analyst for CanaccordGenuity, issued a note Aug. 23 focused on Boeing’s services unit, commonly called CAS (for Commercial Aviation Services).

Boeing, as Herbert notes, is increasingly focused on CAS as a profit center. Herbert writes:

Commercial Aviation Services (CAS) is a ~$8.1B business that will generate ~$1.1B in 2016 operating profit. CAS represents 13% of total BCA sales but over 18% of the segment profits. Relative to other diversified industrial and aerospace firms, this services contribution is significantly lower than peer companies, and highlights a significant opportunity for Boeing. The broad commercial services market is a ~$2.8T market over the next twenty years. On an absolute basis, Boeing has a ~6.5% share of this fragmented market, trailing only GE. In our model, we believe CAS can be a ~$10B business in 2020, with 16% margins, which will represent over 40% of the limited BCA margin expansion we currently expect.

CAS is headed by Stan Deal, who holds an SVP title. He previously headed BCA’s supply chain management unit.

CAS has 12,000 employees.

Deal is one of three internal people whose names I’ve heard as a potential successor to BCA CEO Ray Conner, whose contract runs through December 2017.

57 Comments on “Pontifications: Odds and Ends to end the summer

  1. Emirates probably won’t be announcing any new large WB order before the next Dubai Airshow in November 2017.

    • “the big order for either the Boeing 787-9/10 or the Airbus A350-900.”

      The 787-10 is a conplete non starter for me. For multiple reasons. It wont have the desired power for sea level take offs in the heat. It simply cant have the range Emirates desire to chop and change routes and maxinise efficiency. Its not built yet. I’ll eat my words if they choose it. Its the wrong plane for them and their city pair linking strategy.

      I believe they will choose between additional 777-8X orders and the 787-9, maybe a mix of both. Airbus’ loss of the A350-1000 order was big for Emirates imo. There is a 3rd ootion. They will order noting new in 2017.

      • GE is working on a larger thrust version of the GENx as well as the other PIPs needed to get compliant on fuel burn for the -10 (retrofits back to the 9 and 8)

        I don’t know if its enough, its more than RR for the -10, might be enough to tip the balance (and early delivery as well as a mature aircraft!)

        • It will be a fine plane but not the choice for Emirates I think. As well as engine, this plane has a modified wing. It has the same wingspan as the -8 and -9 but that wing is not optimised for the length of the -10 and hence the need to try and squeeze in some wing refinements. Its a tall order and I think it will give the A359 a run for its money on many routes but it cant beat it on range.

          • Can’t say, I am not the one that has the figures.

            All I know is thrust limit issue was discussed and it may not be the factor indicated with the new up-thrusted engines.

            It is not intended to compete with the A350-900 either, I don’t know if its a fake contest aka Delta and the 787 vs A330/A350 or a real one.

            Others keep saying Boeing has the inside track, I don’t belive that either.

  2. As Mr Clark surveys the scene and notes the dearth of WB orders he must be having a wry smile to himself. To all intents and purposes he is in the driving seat even more than normal. The technical aspects of the bid are relatively minor (A359 vs B791) given the suggested route network and both OEMs will finesse their hand to meet his Hot and heavy requirements. How low can he make them go on price? how long will he play the waiting game? Nov 2017 sounds about right to me

  3. Some source of the delay problem seems to be the unwillingness for Qatar to take up its aircraft promptly or at all. Is this solely due to cabin fit problems or has AAB run out of cash? It is significant that of the A350 backlog there always seem to be substantially longer delays on the Qatar destined aircraft than any other. Given that more than one airline is using Zodiac why is this? I cannot believe that Airbus is favouring other airlines ahead of Qatar. Further I noted back in July three rather forlorn A320neo in Qatar livery dumped engineless on a distant parking stand. I understood that all contractual issues were resolved by mid year.

    http://aviationweek.com/commercial-aviation/qatar-airways-cancels-more-a320neo-orders?NL=AW-05&Issue=AW-05_20160905_AW-05_411&sfvc4enews=42&cl=article_5_3&utm_rid=CPEN1000002204232&utm_campaign=6930&utm_medium=email&elq2=f8eaafe59b584e08abf107bcdd75531f

    • QR has been able to use Airbus’s problems to shield itself against what I believe is its own problems that’s holding up deliveries. As more and more A350s/A320neos are delivered to other customers, they’re going to find it difficult to shift all of the blame on Airbus.

        • How do these things work? I would of thought surely Airbus could find something to charter and then lend it to Qatar. Even if it’s a Boeing.

  4. We indeed had a quiet summer in commercial aviation. Farnborough was not particularly exciting this year and aircraft orders are few and far between.

    What went unnoticed, and in this case it may be a good thing, is the entry into service of the C Series. Swiss currently operates two CS100 and we don’t hear much about them, which means it is a relatively smooth entry. It is still too early and the number of aircraft too small, but the fact that we don’t hear about the C Series during this crucial period bodes well for the reliability of the aircraft. Further deliveries are on hold because the operator has demanded some modifications to the cabin after the flight attendants complained about something that had been missed during development of the airplane. It looks like a small issue because the third aircraft has been rescheduled for delivery later this month, less than three weeks from now.

    Next month it will be the CS300 that will makes its entry into service. It is not only a new variant but the aircraft will also operate in a very different environment. I am anxious to see how the C Series will perform next winter. The airBaltic experience should complement that of Swiss. I estimate that the C Series has carried approximately 20,000 passengers so far. Before the end of the year there may be as many as 18 aircraft in service, 12 CS100 and 6 CS300.

    • For new aircraft no news is definitely good news. I still think there will be teething issues to come, unavoidable really, it will be interesting to see how much the press make of it.

      • The Boeing 777 is the aircraft that had the least teething problems and currently holds the record for EIS reliability. Bombardier made it known publicly that they want to beat this record with the C Series. So far it looks pretty good, but the jury is still out. Swiss will not reveal the level of reliability until, IIRC, five aircraft will have been in service over a period of six months. But my understanding is that it is already around 98.5-99%. If I am not mistaken the aim is to achieve 99.5% on a continuous basis.

    • I have to make some corrections because Bombardier has issued a C Series Program Update today.

      1. The third aircraft will be delivered to Swiss only next month.

      2. The first CS300 will be delivered to airBaltic in the fourth quarter, which is a rather vague statement.

      3. The total number of C Series to be delivered this year has been reduced from 15 to 7 because Pratt & Whitney will not be able to deliver more engines.

  5. One question here, Boeing still is pursuing EK for 777-300ERs. Are they pursuing a new order of confirmation of options? Boeing plans on options being confirmed so if these are already recorded as options non-confirmation might throw Boeing’s plans off a bit more than expected.

  6. Or EK doen’t order any airplanes for a few years. Maybe the overcapacity bubble has burst on them too.

    • The bubble did not burst, because there never was a bubble. Some markets have reached maturity, like the United States for example, but there are still many regions of the world that have not reached their full potential yet. Since the world economy is not particularly vigorous it is normal to see a scarcity of orders. But if we didn’t have a bubble we certainly witnessed a sustained demand that could be characterized as spectacular and which was due to healthier airlines in the West and ultra-fast progression in the East.

      For me a bubble is an artificial phenomenon caused by inflated expectations, like what we have seen in 2001 with the dot-com industry and in 2008 with real estate. However, the growth in commercial aviation that we have witnessed in recent years was something tangible and perfectly natural. It will only become saturated when the market for air travel will have reached maturity il all the regions of the world.

      • Hmmm, low interest rates, high fuel prices and we did not have a bubble, China screaming along ?

        We have the low interest rates left (well if the (IE ever gets staffed) but others are gone.

        Call it excessive exuberance ?

        • “Hmmm, low interest rates, high fuel prices and we did not have a bubble, China screaming along ?”

          High fuel prices? Really? When oil prices remain below $50 for such an extended period, when oil price peaked at $150 not long before the 2008 bubble burst, when multibillion projects are killed because the costs related to extraction are higher than market prices, when the C Series business case is said to we weak because oil is so cheap, I don’t think we can say that fuel prices are high. Unless you are an American of course. 😉

          The only big bubble that I am aware of is real estate in China. But the growth rate over there remains three times that of the US, which is still one of the highest in the world. We see “China screaming along” because they are going through a major transition period that will bring them from an economy based on manufacturing, like England in the 19th century, to an economy based on domestic consumption, like we see today in America and Europe.

          • Normand:

            Translation problem maybe, fuel price WERE high, ergo the ordering frenzy.

            I am aware of what other people in the world pay for fuel.

            A shame some of those countries don’t spend it on defense, US would be able to spend more on its citizens.

          • “I am aware of what other people in the world pay for fuel.”

            When I said that “I don’t think we can say that fuel prices are high, unless you are an American of course” I was only alluding to the fact that American people don’t like to pay high prices for fuel and complain when the price is where it would be considered very low in countries where citizens are used to pay high fuel prices because of the added government taxes. In my part of the world we laugh when we hear Americans complaining about high fuel prices.

          • Normand:

            I would have hoped by now you have realized that I am not a normal American.

            I keep myself informed of what is going on around the world.

            Most non US people also do not know what is going on around the world. Nothing new. Europeans are probably an exception as they are so depended on the US for defense (grin)

            And yes I realize how much you pay for fuel, as well as how little we do.

            The comment was in line with the past high cost of aircraft fuel as well as low interested rates..

            That has taken some time to loose its inertia but loose the inertia it is.

    • EK are experiencing about 8-9% pa growth, as opposed to abt 5% for the rest of the World. So EK are a sort of bell weather now and if they aren’t ordering, the outlook for other airlines ordering isn’t good either.

      One thing to note, with regards to EK B777 orders, is that in Australia, at least, B777s are giving way to A380s as EK take more and more market share. As B777 is often called a route development tool for EK if they are experiencing problems getting more slots or new traffic agreements in place, then their interest in B777s might dry up a bit, so maybe it is a question of shortage of new route opportunities and growing A380 fleet being used in established markets.

      • @MartinA

        Due to increasing capacity constraints at the Dubai International airport (DXB), Emirates is not planning to start using new A350s or 787s until they move all of their operations to the Al Maktoum International at Dubai World Central (DWC), when phase-1 is completed in the mid 2020s.

        http://daep.gov.ae/press-release/al-maktoum-international-phase-1/

        Addendum

        It may look as if Emirates is anticipating that an 85m long A380-1000 will be entering into servie, a decade hence – and may be planning a massive order for such a next generation A380, a couple of years hence.

        Critical aircraft box dimensions of 85m x 85m that cater for the new generation expanded aircraft versions from the leading manufacturers of Airbus and Boeing.

        Four Satellite Concourses featuring an innovative triple-plus layout 2.8 km long encompassing three nodes, each, having the size of 7 football fields.

        Concourses, each with 100 wide body aircraft contact stands and 65 million capacity, totaling over 220 million passengers capacity for the entire airport with over 400 wide body contact stands.

        • I can’t open the link but if EK can maintain last years rate of growth I can well believe that anything smaller than a B777 might seem like a waste of space until the new airport is up and running, but the trouble with that idea is I think they want to expand into new markets, they are always looking to expand, and that means some smaller aircraft, as they are already serving the biggest markets. Using A380s anywhere that now has more than one B777 per day to free up slots for smaller aircraft going into new markets might well be the compromise solution. That would explain why they aren’t interested in B77W at any price.

          There is no point building a new airport and not anticipating future airliner growth. I remember the airports complaining about the impossibility of accommodating the B747-100.

          • Tim Clark is on record saying that Emirates will be able to double in size once they move to DWC.

            Emirates can double in size once the airline makes the move to Al Maktoum International airport in Jebel Ali, the airline’s president said.

            At the International Air Travel Association annual general meeting in Miami, Tim Clark said that within the next decade the airline would eventually move from its current base at Dubai International to the new airport in Jebel Ali removing any constraints on its growth.

            “There is nothing stopping us doubling in size once we get to [the new airport], as simple as that,” said Mr Clark.

            The carrier currently employs about 56,000 staff, operates 234 aircraft, including the largest fleet of A380 superjumbos, on 144 routes and in the last financial year earned revenues of more than $24 billion, up 10 per cent year on year. It carried almost 50 million passengers during the period.

            The airline will benefit from a US$7.8bn 2020 expansion plan at Dubai International Airport that includes Concourse D – a state of the art facility for international airlines, the expansion of Terminal 2, and the complete refurbishment of Terminal 1, according to operator Dubai Airports. It handled over 70 million passengers last year, making it the world’s busiest for international passengers.

            Emirates has targeted flying 70 million people itself by 2020.

            However, the new airport at Dubai World Central is expected by 2022 to have capacity to handle 220 million passengers annually once a $32bn expansion is complete. It will be able to handle 100 A380s at a time.

            http://www.thenational.ae/business/aviation/emirates-can-double-in-size-with-move-to-dubais-al-maktoum-international

            NB: Please do note that DWC will be able to handle 200 A380s at a time once phase-2 of the DWC-expansion project is completed.

          • Blimey, at this rate this rate the “best” route London-Paris will be via Dubai…

      • “is that in Australia, at least, B777s are giving way to A380s”

        That looks to stall as Qantas has decided not to take the final 8 380’s on order.

        • MartinA was referring to Emirates, not Qantas. With the A380 Emirates are clearly thinking big, whilst other airlines seem unsure about the size of the market.

          It seems to be working for them too. Here in the UK there’s now 3 Emirates A380s per day from Manchester, and one from Birmingham and who knows how many from the London airports. They’ve withdrawn 777s from these routes in favour of A380, presumably to meet demand. It seems like they can fill them up too.

          There’s also the A380 comfort factor; passengers clearly like it. Whilst many in the industry believe that the only thing that matters is price, for a similarly priced ticket passengers are choosing the A380. And it’s so big that a full one raises far more overall profit than anything else despite possibly being behind on profit per seat.

          So Qantas not taking their last 8 A380s could be seen as a risky strategy, leaving the barn door wide open. Emirates can come in and supply much more capacity than Qantas can using an aircraft that passengers clearly prefer over anything else in the sky. The irony is that Emirates might do that having snapped up Qantas’s rejected A380s at bargain prices from Airbus.

          If this trend continues, the long haul airline industry will be Emirates, and everyone else trailing behind.

          • QF have no market left for the rest of the A380s, they have been reduced to serving ONLY Sydney and Melbourne. Being unable to afford the last 8 A380s made them too late to the party and EK finished them off on most destinations. Even Perth gets double daily EK A380 services.

          • Only international services I mean, domestic is still alive and kicking outside SYD and MEL

          • Keep in mind Qantas gave away the store with their sharing deal with Emirates.

            Lamb laying down with the Lion, lamb gets eaten.

          • They were in trouble before the EK deal, that was survival, going bankrupt would have taken them out of out of those markets anyway. No chapter eleven down under, mate, its a lot harder to keep going after you go down, down there, ha ha.

          • Martin A:

            Thank you, had not realized you are from Oz. I have had a great discussion with the guys in the RC17 groups from down there (motorcycles)

            Good to know about local Bankruptcy issues.

            Is Quants exempt as its something of an oddity airline wise?

            I know there are some government edicts they have to abide by that others do not but not any of the details.

            I do read Plane Talking blog from down there and that helps.

          • QANTAS are a nearly normal private company BUT they were once govt owned and were privatised by something called the QANTAS sale act. (Law in Australian/UK English) I’m not 100% sure of the details as it is over 30 years since I lived in OZ but they face a number of restrictions, especially on foreign ownership. A couple of years ago they went to the Aus. govt. cap in hand for credit guarantees or bailout money, claiming they were disadvantaged by the act, but got turned down, there might be other posters who know the story better than I do.

            Once upon a time there were 2 airlines in Australia, Ansett and QANTAS, but Ansett went bankrupt and nobody bailed them out. Then for a while there was really only QANTAS as Virgin were just starting out. Now there is Virgin and QANTAS. I doubt if either of them are too big to fall looking at last couple of years developments. I suspect they wouldn’t have been allowed to pull out of secondary destinations like Perth and Brisbane if somebody thought they were important enough to save.

            Australian bankruptcy consist of the creditors or the company declaring bankruptcy, an administrator is appointed by the creditors whose ONLY responsibility is getting as much money back as possible, if that means closing the company and selling the assets so be it. Only if the administrator can see that the company will be worth more as a running company and creditors will get more back that way can it be saved.

          • @MartinA

            They’ll be flying them all over the Place wuth one stop from Latin America to Asia (and vice versa); with one stop from North America to Asia, Australasia and Africa (and vice versa); with one stop from Europe to Eastern Africa, South East Asia and Australasia (and vice versa); and with one stop from Africa to Asia (and vice versa).

            The problem is that too many “observers” (i.e. the Mr. Joneses* of the world), don’t seem to grasp what’s happening here (and they don’t know what it is, do they?) – that is, except for Ben Sandilands, and a few others. 😉

            -*

            https://www.youtube.com/watch?v=MQNqSGc2cHg

      • “EK are experiencing about 8-9% pa growth, as opposed to abt 5% for the rest of the World. So EK are a sort of bell weather ”

        I dont agree that EK are the bell weather at all. Thats a very vague context. Emirates link up city pairs around the world at distances in 2 hops. Depending on your economic perspective you could pick any of several airlines that are bell weathers.

        Id say that with the US and Europe, Japan lumbering along, the slack is picked up by China which is pretty scary. China Eastern would be a pretty good bell weather for the state of the Chinese economy and the general health of the global economy. Obviously, TAM are a pretty good indicator for how South America is doing.

        If China Eastern cut routes in the future (which they probably will in the coming years) thats when youll know things are really slowing down. Narrowbodys are a better bet going forward.

        • As the biggest carrier by pax, and with it’s international footprint, I would say EK are a good measure in Asia, Africa and Europe. I agree US and South America are a bit separate. World is going through a transition phase and picking what will come out of it is risky. China’s dominance as a growth engine is over, so I agree that not just China Eastern but Chinese airline growth in general won’t be what some people expect. Current growth is stimulus money and China is building up a lot of debt which will hinder them in the future. US/EU are suffering from poor economic management, trickle down theory has been discredited, no doubt responsible for the slack growth in the countries which practice it, and unless median wages go up stagnation will dominate, and political instability rise. For the airline industry we have seen that customers have been squeezed and forced into ever cheaper/nastier seating, and now it could be that pax are quitting air travel all together. High speed rail in Europe is getting cheaper all the time. Brazil is going down but Colombia is rising. Personally I think India might be the driver of growth for the next half century, if they get it right.

          All up I think it is a pretty good time to keep the powder dry, sit back and watch.

  7. Today 3 Vietnamese Airlines have signed contracts for 10x A320, 20x A321 and 10x A350.
    Who knows, but maybe the third quarter will not be quite so slow as many seem to be expecting.
    I wouldn’t be surprised of aa acceleration of orders for the C-Series with the successfull entry into service and possible delivery slots moving East.
    Same with the A350 which I believe will become a huge success both for Airbus and the airlines that use them.

    • The irony is that we were expecting problems with the CFMI Leap, and instead it is the Pratt & Whitney engine that makes the news, and for the wrong reasons. But those issues are not related to engine performance, which is slightly better than expected. We have to keep im mind though that the C Series engine is different than the A320’s and is not manufactured at the same site. The P&W engine for Airbus is manufactured in the United States while most of the other GTF engines are manufactured in Canada, near the C Series plant in Mirabel. We already know that there are technical issues with the A320 engine, but for the C Series it appears to be production issues. However, it is possible that one set of issues is related to the other. In other words the problems with the PW1100 may have an incidence on the PW1500 production, because they share a number of parts. But this is just speculation on my part and I don’t want it to become a rumour.

      • We also have to keep in mind that they blew up an engine attached to a C series.

        While supposedly an operation problem, oil seal was re-designed.

        And all that aside, C is tied totally to P&W and its a serious impact.

        P&W is not looking on good on implementation.

  8. @MartinA

    “World is going through a transition phase and picking what will come out of it is risky. China’s dominance as a growth engine is over.”

    – China’s dominance as a growth engine is over? In my opinion it is just starting. Wait until the vast Chinese population become consumers. They have just started buying goods and many of them have never traveled outside of their village, even though that “village” may be bigger than New York. We have’t seen anything yet.

    “Current growth is stimulus money and China is building up a lot of debt which will hinder them in the future.”

    – The Chinese debt-to-GDP ratio is about 150%, while it is 300% in the United States. And most of the US debt is owned by the Chinese, which is a good thing because it may prevent WW3. Growth in China, while being lower that what we are accustomed to, is still three times that of the US. China is a mysterious nation and the issues they face are numerous and very complex. But they are a determined and very ambitious people.

    “Personally I think India might be the driver of growth for the next half century, if they get it right.”

    – Possibly, but India is even more mysterious than China, and that is why I remain cautious about their economic prospects. They haven’t blossomed as a nation yet like China has for many years now. But if they can overcome some tenacious cultural barriers then the sky is the limit.

    Martin, keep writing, for I enjoy reading your posts immensely.

    • Normand:

      China to is a bubble. I have seen the reports of the housing binge that no one was living in.

      Its settling down to norms, if it crashes it takes us with it.

      Japan also went through that and been in stagnation for 20 years or more.

      Central run economics do not do well long term.

      • China is nowhere near where Japan was when the latter hit the stagnation wall. Until they reach that level of development, which is normally associated with the acquisition of basic goods, like appliances and cars, plus decent housing, they have a long way to go. There is indeed a housing bubble in China and I have mentioned it in a previous post. But because of the way the Chinese economy works it does not have the same impact it would have in other parts of the world.

        • The current economic situation in China in no way resembles the Great Bubble that formed in the Japanese real Estate and Investment Markets in the late 1980’s. there may be a lot of debt in China – but it’s mostly Capital Debt, and that’s the best kind of Debt to have for you it provides you the tools (i.e., the hard capital) to repay the debt you already owe. So yeah…Chinese manufacturers have a lot of debt associated with factories and machines tools – which they can be used to pay off the debt!

          And this is very much unlike Japan which had debt associated with real-estate prices and the stock market fiasco – which is just money that was burned (and in the case of real-estate debt, a 20-year financial drag to pay it off). China has none of these problems, and speculating that they do is just wishful thinking by people who are dismayed and confused as to how China could be so darned prosperous while upending a lot of the dogma that they had come to believe about “Free Markets”.

          • @Jimmy

            Well said.

            Here’s an interesting take on the failures of neoliberal capitalism:

            Recently, a new economic truth has emerged. It is simple and powerful. Those nations that economically empower and exploit their people to the fullest extent possible, win. And, those nations that permit their people to suffer mass economic marginalization, lose. Economic science, as opposed to economic mythology, fully supports this central point. Nations that build human capital, reduce economically corrosive inequality, and build institutions to support the exploitation of human ingenuity, outgrow those that neglect these props to free
            market capitalism.

            http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1209&context=blrlj

            Here’s an interesting comparison between China and the US in infrastructure investments:

            A)

            Infrastructure development remains a top priority for China’s government, which has long recognized that a modern economy runs on reliable roads and rails, electricity, and telecommunications. From the late 1990s to 2005, 100 million Chinese benefited from power and telecommunications upgrades. Between 2001 and 2004, investment in rural roads grew by a massive 51 percent annually. And in recent years, the government has used substantial infrastructure spending to hedge against flagging economic growth.

            China’s leadership has charted equally ambitious plans for the future. Its goal is to bring the entire nation’s urban infrastructure up to the level of infrastructure in a middle-income country, while using increasingly efficient transport logistics to tie the country together. What follows is a by-the-numbers portrait of this dynamic sector.

            http://www.mckinsey.com/global-themes/winning-in-emerging-markets/chinese-infrastructure-the-big-picture

            B)

            Infrastructure is the backbone of the U.S. economy and a necessary input to every economic output. It is critical to every nation’s prosperity and the public’s health and welfare. Each Failure to Act study demonstrates that deteriorating infrastructure, long known to be a public safety issue, has a cascading impact on our nation’s economy, impacting business productivity, gross domestic product (GDP), employment, personal income, and international competitiveness.

            The cost of deteriorating infrastructure takes a toll on families’ disposable household income and impacts the quality and quantity of jobs in the U.S. economy.

            If this investment gap is not addressed throughout the nation’s infrastructure sectors by 2025, the economy is expected to lose almost $4 trillion in GDP, resulting in a loss of 2.5 million jobs in 2025.

            http://www.infrastructurereportcard.org/wp-content/uploads/2016/05/ASCE-Failure-to-Act-Report-for-Web-5.23.16.pdf

            And finally, perhaps the advocates of free market policies could explain why American airports rank so poorly?

            The United States of America may have pioneered commercial aviation, but today the crossroads of global air commerce are places like Dubai, Frankfurt, Istanbul, Seoul, Hong Kong and Bangkok. These are the places — not New York or Chicago or Los Angeles — that are setting the standards. They’ve got the best airports, the fastest-growing airlines, and they offer the most convenience for travelers.

            Some of their success is owed to simple geography. Dubai, for instance, is perfectly placed between the planet’s biggest population centers. It’s the ideal transfer hub for the millions of people moving between Asia and Europe; Asia and Africa; North America and the Near East. The government of the U.A.E. saw this opportunity years ago, and began to invest accordingly. Today, Dubai airport is one of the busiest, and its airline, Emirates, is now the largest in the world if you exclude the U.S. domestic market. The book value of the planes Emirates has on order — to say nothing of the 200 widebody jets it already operates — exceeds the value of the entire US airline industry!

            Not far from Dubai, Istanbul’s Ataturk Airport is being massively expanded, poised to become a similar mega-hub. Its hometown carrier, Turkish Airlines, in addition to winning numerous service awards, now flies to more countries than any other airline in the world.

            There’s not much we can do about geography. At the same time, there’s no excuse for the American aviation sector to have fallen so far. We’ve done it to ourselves, of course, through shortsightedness, underfunding, and flyer-unfriendly policies. The Federal government seems to treat air travel as a nuisance, something to be dissuaded, rather than a vital contributor of tens of billions of dollars to the annual economy. As a result our airports are substandard across a number of fronts, both procedurally and infrastructurally; our terminals are dirty and overcrowded; our air traffic control system is underfunded; Customs and Border Protection facilities are understaffed; airline passengers are groped and hassled, to the point where, if that CNN poll is to be believed, millions of them will refuse to visit the country.

            http://www.askthepilot.com/the-decline-and-fall/

          • Sad but true in many if not all respects.

            Still when dictatorships go off the rail they really go off the rail.

            And you have to add in an expansionist imperialist policy (funny how that works, good for us but you sure should not do it) that is not added on top of China .

            I disagree that a housing bubble can’t take them down, it came close to doing so in the US and when you have one person deciding the right course, it only takes one mistake and you go over the edge.

        • I think the Chinese govt is determined to avoid a repeat of the Japan syndrome, and even now are encouraging consumerism, but that in itself means a slowdown in headline figures. Cheap exports and consumption don’t go hand in hand. What is worrying to me is the tendency of China’s leaders to jump in with stimulus every time the headline numbers drop below 7%. Economic re-organisation costs, China’s GDP will drop to below 3% at some point in this, and might even go negative. I feel (and I’m not an economist) that the accumulation of govt debt means they are using their ammunition before they need it. They need household debt to increase and Chinese to buy things, esp houses, rising govt debt and investment in unused production is not good at this time. Infrastructure is needed to a point, so I think they are on the right track there but all in all they look too unbalanced to me and even a well managed transition cuts growth right down for quite a few years.

          • “I think the Chinese govt is determined to avoid a repeat of the Japan syndrome.”

            In Japan people save their money instead of spending it, and that keeps demand low, which is not good for a Western style economy based on growth. If they can afford to save their money it is because their basic needs have been satisfied. However, in China there are still many people who live in extreme poverty and have little to go about. This represents an enormous growth potential that the government is intent on exploiting with massive investments. Of course there will come a point where China will no longer be competitive, like what happened in Japan and other developed countries. However, when this will happen they will be able to rely on domestic consumption because it is such a big country. But they still have a long way to go before they reach that point. In Japan the population is much smaller and is actually declining. That is because they have the highest proportion of elderly people in the world while the country’s birth rate is extremely low and immigration remains anemic.

          • @Normand

            It’s true that spending is necessary to stimulate an economy. However, when spending is largely fueled by credit, it’s typically only good for short-term economic growth, while the long-term economic sustainability may be seriously affected.

            Quote:”In Japan people save their money instead of spending it, and that keeps demand low, which is not good for a Western style economy based on growth”.

            Well, that’s not entirely correct. In contrast to the US – which is an example of a hyper-consumerist society – Germany and quite a few of its neighbouring countries in Northern Europe, have long since been encouraging their citizens to save. Saving, rather than overspending, seems to be the rule of the day for both citizens and the countries themselves. In short, credit consumerism has been much more extreme in the US than in “Old Europe”. When spending is fueled by credit, rather than by cash, it’s only a matter of time before you start getting alarming consumer debt statistics

            Now what the Chinese and the Danes/Germans/Swedes (etc.) may have in common is their longterm orientation of life. Self-mastery, discipline and to set aside savings to cover a rainy day are important values. A quick and risky investment does not fit into this mind set as they would rather avoid uncertainty. FWIW, the countries in Europe that has been most resistant to the “American model” have been doing significantly better than those European countries that have been more inclined to follow the American route by going into debt heavily, using housing speculation as a major engine of the economy, and opening their economies to bank debt and finance. Germany and their Northern European neighbours continue to prosper, while encouraging their citizens to save, instead of spending. It’s interesting to note that neoliberal economists in the US continue to recommend a diametrically opposite growth track for these countries.

            Of course, both China and Germany have prospered due to the success of their exports. The US economy is 5 times larger than the German economy. While the US beats Germany on exports by only around 15 percent in real value, Germany exports more manufactured goods than the US (i.e. 34 % of GDP vs. 6 % of GDP)

  9. @OV-099

    At the risk of upsetting the owner of this blog, who may want to put an end to this off-topic but interesting discussion (I can hear him grinding his teeth from 3,675 km away), I would like to remind you that the Iron Lady has made it clear that “all the problems come from mainland Europe, and all the solutions come from the English-speaking nations across the world”. 🙂

    More seriously, while reading your fascinating post each paragraph reminded me that the same system may be applied differently in various countries and with very different results. So it’s not one system versus another. Theoretically Canada enjoys the same economic system as the US, but the former is still perceived as a “socialist country” by many inhabitants of the latter. And when you remark that “it’s interesting to note that neoliberal economists in the US continue to recommend a diametrically opposite growth track for these countries” it makes it clear for me that in this case ideology has precedence over reality; i.e., even if a country enjoys prosperity and freedom the system must be changed in favour of a neo-liberal one. At all costs, I might add.

    • Exactly, the neoliberal economists in the US are just flummoxed at the success of China and as a knee-jerk reaction constantly keep saying “The China Bubble is about to Burst” and referencing the “Japan Syndrome” – an economic episode (and tragedy) most know little about. Meanwhile, China is economically quite healthy. China has low household debt and the government has already diffused any serious potential real-estate bubbles like those suffered in Japan (what do you think those so-called “Ghost Cities” are all about, anyways?). Chinese companies are carrying a lot of debt, but it’s capital debt, and it’s the best kind of debt to have if you are going to be in debt because that capital can be used to work your way out of debt.

      Also, the Chinese Government is supporting the civilian aerospace industry to the hilt and is determined not only to see China get into the civilian jetliner market – but also produce it’s own jet engines (both military and commercial). And they are going to spend whatever it takes to get there. So it’s not a matter of “if”, it’s a matter of “when”.

      China is going to be an aerospace leader, and people should get used to it. These are the same people who laid more high-speed railroad than the rest of the world combined and have built a highway system nearly as large as Europe and the US combined – all in the past 15 years. So building an World-Class Aerospace Industry should be no problemo.

      • I think you have missed the household dept. is high with buying of houses, apartments and or condos that no one is occupying.

  10. “I would have hoped by now you have realized that I am not a normal American.”

    I understand what you are saying, but in my mind there is no such thing as a normal American. The United-States are a land of contrasts. Some of the nicest individuals I have ever met were Americans. But like any other places some others were not so pleasant, to put it mildly. What many non-Americans don’t like is that generally speaking they are slow to recognize the contributions of others, and when I say this I have specifically Airbus in mind. Other extremes can be found in the weather and the geography. It is a huge country that is particularly well positioned in terms of latitude. Nowhere on Earth is there so much wealth and such extreme poverty at the same time, often in the same cities. Nowhere on Earth is there so much knowledge and so much ignorance. Many people admire the United States, but few love the Americans. Personally I do both.

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