Saturday, April 19, 2008

Are We At The End Of The First Half Of The Recession?

More and more CEOs and economist are now saying publicly that we are in a recession, a subject that I’ve discussed previously in We Are In A Recession But What Type? A Comparison To Two Recent Recessions. As more people climb on the recession bandwagon, it seems that the nadir may be near.

Just as Punxsutawney Phil is a an unofficial arbitrator of the start of Spring, Charles Peabody, head of research at Portales Partners, an independent research firm in New York, and a near perma-bear on financial stocks, is being the unofficial arbitrator of calling the bottom of the current recession. With his track record, he may not be that far off in calling it a bottom. Unfortunately, it is not going to be a “V” shaped bottom that the bulls are hoping for. Optimistically, it may be a “U” shaped bottom, where we will tread the bottom for a few quarters before heading back up to the surface. I estimated that this process would take approximately 8 to 14 months. I am in good company as Nouriel Roubini is also looking at a “U” shaped recession lasting 12 to 18 months through the middle of 2009.

So how can one determine whether we are at or near the bottom? The short answer is: no one can. Calling the bottom or even the start of a recession is a highly subjective matter. While the data is the same, the way the one interprets the data will result in different results. This is because different set of data can contradict each other, leading to widely varying results and therefore it is only an educated guess at this point.

MarketWatch is also making an educated guess with its article on the five signs of the bottom of the stock market. While the article makes for a great read, it appears to be a bit short on its analysis, which is the reason for having so many caveats. The problem with the MarketWatch article is its reliance on anecdotal data such as the Investors Intelligence survey, Ratio of New highs/new lows, and discretionary consumer spending. Relying on a set of anecdotal indicators like the one in MarketWatch is not a smart strategy. Even the Investors Intelligence website offers this caveat: “…bear in mind that this is anecdotal evidence of how advisors feel towards the market not necessarily how they, or their readership, acts.”

So do not fall in to the easy trap of feeling that one can trade using these methods. The best method has always been to (1) read the financial statements, especially the balance sheet, of the company that one is interested in investing; (2) read all their caveats and risks listed in their 10k and 8ks; and (3) source reliable references and periodicals and see the trends occurring in local and global economics, geopolitics, and world events. Yes, it is a lot of work but if done steadily and with discipline, it will yield a handsome reward.

May Yours Trades Be Profitable.

Ed Kim

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Friday, April 18, 2008

Issues With The Delta-Northwest Merger - Part 2

There is one critical question that no one is asking about the Delta-Northwest merger: “If the reasons for the merger are to have the financial strength to survive the high fuel environment and reallocate airplanes to higher-profit, international routes, then is the merger necessary?”

I think if they earnestly asked this question, then they would realize that the Delta-Northwest merger might not make them as profitable as they had hoped. Here’s why:

1. Northwest had $3 billion in cash and cash equivalent and Delta had $2.8 billion as at December 2007. If they thought that they didn’t have sufficient financial strength alone, then what makes them think that by combining their two companies together that they will automatically achieve it? It is analogous to stating that 1 + 1 equals 3. That corporate-speak of financial ‘synergies’ does not exist as they will have additional cost of legal and PR expenses on top of their existing cost structure. This will result in a faster depletion of their combined cash position.

According to Delta’s 2007 annual report, page F-12, Delta spent $237 million in professional fees with their bankruptcy filing. So, given that the merger will be less complicated than a bankruptcy but still a costly proposition, one can assume that they will incur about half of this, or $118.5 million in professional fees fro the merger. Add in 10% margin of error and duplicate this cost for Northwest, we arrive at an immediate hit to the new Delta’s financial reserve of approximately $261 million.

2. Delta-Northwest plan for growing revenue is to reallocate airplanes to more profitable international routes. They also plan on keeping all their current hubs and maintain as much of the routes as possible, less the routes that they will have to give up per the antitrust ruling. To achieve this, they will have to buy or lease new equipment to effectively compete in the more profitable international routes against foreign carriers that fly newer airplanes. The reason is that Northwest’s fleet is the oldest at an average age of 18.5 years and Delta is not too far behind at an average age of 13.8 years. If they try to expand internationally using older equipment, it will be a failed effort.

Purchasing new airplanes for international routes will mean more cash layout. But wait; there is a long wait list for new airplanes as both Boeing and Airbus have multi-year backlogs, according to the Star Tribune report:

“The two principal manufacturers used by Delta and Northwest -- Boeing and Airbus -- are booked with orders for several years. There's a four- to five-year backlog for the Boeing 777, a wide-body fairly new to the Delta fleet, Hamilton said. Airbus is back-ordered until 2012. Northwest is scheduled to be the first U.S. carrier to get the widely anticipated Boeing 787 Dreamliner, but Boeing repeatedly has pushed back the delivery time, now into 2009.”

Leasing new equipment is also going to be difficult as the leasing companies have most of the equipments already leased. So, any immediate growth in international flights will be small and incremental as they are only able to replace the older airplanes at a snail’s pace.

3. All airline companies have code-sharing partner that allows them to book a passenger end to end, even internationally. This allows the carrier to advertise fares for routes that they cannot fly directly and earn revenue for booking the passenger without actually having to incur the cost of flying the passenger. Both Northwest and Delta already have worldwide code-sharing partners called the “SkyTeam.” So through the SkyTeam, they are able to achieve an international presence by proxy, which allows them to generate revenue.

4. Delta and Northwest are staking their profitability on flying more international routes. However, obtaining the necessary authority from the FAA and the destination country for some international routes is a complex and long process.

5. With the EU-US Open Skies Agreement, effective as of March 2008, competition on routes between the U.S. and the European Union will be real, as it permits any carriers on both side of the ocean to fly directly. This means that any low-fare EU carrier, such as RyanAir, can offer flights between EU and the U.S. and undercut major airline companies; a throwback to Sir Freddy Laker’s “Sky Train”, the original low fare airline. This will reduce any cost advantage Delta-Northwest was counting on to generate additional revenue.

6. Finally, even if Delta-Northwest wants to expand their international routes to serve more cities, there is the problem of capacity as many airports have limited gate slots available. No gate access, no flight.

So the two reasons Delta raised for the merger of (1) financial strength to survive the high fuel environment and (2) reallocate airplanes to higher-profit, international routes, seems to all smoke and mirrors.

I think American Airline chairman and chief executive Gerard Arpey is correct in his assessment that the challenge facing the airline industry is “being profitable” regardless of size and that while consolidation may be one way to achieve profitability; it is simply one of the ways.

So far, Delta-Northwest has failed to clearly demonstrate that their proposed merger will result in a profitable carrier. What they have clearly demonstrated is a lack of strategic vision to profitability, a clear enterprise risk. Given the challenging times faced by the airline industry, it is strategic vision that is sorely needed now.

Ed Kim

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Thursday, April 17, 2008

Issues With The Delta-Northwest Merger - Part 1

Improving the fuel efficiency of the merged fleet will not happen
Northwest has 94 DC-9 that are not very fuel efficient. Delta has 133 MD-80 series airplanes that are also not very fuel efficient. These two airplane types, totaling 227, make up 28.6% of the combined fleet.

Source: Northwest - (As of December 2007)
Delta - (As of April 2008)

The MD80 and DC-9 burn about 22.6% more fuel, on an equivalent per available seat kilometer basis, than a B737-700, according to a 2003 study done by the Danish Environmental Protection Agency. This is corroborated by hearsay source such as the Dallas Morning News, which noted that the MD80 burned 879 gallons of fuel (or 26.4%) more than a B737-800 on average, flying the same LGA-DFW route. The Dallas Morning News goes on to further note that to replace all 300 MD-80s that American Airline owns will take more than 10 years, assuming that Boeing can deliver at that fast rate.

Given this, there is near zero probability that the new Delta can achieve fuel cost savings that they are touting on their website:

“The revenue and cost synergies achieved through this merger will help offset rising fuel costs in three ways:
* Increased revenues as a result of increased size and scope, leading to improved corporate contracting thanks to better options for customers.
* More efficient aircraft routing to better match capacity to demand.
* Higher average yields driven by more international customers and routes where fares better cover the cost of fuel.”

Analysis Of Delta’s Fuel Savings Assumption:
On the first point: I don’t even understand their first point. It is a complete sentence but appears to be a jumble of half-baked thoughts being highlighted as corporate vision.

On the second point: More efficient routing does not overcome the fact that they are still flying 227 MD-80s and DC-9s that are using 22% to 26% more fuel per seat miles flown than a more efficient airplane. This is an apples-to-apples comparison.

On the third point: To attract higher paying international travelers, they would have to fly their largest and newest airplanes on long-haul international routes. So, this means that the older and less efficient airplanes will be plying the domestic routes. Another way of saying: Let’s screw the American public.

So, going back partly to their first point of "improved corporate contracting thanks to better options for customers," I think this is thinly veiled corporate-speak for: "Thanks for still wanting to fly with us, even after you realize that we will be charging you a little more and giving you an option of flying between one old airplane (MD80) or the other (DC-9)."

Ed Kim

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Risk Of Poor Fiscal Leadership And Its Cost To The U.S. Taxpayers

If an adventurous artist drew a picture of President George W. Bush’s fiscal leadership to date, I think the artist would draw a dark picture similar to “The Scream” by Edvard Munch, rendered in the Cubism style. In lay terms, it would look hideous, confused, and nearly deranged with juxtaposed pieces that are difficult to make out clearly.

So what are the risks of the Bush’s Poor Fiscal Leadership? Here are some of the most egregious:

Misallocation of The Federal Budget
1. ($636 to $655 Billion to date) Iraq War: The clearest misallocation of resources was starting the Iraq War. Congressional Research Service (page CRS-5) pegs the cost of the wars in Iraq and Afghanistan through FY 2008 at around $636 billion (Department of Defense calculations) to $655 (Congress calculation). Congressman Ron Paul was very clear on this issue when he grilled General Petraeus

2. ($4 to $7 Billion / year) Grain for ethanol production: As I have previously noted in “Risk Of President Bush's Ethanol Fuel Program To Common Sense,” there is no economical way for the U.S. to be weaned off oil imports by diverting grain toward ethanol production. So, by going to ethanol production, we are spending approximately $7 billion a year on ethanol subsidy (OECD report section 1.4 notes this to be $4 billion).

3. ($41.5 to $79 billion projected) U.S. – Mexico Border Fence: As I have previously noted in “Risks And Rewards(?) Of The U.S. – Mexico Border Fence,” it will take $11.5 billion to $49 billion over 25-years period. Plus we are gave Boeing a $30 billion Secure Border Initiative Project contract, which is to provide electronic surveillance of the border. Only problem with the contract to Boeing is that it is trying to do the job that rightly belongs to the border protection agents.

4. ($6 billion / year) Transportation Security Agency: Department of Homeland Security’s FY2008 budget has earmarked $6.3 billion (actual 2007 spending was $6 billion) for a department that hasn’t done much except to frustrate the flying public.

5. ($3.2 billion / year) Department Of Homeland Security (DHS): In a corporate world, a merger of companies results in cost savings. In government’s world, it creates added layer of bureaucracy. Take DHS. In their FY2008 budget, there are four line items totaling $3.2 billion: the National Protection and Programs Directorate, which duplicates what the FBI and CIA are supposed to be doing, the Science and Technology Directorate, which duplicates what the Department of Technology is doing, Domestic Nuclear Detection Office, which duplicates the DOE’s Office of Nuclear Energy, the FBI, CIA, NSA, and other surveillance organizations out there protecting the U.S. from nuclear threats, and the overarching Departmental Management and Operations, which is the bloated layer of bureaucracy. Oh, according to the FY 2006 report card, page 2, the Departmental Management and Operations failed to meet 69% of its planned objectives. This is what we get for our $913 million that they spent in FY2007. Or, in Bush-speak: the DHS is “doing a fine job.” For those who are curious about how the DHS did in its FY 2006 report card, here is the full 88-page report.

Annualized, the misallocated portion of the federal budget comes to $142 billion to $150 billion a year.

How Is The Misallocation Of The Federal Budget A Risk?
The misallocation of federal budget is a risk to the nation since:

  • the funds have been diverted from truly vital and strategic uses of these funds that could make this a stronger nation.

  • it has help to turn the world's opinion against the U.S., cost the lives of 4,026 of our brave soldiers, and disrupted the lives of our soldiers and their families

  • granting credits and subsidies to ethanol production, we made basic staples more expensive to consumers, worldwide

  • it drove up our national debt and reduced the value of the dollar against other major currencies

  • the devalued dollar just made everything the U.S. consumers use much more expensive, especially gasoline
What Are The Corrective Actions?
While everybody has ready answers for correcting the ills of federal funds misappropriation, I happened to endorse what our founding fathers have said, since they are appropriate now as they were then:
  • "The happiness and prosperity of our citizens... is the only legitimate object of government and the first duty of governors." - Thomas Jefferson to Thaddeus Kosciusko, 1811. ME 13:41

  • "A... chief [executive] strictly limited, the right of war vested in the legislative body, a rigid economy of the public contributions and absolute interdiction of all useless expenses will go far towards keeping the government honest and unoppressive." - Thomas Jefferson to Lafayette, 1823. (*) ME 15:491

  • "[Let us] go on in doing with [the] pen what in other times was done with the sword, [and] show that reformation is more practicable by operating on the mind than on the body of man." - Thomas Jefferson to Thomas Paine, 1792. FE 6:88

  • ”They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.” - Benjamin Franklin

  • ”Great is the guilt of an unnecessary war.” - John Adams

  • ”Government is not reason, it is not eloquence — it is force! Like fire, it is a dangerous servant and a fearful master. Never for a moment should it be left to irresponsible action.” - George Washington
Have A Great Day!

Ed Kim

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Wednesday, April 16, 2008

Why The Delta-Northwest Merger Doesn't Make Financial Sense

According to MarketWatch, Delta is projecting approximately $1 billion in cost savings by reducing overhead and improving cost-overhead structure, particularly through the use of better leverage its purchase of bulk items, such as fuel. Further, Ed Bastian, Delta’s CFO is quoted as expecting the synergies to be achieved by 2012.

I think the market didn’t believe the cost savings projections, and neither do I. Here are the reasons why I think the merger makes no financial sense, even if it does happen.

No Cost Savings Realized
Fortune was prescient in its reporting by writing that the merger will not result in any cost savings.

“The "new" Delta doesn't plan to cut many jobs or reduce much capacity. They don't even plan to drop any hubs. If that remains the plan, then the combined carrier won't be able to generate more revenue through higher fares.

Instead, they plan to boost revenue by leveraging their global network to seize market share. It makes sense in theory: Northwest has an extensive Asian presence while Delta has a large European and Latin American network. The problem is, size alone won't stimulate demand.”

As soon as this merger occurs, expect a flurry of mergers to occur. Already there are stories of potential United and Continental merger. This makes better sense than the Delta-Northwest merger as United and Continental fly similar equipments (see chart) and their routes (United here, and Continental, here) do not overlap as much as Delta-Northwest. Moreover, United and Continental have sufficient international presence to be competitive with the new Delta.

Different Configuration Of Equipment
Further, Delta and Northwest are flying different airplane configurations. Delta is exclusively Boeing while Northwest is predominately Airbus. This means that they will have to retain all of the pilots and maintenance crew. No cost savings here. In fact, there may be additional cost with the merger, as they will have to replace older airplanes, especially the 94 DC-9s flown by Northwest. If the new Delta replaces the 94 DC-9 with either the B737 or A320, they are looking at approximately $50 million per airplane, or approximately $4.7 billion over the next 3 to 5 years.

Overlapping Route Will Cause Labor Problems And Added Costs

In order for the merger to pass the Department of Justice antitrust review, Delta-Northwest must demonstrate that they are able to relinquish some of the overlapping routes to other carriers.

However, any reduction in routes – major routes such as NY and Atlanta and Detroit and Atlanta – or reduction in number of flights in and out of the Cincinnati hub will be difficult, as any reduction in routes or flights will mean negotiation with various unions, including the pilots, mechanics, baggage handlers, and flight attendants. Any successful negotiation will result in major concessions to the various unions, which will result in immediate cost to the new Delta.

Example of the route overlaps between Delta and Northwest

Flights Between NY and Atlanta:
Delta has 40 flights daily from Newark (EWR) to Atlanta (ATL) using Boeing on nearly all of its flights. In total, Delta has 98 flights daily out of the three NY airports (22 flights daily from JFK, 36 flights daily from LaGuardia (LGA), and 40 flights daily from EWR). Northwest has 22 flights daily from Newark to Atlanta using only Airbus on its flights (it only has 2 flights to Atlanta from LGA).

Flights between Detroit and Atlanta:
Northwest has 14 flights daily from Detroit to Atlanta using Airbus on 29 of its flights and DC-9 on 5 of its flights
Delta has 34 flights from Detroit to Atlanta using their Delta Connection Partners of 28 of its flights and MD-88 and MD-90 on eight (8) of its flights

Resistance From Legislators
Both Delta and Northwest have over 100 flights in and out of the Cincinnati hub. According to a 2006 USAToday report, Cincinnati is Delta’s second-largest hub and is a major contributor to the area’s economy:
”…it [Delta] employs more than 7,000 in conjunction with its locally based subsidiary, Comair. One estimate of the airport's overall economic impact on the region last year was pegged at $4.5 billion a year. That was before Delta cut about 26% of its flying and began reducing about 1,650 jobs for both at Delta and Comair — but those cuts were expected to take only $400 million plus out of the regional economy.”

How will the merger play out in the case of Cincinnati hub? If the Justice Department sees a near monopoly of the Cincinnati airport by the new Delta (and it will) and orders it to drastically reduce its gate holding and give up routes (highly likely), one can see a major battle here as the two states, Ohio and Kentucky, fight to keep the merger from happening to reduce the probability of Delta taking more money out of the local economy. Again, no cost savings here as the legal and PR costs will eat into any projected gains from the ‘synergies’ touted by Delta.

CNNMoney reports “[Minnesota] state lawmakers were searching for ways Tuesday to prevent a Delta-Northwest combination that would leave Minnesota without a major airline headquarters.” The Minnesota state government could use their agreement with Northwest to force Delta into making “quicker repayment of $245 million in outstanding loans and cancel $200 million worth of lease breaks over the next 20 years.” Again, no savings here if Delta has to pay upfront to settle the broken agreement. Add in the legal and PR costs, again, the new Delta could be looking at another $300 to $350 million hole.

Based on the facts, I cannot fathom where the Delta CEO and CFO are able to pull $1 billion in savings by 2012 out of the merger or reach $4 billion in free cash flow, sometime between 2009 and 2011. With the news of this merger, there are going to be other mergers ready to be done, waiting in the pipeline for the antitrust review to be completed. As soon as this merger is done, look for United and Continental to merge, which will force American Air and USAir to look to merge as well. Perhaps, by the time merger mania is over, we will end up with one national airline:

Ed Kim

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Tuesday, April 15, 2008

Beijing Summer Olympics' Impact On Commodities Prices

***Correction: The total output of the seven power plants that use coal for power generation in Beijing, is 25.6 billion mWh of electricity, as noted in the link to CARMA. Hat tip to CrossProfit for pointing this out***

With the recent news of China taking drastic measures to reduce air pollution during the Summer Olympics, there will be an impact on the price of commodities. This is a risk potential since China is a large consumer of commodities. According to Beijing Summer Olympic Committee news, Du Shaozhong, the deputy director of the Beijing Environmental Protection Bureau (BEPA) has outlined more details on the temporary but drastic measures, in and around Beijing, to bring air pollution down to an acceptable level.

List Of Planned Restrictions
Complied from Associated Press (AP), Guardian (G), and the New York Times (NYT), here is the list of measures that BEPA will take to reduce air pollution during the Summer Olympic games:

  1. AP: All digging and pouring of concrete on construction sites will be suspended from July 20-Sept. 20
  2. G: Any construction projects not scheduled to have completed excavations and concrete placement as well as site "greening and coverage" by July 20 will not be allowed to start work.
  3. AP: 19 heavy-polluting companies are to cut their emissions by 30% from July 20-Sept. 20, including:
    • G: several plants run by Shougang Steel (aka Capital Steel Group) in west Beijing, the city's worst offender
    • G: Yanshan Petrochemical Group
    • G: Jingneng Thermal power company and three other coal-burning plants
    • G: Copper cable producers in the Beijing area
    • G: Number 27 Locomotive Factory.
  4. G: Eastern Chemical Plant of Beijing Eastern Petrochemical Co will stop production for two months
  5. AP: Coal-burning boilers that fail to meet emission standards will be closed (according to CARMA, Beijing has 10 power plants, of which seven are coal-fired)
  6. AP: Production would be stopped at cement plants, concrete mixing plants, and cement grinding plants in southeastern Beijing
  7. AP: Quarrying operations will be stopped
  8. AP: Gas stations, oil depots and tanker trucks would cease operations unless equipped with "oil vapor recovery" technology
  9. NYT: More than half of Beijing’s 3.5 million cars and trucks will most likely be off the road for the full duration of the Olympic
  10. AP: Five provinces and municipalities surrounding Beijing (city of Tianjin; Hebei, Shanxi and Shandong provinces and Inner Mongolia region) will also be shuttering factories, although their plans were not released.
What Will Be The Impact Of These Restrictions?
Construction expenditures in China, which topped 2.2 trillion yuan (US$267 billion) in 2003, is still going strong with expenditures forecasted to rise 8.8% annually through 2011, according to Freedonia Group Inc., a major business research firm. So in the long term, commodities prices will be well supported by China’s growth, which is still racing ahead. (The Economist is forecasting China’s real GDP growth to be 9.6% in 2008 and 9% in 2009.)

However, in the short run, particularly the months leading up to the Beijing Summer Olympics, there is a risk of substantial fluctuation in commodities prices as more people begin to fully grasp the consequences of the air pollution crackdown in Beijing, nearby provinces, and municipalities.

Commodities That May Be Affected
China is the world's largest importer of cotton, copper and soybeans and the second-largest importer of oil, according to Yale Center for the Study of Globalization. While China’s commodity imports are expected to rise at double-digit rates until 2020, the Summer Olympic should provide a bit of a pause from the current growth, which have been 10 times higher than the average import growth rates for the rest of the world.

Coal: Price Decline Anticipated
In Beijing, there are seven power plants that use coal for power generation, according to CARMA. These seven power plants generate 25.6 billion mWh 25.6 mWh of electricity, using approximately 12.6 million tons of coal[i], or 24.6% of all coal imported into China in 2007. (China imported 50 million tons of coal in 2007, according to China View News.) So, if Beijing shuts down or reduces output of these plants by 30%, as planned, then the impact on coal prices would be immediate as it would result in a reduction of approximately 942, 073 tons of coals, or 1.8% of 2007 import, during the two months of the Summer Olympic period.[ii] If additional coal-powered generators in nearby regions and municipalities also shut down or reduce their output, expect to see further downward pressure on global coal price.

Cement & Other Building Material: Price Decline Anticipated
China is already exporting building materials, including cement. With the construction stoppage in Beijing, and planned in five nearby regions and municipalities, for two months, the building material that were destined for Beijing (and nearby regions and municipalities) will be diverted elsewhere, increasing the supply of building materials temporarily. This will have a short-term downward pressure on the prices of cement and building materials. Once the Beijing Summer Olympics is over, this trend should reverse itself as China continues on its torrid growth rate.

Steel: Price Increase Anticipated
Shougang Steel (a.k.a. Capital Steel Plant), a part of the Tangshan group and China’s fourth largest steel maker, produced 12.48 million metric tons of steel in 2006. With the current global steel shortage (also see here), the reduction of Shougang Steel’s production out of its Beijing location -- 2007 production of 6.5 metric tons, or 1.1% of global supply -- will have an immediate impact on global steel prices.

Oil And Auto Fuel: May Not Be Affected
Even with the plan of removing nearly 1.25 million vehicles from the road during the Summer Olympics, it may not do much to sway the price of oil. Assumptions: (1) 1.25 million vehicles will be removed, (2) for two months, and (3) each vehicle consumes 5 gallons of fuel per day. Based on this assumption, a total of 375 million gallons of fuel -- equal to approximately 6.2 days of fuel consumed by U.S. drivers -- would be available for other uses. Since coal burning power generators may be offline or running at reduced capacity, this fuel may be diverted to generate electricity elsewhere or stored in strategic fuel reserve for future use.

Ethylene: No Material Affect
Yanshan Petrochemical Group is a producer of ethylene, a product of which China is a net importer. However, the 30% reduction in production of ethylene will not have no material effect on the ethylene market, which is expected to soften going into 2009, as more ethylene producing plants come on line in the Middle East.[iii]

I have listed some of the commodities that may be affected by Beijing’s crack down on air pollution during the Summer Olympics. However, as more information filters out, especially that of the nearby provinces and municipalities, revision to the above projections may be required. If Beijing stands firm on its crack down, then a short-term movement of commodities, as outlined, may be expected.

May your trading be profitable!

Ed Kim
[i] Electricity generated per ton of coal is 0.4 x 6,150 kWh or 2,460 kWh/ton. This was used to calculate the total short ton of coal used (source:
[ii] Calculated at 2 months supply of coal for the seven power plants x 30% reduction (10,424,366 tons of coal / 12 months x 2 months X 30%)

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Monday, April 14, 2008

Risk Analysis Of More FAA Airworthiness Directives

Impact Of FAA Airworthiness Directives
FAA recently came out with a slew of Airworthiness Directive (AD), a formal notice to airliners on identified safety issues. Of the recent FAA released ADs, I have complied a list of the 19 most serious ADs. These 19 ADs affect most airlines as they are issued on B737 series, B757 series, B767 series, and A300-340 series airplanes (six new ADs for the Boeing 737 series airplanes, five new ADs for the Airbus 330 and 340 series airplanes, three new ADs for the Boeing 757 series airplanes, and two new ADs for the Boeing 767 series airplanes). These airplanes are flown by most major airlines and, in many cases, make up the bulk of their fleet (see Airplane Type chart, below, for details).

Moreover, airline companies are now under added pressure to comply with all these ADs. This pressure comes from the FAA, which seemed to have woken up from its regulatory stupor. As the FAA continues auditing airliners’ maintenance records and physically re-inspecting the airplanes, airliners have no other option but to cancel flights or modify their routing so they can conduct proper inspections and maintenances.

Here is the compilation of the 19 ADs (for the hyperlink to the FAA ADs, click here:

Risks Of The FAA ADs To Consumers
These new airworthiness directives will have an immediate and continued effect on the airline companies as airliners now know that the FAA means business. Previously complacent airline companies will now take more proactive stance and pull airplanes out of service at regular intervals to comply with the FAA ADs. However, since the airliners are already flying each airplanes at nearly full capacity, any reduction in the number of airplanes available for flight will result in delays and cancellations. With the summer months coming up, the potential for more severe delays and flight cancellations will be the norm for awhile:

  • Increased risk of flight delays and/or cancellations from airplanes being pulled from service for required inspections and maintenances
  • Increased risk of flight delays and/or cancellations resulting from re-routing of airplanes (from less profitable routes) due to affected airplanes being out of service longer than expected to meet FAA AD requirements
  • Increased risk of missed flight connections resulting from flight delays and cancellations
  • Increased risk of overbooked flights resulting from airliners flying less flights or combining flights
Preventive Actions To Minimize The Risks
  • Check with your airline often and also check with travel websites, such as FAA Flight Delay Center, FlyteComm, FlightAware, FlightStat, Travelocity Travel Info Center, for latest flight delays and updates
  • Opt for Travel Insurance, which would cover your cancellations; some even cover hotels and meals, if there are delays
  • Plan for alternative mode of transportation: take a train or drive, if possible
  • Plan alternative vacation, one that does not require flying
  • Know your flight route and plane configuration flown on the route. Each airline has route schedule, which includes the type of plane flown on each leg of the route.
Finally, here is an alphabetical list of major airlines and the types of airplanes flown by each carrier that I complied from Wikipedia. You can click on each carrier’s name to obtain more detailed information on the airplane types. The color scheme: Yellow, if the affected airplanes make up more than 60% of the airline’s total fleet. Orange, if the affected airplanes make up 80% or more of the airline’s total fleet. (For the hyperlink to the carriers listed, click here):

May your travels be safe and timely

Ed Kim

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