Max Grounding Will Cost Boeing $100 Million Per Month (Podcast)

they cannot catch a break. The latest is at Seattle Times is reporting that the f a A was alerted to issues at Boeing and Bowing should have been aware of some of the regulatory problems here seven years ago. Joining us now to talk about it is Peter Robinson, projects an investigations reporter, as well as George Ferguson of Bloomberg Intelligence. Uh, Peter, let's start with you. What do

we know here? What should Boeing have been aware of that led to the two fatal crashes that have left so many people wondering whether their new jet is fit to fly well? The the issue for Boeing and that the reason the shares are down almost three percent today is that the the process by which the seven thirty seven plane and involved in the crashes was certified as by the f a A is is coming under really unusual scrutiny by both the Department of Transportations Inspector General and,

according to the Wall Street Journal, federal prosecutors. A grand jury in Washington, d C. That the journal is reporting issued a subpoena to at least one person involved in the planes development, which is not something that in recent

memory has happened within a new aircraft program. Yeah, George, a question for you, if I mean, the thing that strikes me about Peter story what was unnamed sources in the Seattle Times that they underestimated the power of the flight control software that they reported to the f a A. And the newspaper also cited and said that the system could not reset itself each time a pilot or or each time a pilot responds. In essence, it ratcheted the

horizontal stabilizer into a dive position. How does something like that just go by the boards? Yeah, I mean, I think that's uh, that's going to be the big question here. It sounds like the first time they showed the f a A some of that data, that's the deflection they had on that on the elevator, that trim piece was much less than it ultimately was at at the final approval or what have you gonna call it? For the airplane, so um, it shouldn't go by the boards the f

A ship been looking at that closer. I think that there's always a challenge when you're when you're the big behemoth in the in the industry. Right. We've seen it in finance, where the regulators try to regulate an industry that's probably a heck of a lot more conversant and what's going on inside the you know, in the cutting

edge of the space. And I think that's you have a bit of maybe the FA differring too much to Boeing here and thinking they're were in the cutting edge and not focusing on details like that, details details that led to the death of hundreds of people. Uh. But Peter to that point to exactly what George Ferguson was just saying, how much is this a problem with the f a A And how much is this a problem with Bowen? I mean, who looks worse here? They both

are on the hot seats. As you were saying that the the issue we we we reported on UM concerns that people within the f A had as as long as seven years ago, that people, UH, we were set enough about this way that Boeing had over the approval process that they went to the Department of Transportations Inspector General and said that there needed to be changes in the process. Who are those people? Can you just give us?

So the the in its report, which was only released UM in a public records request, which didn't get any attention at the time, some of these allegations weren't anonymous facts is which were sent from f A managers UM to the O I G and and these UH employees that the FAA felt that they weren't being heard and that they were trying to hold Bowing accountable but their managers were not letting them. So. Again but back to the the you know, as you say, who's more culpable,

the f A or or Boeing. SKay, we're trying to um Peter. They were trying to speed up the certification process because they were behind. You know, you talk about bank regulation being one thing. You know, somebody embezzles money, a plane doesn't fall out of the sky. To to try to rush a brand new design of an airplane

seems perilous and irresponsible. I'm sorry, I understand, but you know, yes, that is a question, and I guess that George to you, I'm curious, do you have a sense of what the bigger liability is to Bowing at this point from a from a financial standpoint? Is it the potential for lawsuits or is this a potential for are for airlines not

ordering from them because of concerns about safety? Yes, so, I mean I think you know the numbers that we're starting to run, is that the cost of the airplane being out of service and getting it back in service will be a lot more. I mean, notwithstanding our sensitivity to the fact that people died on this crash, these two crashes, you know, we kind of see Bowings liability being about a hundred million dollars a month um to buy to support airlines that have airplanes grounded in maintaining

their um the route networks. We don't think there's enough airplanes actually parked to get that done as we go through the year, because there's the majority of the deliveries for Boeing seven seven throughout this year would be would have been max is like I still think they'll get this airplane in service UM in a bunch of months. I think the the the burden will be hired to get into service, given the issues at the f A A and and Boeing. But we see again a hundred

million of month. We think every month as another twelve or months, two hundred and twelve months, three four million UM, and we haven't even started to We can't really give a good estimate on what it's going to take to fix the airplane. We think if it takes work to the structure, that will be a lot more money than just a software fix. And I tend to think there'll be at least some work under the structure UM to make it easier to shut off the autopilot and maybe

to manage some of the center gravity issues. So Peter um back to the public if you will, UM. Even solving all these problems, UM, it doesn't strike me that the consumer is going to feel terribly confident flying in this airplane immediately after the fix. How does that impact bowing, how does that impact the air traffic system, etcetera. Well, there there's a lot of conversation that that this is going to impact bowing future sales of this plane. And

already you see commentary on social media. You see that Line Air which I had the first seven thirty seven Mac they crashes, has has pulled a twenty two billion dollar order for Boeing planes. Uh so, over time it could create pressure for Boeing to to move on to the next generation of airplanes, which is going to be extremely expensive, and just to sort of finish up here. George, I'm curious from your perspective going forward, what does Boeing need to do to give people confidence that it has

reached a bottom in this whole issue. Yeah, I think. I think that any fix that comes out can't be a partial fix. It has to be clear that it is um the right fix, maximize his safety, I think, to restore faith in Boeing, I think that's gonna that's going to be huge. Thank you so much to both of you. Peter Robinson, Projects an investigations reporter for Bloomberg News, joining us from Seattle. George Ferguson, Senior Aerospace, Defense and

Airlines analyst for Bloomberg Intelligence. Right now it is that time to take a look at small and mid cap shares. Dave Wilson has not blasted off into space. Just yet, he is joining us here in her believe we're getta active. Broger Studios. Small caps and mid caps doing pretty well. I am firmly on the ground. Cap stocks are firmly higher. The Wrestle two thousand index up one percent, while the S and P five hundred is only up four tenths

of a percent. So smaller companies leading the way here and the Russell's biggest game belongs to Dermira, whose ticker is d e r M. The drug developer has soared nineties seven per cent. Second stage study data showed the company's proposed treatment for a skin condition was safe and effective. Dermira's results also lifted shares of a Claris Therapeutics ticker a c r S. They're up twenty two and a half percent. The company is developing a rival medicine for

the condition known as a topic dermatitis. Now. The Sans Joanes Solutions ticker dz s I has risen ten and a half percent. To communications equipment maker narrow It is projected first quarter loss before interest, taxes, depreciation and amortization.

The russell steepest drop belongs to n II Holdings ticker n i h D, the owner of a seventy percent stake in the wireless company next to Help Brazil is down twenty six percent, and II is Selliens holding to Mexico's American Mobile as part of a nine five million dollar takeover and will dissolve once the deal is final. And Synaptics ticker s y n A as well in twenty percent. The maker of touch sensitive paths from mobile phones and computers, was cut to neutral from by Mitzuho Financial,

which cited market share losses. DA Wilson firmly on earth. Thank you so much for that, Davilis some lyrics sucks. Editor. Right now, let us turn our focus to Lift, seeking to raise almost two point one billion dollars in its initial public offering, which will be the largest startup listing since Snaps twenty seventeen. I p O joining us now to discuss a Tish Davda, chief executive officer of Equiti Zen based in New York, A tich, what do you think of this valuation, which would give the firm a

value of about twenty billion dollars. Well, I'll tell you this. I don't know that Lift wants to be compared to Snap too many times ahead of this public list they're working on. Uh lifts last valuation was at fifteen billion dollars.

UH and Equities and is a firm that allows buying and selling of private companies with issuer approval for many years ahead of the I p O. With that said, you know, looking at our data and not talking about anyone company in particular, I think it's uh, you know, I think it's pretty promising for a company to come out there and put evaluation target meaningfully higher, it's above round um because you know, we've definitely seen some some unicorns go out to the public market with with the

value at or even sometimes below their last private valuation. So this definitely seems promising. A question for you is we we had a Bloomberg story that said in its filing, Lifts said that expenses are likely to increase and that it may not be able to achieve or maintain profitability in the future. How does that speak to attended to hold multiple Basically, you know, that's UH that's actually becoming more and more common in a lot of companies going public,

a lot of unicorns going public. Look if you take a look at what wall streets looking for Uh. Wall Street seeing a record low number of publicly listed companies into which it can and it can invest. Uh. You know, growth has been continuously rewarded over the last several years.

And I think what LIFT is trying to say publicly, um, the same way that you know, Uber apparently next month is going to go out with its own roads show and is gonna likely say the exact same thing, same thing We've seen many other companies out there that are public now say, is we are focused on growth. We believe we have that of the interneconomics. Uh so if we ever turn off the marketings pigot, we automatically turn

positive in terms of our net income. But one of the best things we see about LIFT, and it is promising, is that in addition to a growth, you know, they went from about a billion in revenue to over two point one in revenue last year, we see shrinking net income, lost margins. UM. That's not something you see in every company. It's obviously very important to show that there's a line of sight to profitability. UH. And I think the LIFT is trying to make sure that that is seen by

its you know, by the investors. It's road showing too today. So one thing a teach that you said was that probably Lift doesn't want to be associated with the Snap i p O too much, given the disastrous performance of that IPO in subsequent trading months. But I do have to wonder if there is a similarity here, because these are both startups that waited quite a long time before the i p oed being able to get financing through

private markets and through public debt markets. I'm just wondering, does that set these company needs up to have less upside. In other words, they've already become mature enough that the growth perspective just isn't there. I think that's true for the typical public market only investor. I mean, one of the reasons our business exists is that, you know, equities don't allow is qualified, accredited investors that want to invest ahead of the I p O to actually gain that access.

Uh So, whether or not you know it's it's Lift or Uber or the you know twenty other companies that we believe are going to go public later this year, I think one thing is absolutely true is that you know, you hit the nail on the head more and more value, more and more value creation is happening in the private

markets now. The story Lift and Uber and many of these other firms are trying to say is that we're still in the kind of early stages of transportation as a service as a sector um and so you know you're gonna see Lift come out and say, you know, here's why we see U. You know, we only operate in North America at the moment. There's the rest of the world to conquer. Uber is going to come out hopefull a month from now and come out and say, look, we already have bits and pieces of the world now.

In addition to ride sharing, we're offering Uber eats and autonomous vehicles and you know the four or five other ways in which they can see, um, you know, a way to capture market. I think one comparison though, that Lift wants to avoid but can't get around, is that

of corporate governance. You see. You know, the same thing that Google and Facebook did, that Snapped tried to do, it did successfully, really didn't work out well for them, is the dual class listing of shares and listed Lift is uh, you know, it's no different in that matter.

A TI Data, Thank you so much for being with us a Ti Dafta, chief executive of Equity Zen talking about that lift I p O. Over the weekend, President Trump tweeting about General Motors plan to close an Ohio factor their closure of an Ohio factory, demanding that the carmaker reopen UH the facility, also saying that the United Auto Workers, run by Democrats, are to blame for this closure.

Joining us now, Alan Baum principle of Baum and Associates, which is in a Michigan based research firm focused on automotive UH for analysis of auto sales. Allan, thank you so much for being with us. Let's start with what this closure actually came as a result of How long was it in the works. Can you give us some background? Well, the the obvious problem is that GM has far more assembly plants than it has sales that that justified those plants.

And obviously that's particularly true on the car side. UM and so you saw closures uh in Oshua, uh In, in Lordstown, uh and in Detroit ham Trammic the unforced. The thing is GMS cars are a lot better than their sales. UM. Now, of course GM some responsibility for that. They've had some marketing issues on those cars. UM. But the other thing is that cars and crossovers are in fact built on the same platform, and they're they're made

to be built together. UH, Honda, Toyota, Nissan all understand that. Obviously the rest of the industry does as well, they're just not as good as implementing it. And obviously GM is is an example of that how much of this is economics and how much of it is politics? And the GM said they've they've placed more than a thousand employees from the unallocated plants and that they have opportunities

available for basically all of the impacted employees. And of course those employees are going to have to give up a huge uh portion of their personal lives if because the UW contract allows for bumping UM to other plants, but of course the plants are are not necessarily within the Lord's town or even Cleveland area, and so they're they're talking about major moves the the the issue is obviously much more economic, and the obvious problem is we're

also into a period where the auto industry is starting to turn south, not dramatically, but the auto industry was ahead of the overall economy and its recovery. It's also ahead of the overall economy and its downturn. How much is this alan a case of automation taking jobs and just not there being the need for as many plants or as many employees at each plant. And how much is this that it is just cheaper to produce cars in the parts elsewhere? Well, and that's not just a

North American issue. Obviously, North America is competing with the rest of the world. When you look at the case of the Detroit three. UH, the Detroit three is generally maintaining obviously declining in some situation issues. It's it's footprint here in then in North America, whereas the rest of the world's automakers see North America as a great opportunity. Our volume is not increasing so much, but our our profitability remains among the highest in the world. UM with

respect to automation. That's true across the board. UH. It's it's true when you particularly when you have declining profit margins and you need to reduce your cost UH. The Detroit three UH in cars obviously have had that. Again, the Detroit three could be as profitable UH and sell more cars than they do as compared to their competitors. They simply haven't put as much opportunity or focus on cars and perhaps more importantly, on crossovers where the market

is growing. Sure they're strong, but they're losing some of their their share there as well. Is there an opportunity for the for the North American three, if you will, to get a potential bump if we imposed tariffs on European cars, Well, this sort of be a backdoor push for them. Maybe. Well, that's that's the idea. The the of course, the dirty little secret is all automakers use lots of parts and to different levels of degree, car imports from around the world, and of course I should

say vehicle imports. Um So in theory the Detroit three would be less disadvantaged in the other players. But the point is what I just said, less disadvantaged. Uh, Those those brute forced tarraffs are likely to reduce the overall industry, and obviously UH to the extent that that a company is less in less than great shape relatively speaking, they'll

be heard even more. Allan boun thank you so much for being with us, Alan bound principle of Baum and Associates joining us from Michigan and Vince I am struck by the idea that this is Ohio, we're talking about a swing state, and that President Trump is making this into something of a campaign issue as we sort of have a drumbeat towards elections. Sort Of interesting to note that, yeah, it does have it rings, a lot of politics and a lot less economics to me, to be perfectly honest.

Generator shares though, are down one percent today. Interesting to see that to sort of what degree President Trump's involvement in this just there is a certain political risk that is inherent to companies regardless of the economic factors. Right now, let us talk about the wicked experience of trying to bet on the Commerce Bank Deutsche Bank tie up that has been in the works for so long. Joining us now is a Lisa Martin Usy. She's a columnist covering

finance for a Bloomberg opinion. Joining us from London. We have seen the shares rally of both Deutsche Bank and Commerce Bank. I guess the key question is how much of a game changer is it that the German government has officially or not officially but given a sign that they are okay with the job cuts that would make this tie up worthwhile? Yes. On the one hand, as you say, the government has signaled that they would be they wouldn't stand in the way of job cuts. On

the other hand, you had Angla locals. The chief of staff today is signaling that, you know, there wouldn't be too keen on job cuts. And in the middle all of this is the role that will be played by the employee and label representatives that of course sit on both of those banks supervisory boards. So we are quite

a long way, it feels like from from an agreement. Um, the formal discussions only started over the weekend, but critical to the steel working would be tens of thousands of job cuts in Germany, something in the order of you know, as many as thirty thous So getting the backing for

those is going to be absolutely crucial. How much of this when you put it all together, um, and you know it's separately, both banks would have had to have job cuts and consolidation to make both institutions work anyway, how much of this makes it a little easier to swallow in job cuts when you say, well, there was a merger and that the job cuts are as a result of the consolidation and the merger as opposed to

just meaning both absolutely. But I think the trouble there is that these two banks overlapped considerably in parts of commercial and consumer banking in Germany, and by putting them together, as you are allowing the cost, but you're not necessarily changing the competitive landscape in Germany because they would become

the dominant player. They're still competing with hundreds of local savings banks, local cooperatives that compete on very different terms that they're not necessarily competing to make huge you know, to make profit, so that dynamic will remain unchanged. And on top of that, you're not really grapping with the weaknesses the Deutsche Bank banks to the table, which is it's investent bank, because Commis Bank doesn't have much of an investon bank. So putting those together isn't really going

to change the difficulties that Deutsche Bank has. On Wall Street, I'm watching the Coco bonds. These are the tier one capital debt instruments of Deutsche Bank that have been pretty volatile over the past few years, and I'm struck by how much they're gaining on this news. I'm just wondering across the board whether this is a bet that the German government will enable Deutsche Bank and Commerce Bank together to have higher capital buffers and that these that these

instruments will be treated nicely in any kind of merger. Yes, well, the the expectation is that this deal would come with some kind of capital requirement or capital need and um those talk about how the bad wild the negative good will that the you know, the target would would would bring up, and how that could be used to strengthen capital um. But I think, you know, more to your

point about Germany is backing. I think even though on paper the steel doesn't look too great, the fact that Germany behind the scenes seems to be orchestrating it is increasing the odds that there actually happening. Does this does it dramatically change the tier one capital? Holdings of both banks are our Deutsche and commerces Um, for instance, large holders of sovereign debt, as as a lot of the Italian banks are. Does it? Does it does that cause them or will that force them to switch out of

some of those assets into others to structure the capital? Well, as you come, as you come together, there's obviously into a review of the assets and both books and you know, yes, Commace Bank UM own some sovereign Talian sovereign a talient debt that it hasn't that mark to market UM though. You know, on the other hand, Deutsche Bank has a very large UM portion of of Level three assets which

you know may have to review. So UM I think it's it's you know, we don't really have the numbers yet, so it's a little bit unclear to see how they come out of this. But the expectation is that UM there would be some kind of capital requirement needed. What happens to the investment banking Deutsche Bank, Well, this is

what the talk still is about. And you know, the Commons Bank has shifted away from that space, so they're unlikely to want to inherit a large investment bank that's so inefficient UM and so it doesn't really alleviate the pressure on on Deutsche Bank and a combined entity to try and make that business work. People have talked about retrenching from the US, certainly in terms of trying to compete head on with Wall Street firms or new US staff. Is what they would have to look at and potentially

scale back considerably their equities business, which is subscale. So but Deutsche Bank has been actually scaling back quite some time in the United States, at least from a competitive advantage. But as you said, putting the banks together, while you you really don't have a United European banking system, puts them continues at a state of disadvantage. Um. Interesting how this is going to play out. Most of the people that I've talked to don't feel terribly confident that this

is really a solution for both of the banks. What's your take on that? Agreed? I think you know it leaves you know, it leaves the combined business still very much exposed to the interest rate circle as well here, and of course we're into negative. We have been a negative territory for some years. There's no real end in sight to that. And it still doesn't alleviate um that Prussia and you know, in the in the German market,

they're still very exposed to the competitive Prussias. So it doesn't really solve much that they're trying to glapple with independently. A Lisa Martin Newsy, Thank you so much for being with us calumnist covering finance for Bloomberg Opinion. Thanks for listening to the Bloomberg penl podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. Paul Sweenie, I'm on Twitter at et Sweeney, I'm Lisa Abram Whods. I'm on Twitter at Lisa Abram

whits One. Before the podcast, you can always catch us worldwide on Bloomberg Radio