MH370: The screenplay

New Deal Democrat wrote a highly sepeculative post about the mysterious disappearance of flight MH370. He outlined three scenarios. The most intriguing was the third:

3. The plane was deliberately diverted by a pilot or hijacker and landed somewhere else, with a further act having already been planned.

What we have learned in the last several days has only strengthened the likelihood of scenario number 3. Most importantly, the plane was equipped with a beacon that would send a signal if the plane was about to crash into the ocean. The beacon never went off.

In the last 24 hours, more and more officials are saying outright that the disappearance of the airplane was a deliberate act. In fact, as of this morning it appears to be emerging that a series of deliberate acts were undertaken to minimize the likelihood that the plane could be tracked on radar.

So the narrative seems to be focusing more and more in the direction of scenario 3.

But if scenario 3 is correct, then the persons who planned it are not the underpants gnomes. You know the meme: Step (1) steal underpants. Step (2). ???? Step (3) Profit!

No, these persons already have a plan for Step 2. The did not simply park the plane in a hangar somewhere, high five one another, and over a round of celebratory drinks, start discussing what they might be able to do with the plane at some later date.

IF scenario 3 is the correct scenario, then the preparations to carry out Act 2 are already in motion.

What would be a big enough Event planned for Act 2 to justify all of the planning necessary to actually commandeer a commercial airliner in the manner that took place one week ago? Whatever it is, it must be really Big.

The events of 9/11 exposed a vulnerability of the Air Traffic Control (ATC) system. ATC could not track one of the hijacked airliners among the myriad of planes in the air because it had turned off its transponder. That episode begged the question, "If Russian Backfire bombers approached the US coast and was preparing to fire cruise missiles at Washington, did NORAD expect the Backfires to be transmitting transponder signals?"

The disappearance of MH370 exposed another flaw in global ATC. When an aircraft is in international airspace over the ocean, they are not under the control of any country's ATC system. Airliners, however, do fly commonly specified routes at specified altitudes as then cross the ocean. When they enter a country's airspace, they then check in with local ATC, who then guides them.

Imagine the following scenario:

1. A group of terrorists hijack an airliner, turn off its transponder and other communication systems, and spirit the plane to places unknown.
2. The plane lands and it is re-loaded with high explosives, which makes it an even more powerful bomb than the hijacked 9/11 planes.
3. The plane takes off again and blends into traffic on an international route.
4. When it approaches the airspace of the target country, it identifies itself as a fictitious flight.
5. The pilots then flies into its target and the flying bomb wreaks havoc on whatever it hits.

Given its likely direction of flight, which is currently postulated in a westward direction from Malaysia, a likely target under this scenario would be a oil facility in the Middle East. Imagine a flying bomb crashing into a large refining or oil export facility and taking out a significant portion of global production and you get the idea of the global impact of such an act.

While this scenario would make a good movie, its plausibility depends a number of key assumptions:

• There are enough skilled, dedicated and well-trained volunteers to hijack and take over an airliner (step 1 as postulated by New Deal Democrat).
• The ability to land a 777 somewhere undetected by local authorities;
• The facility to deal with the passengers, either dead or alive, after landing;
• The ability to refuel a 777 at the airport which the plane landed;
• The ability to disable the aircraft engines' software to "ping" the satellites with data once the aircraft has re-started on the way to its final mission; and
• An accomplice to file a false flight plan for the plane on its flight. ATC generally knows the schedules of airliners coming into its airspace and the appearance of an unknown plane with unusual call signs would set off warnings.

Such an operation would require a high level of planning and coordination. It's very difficult to just land a 777 somewhere out of the blue, hope that it won't be noticed by somebody and refuel it without detection. Any state that allows its facility to be used for such an operation would be branded a sponsor of terrorism and suffer the consequences.

What's more, what are the chances that an organization, however nefarious, could pull off such an operation involving so many people without arousing the suspicion of one or more intelligence services?

The disappearance of MH370 remains a mystery, but I suppose that such a scenario could be the inspiration for a book or screenplay.






Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this blog constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or I may hold or control long or short positions in the securities or instruments mentioned.

More on the secular pilot shortage

My recent post entitled a secular warning for the airlines elicited a lot of comments from the pilot community. The comments fall mainly into the category of “if there is a pilot shortage why am I so badly paid/poorly treated?”

Don't confuse secular with cyclical effects
My answers consist of several parts. First, don’t confuse the secular effect with the cyclical effect. With airlines from Aloha to Frontier going into Chapter 11, a possible Delta-Northwest merger in the works and the US economy in recession, there should be a surplus of pilots in the short term – that’s the cyclical effect. The longer term secular effect is found at the age demographics of most flying clubs that I have visited – there are few members in their 20s and 30s. Members below the age of 50 seem to be the “young pups”.

Some airlines have begun to address this problem by doing their own training, which takes a long time to pay off, or moving to the multi-crew pilot concept in which someone gets qualified as a member of a cockpit crew instead of a pilot. Under this scheme, it is possible to qualify as a member of a cockpit crew without being qualified as a private pilot. This solution seems to be just a case of the blind leading the blind.

Pilots reap what they sow
The history of poor pay for pilots is related to the number of people who love flying. There are many pilots who would still say that they have the greatest job in the world despite the mediocre pay scales, long hours away from home, etc. If you are willing to accept those conditions in exchange for the experience of flying for a living, who do you have to blame for that?

Still a lot of denial out there about the secular trend
Nevertheless, I continue to be disappointed by the reaction to this secular trend. A recent discussion of air travel in 10 years by a number of observers in the aviation industry was mostly a case of people talking their own “book”, an indication that the industry remain in denial over the looming pilot shortage.

A secular warning for the airlines

I don’t normally comment on fundamental analysis here, despite having been a small cap analyst early in my career. However, since Mrs. Humble Student of the Markets is a pilot and has numerous contacts in the aviation industry I thought I would make an exception.

There seems to be a dearth of flight instructors in North America, largely because of the low paying nature of the job. Recently, Mrs. Humble Student of the Markets was involved in a feasibility study to bring students from China to Canada to be trained as pilots. To make a long story short, she found that there was little spare educational capacity at Canadian flight schools, largely because of an instructor shortage. The parallel situation exists in the US (and in any case the US is not suitable for foreign student flight training in the post-9/11 era.)

Why does that matter? It matters because pilots, and airline pilots in particular, need to be trained as older ones retire. This shortage of flight instructors will eventually feed into a shortage of pilots, which will shift the bargaining power of pilot unions vs. the airlines. In fact, the shortage is starting to be felt in the emerging markets, where there is not a ready supply of experienced pilots. In one instance, an airline based in an emerging market country offered a job to a recently a qualified pilot (commercial multi-engine IFR rating) as a First Officer (co-pilot) with the understanding that he would be promoted to Captain (pilot) after 500 hours of flight time. This would be the equivalent of allowing a fresh intern, one or two years out of medical school, to perform brain surgery.

Back in North America, it probably doesn’t make a huge difference in the medium term as the United States heads into recession, which would likely result in layoffs at the airlines and create a surplus of pilots. Longer term, however, the shortage of flight instructors and eventually pilots is like the plankton disappearing from the ocean – it eventually makes itself felt all the way up the food chain.