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The current system relies on the plane maker, not regulators, to ensure that jets are produced properly; ‘We’re not their quality department’

After two Boeing 737 MAX crashes five years ago that killed everyone aboard both jets, air-safety regulators cranked up the heat on the plane maker.

The Federal Aviation Administration, under fire for being too soft on Boeing BA -1.31%decrease; red down pointing triangle, assigned more people to oversee the company’s production. FAA inspectors, not Boeing’s own employees, would now do the final safety check on each 737 MAX. Boeing would add back quality inspections it had stopped doing. Two FAA inspectors would keep tabs on Spirit AeroSystems, Boeing’s troubled supplier of door plugs and other equipment.

When the problem-plagued 737 MAX was finally cleared to fly again in 2020, the FAA’s then chief Steve Dickson called it “the most heavily scrutinized transport aircraft in aviation history,” telling reporters: “I am fully confident that the aircraft is safe, and I would put my own family on it.”

Those comforting words look a lot less reassuring after a door plug blew out midair on an Alaska Airlines 737 MAX on Jan. 5, and it emerged that the plane likely had rolled off the factory floor weeks earlier without the bolts necessary to hold it in place. “That can’t happen,” Dickson, now a consultant, said on Saturday about the blowout. He still believes the aircraft is safe, he said, “but that assumes they’re put together properly.”

On Sunday, Boeing said it would have to rework 50 undelivered 737 MAX jets because of newly discovered misdrilled holes.

Now the same old questions are resurfacing about the effectiveness of the FAA and its largely hands-off regulatory system for overseeing Boeing. The agency has so few people watching over Boeing relative to the size of its production operations that a former government official familiar with the oversight likened the process to looking through a keyhole.

Boeing employs more than 12,000 in Renton, Wash., where 737s are assembled. The FAA had eight inspectors assigned to the plant there late last year, up from two in 2018, according to the former government official.

“That’s not enough people to monitor the restaurant operations at the site,” said Ed Pierson, a former senior Boeing production manager who raised concerns about quality problems at the 737 factory after the crashes.

On Tuesday, current FAA chief Mike Whitaker is scheduled to testify before a U.S. House panel about the agency’s oversight of Boeing’s manufacturing. In an interview with The Wall Street Journal last month, Whitaker said: “We’re going to be looking at the entire production process, the quality assurance process, try to understand where these breakdowns have occurred, and what are the levers that we have to fix that.”

FAA deputy safety chief Jodi Baker said on Monday that the agency was still figuring out its “reimagined oversight” of Boeing, but that it would include more agency personnel on the factory floor to talk to employees and better assess the safety culture.

Boeing Chief Executive David Calhoun said last month: “This increased scrutiny that comes from us or our regulator or from third parties will make us better. It’s that simple.”

Already, the FAA has sent more inspectors to monitor Boeing, launched an enforcement probe and begun a broader audit of the company’s manufacturing. It has imposed new limits on 737 MAX production, which could delay when airlines get new jets.

“I thought I fixed the system, but clearly, I didn’t,” said former U.S. Rep. Peter DeFazio, who led a congressional probe beginning in 2019 into the 737 MAX crashes. That investigation led to new protections for the Boeing employees who work on behalf of the FAA, aiming to shield them from management pressure.

The system still relies on Boeing, not the FAA, to ensure that planes are produced properly. FAA inspectors have only a small presence in Boeing’s factories. “We’re not their quality department,” said a former senior agency official.

Boeing employees working on behalf of the FAA are supposed to make sure the company adheres to federal safety rules. Those company-employed inspectors are supposed to answer to the FAA, but some of them have reported that they have felt pressure from their Boeing bosses. Boeing has said it tells employees that their colleagues who answer to the FAA should be treated with the same respect and deference as the regulator.

Much of FAA inspectors’ job nowadays involves reviewing paperwork and analyzing Boeing’s quality-control system, not physically inspecting aircraft. At the Renton factory, Boeing employees who represent the FAA are performing nearly all the checks to determine whether new aircraft meet federal safety standards, current and former government officials said.

FAA rules require inspectors to announce many audits of the company’s production systems months in advance, allowing Boeing time to prepare. Baker said announced audits can be helpful so Boeing has the right people and documents available. The agency can conduct unannounced audits as well.

Last summer, the FAA assigned two senior inspectors to keep tabs on Spirit AeroSystems, a Wichita, Kan.-based supplier that initially installed the plug door on the Alaska jet’s fuselage. Spirit has been the source of various Boeing production problems in recent years. A Spirit spokesman said the supplier welcomes FAA oversight and is focused on the quality of its products.

For decades, the FAA has delegated certain responsibilities to the aerospace manufacturers it oversees, often with the support of lawmakers. In the early 2000s, the agency began giving companies such as Boeing an even bigger role.

Some FAA employees worried that the new system would reduce the role of agency engineers in Boeing’s work to design and build new aircraft, said Stan Sorscher, a former Boeing physicist who later worked for the union representing the company’s engineers in the Seattle area.

The new structure established what is now known as the Organization Designation Authorization, or ODA. Boeing’s ODA unit employs about 250 inspectors who represent the FAA on Boeing factory floors and at suppliers.

The FAA inspectors’ union, now known as the Professional Aviation Safety Specialists, warned in a 2004 public letter that delegating more authority to manufacturers would effectively let the fox guard the henhouse.

“It allows them to have planes going out the door without an actual FAA person ever looking at it,” Jim Pratt, a retired FAA inspector and former union official, said in a recent interview.

The 737 MAX crashes in 2018 and 2019 exposed flaws in the regulatory approach. Accident investigators blamed a faulty flight-control system known as MCAS for sending the planes into fatal nosedives. Boeing engineers had developed the system with little FAA input or review.

In response to those crashes, the FAA took steps to tighten its oversight of how Boeing assembled the aircraft. It revoked Boeing’s authority to conduct final safety checks on newly produced 737 MAX jets and to issue airworthiness certificates on the agency’s behalf. The FAA has held on to those tasks since then.

The agency staffed up its Boeing oversight office. The FAA said it has pushed the company to stop using statistical sampling methods called “process monitoring” and “process surveillance.” At one meeting, FAA officials told Boeing representatives that they wouldn’t be allowed to continue the practice because they couldn’t do it right, according to the former government official. The FAA ordered Boeing to restore the quality inspections it had discontinued.

Separately, FAA officials worked with Boeing to start a voluntary reporting system aimed at addressing emerging safety problems. Similar systems at airlines are credited with reducing accidents.

The FAA has had difficulty gauging whether its oversight has worked. According to an internal 2022 survey reviewed by the Journal, 83% of responding FAA employees said they couldn’t determine whether their actions prevented repeat violations of federal safety rules. The FAA said it has told managers to follow up with employees on compliance actions.

Problems with Boeing manufacturing continued after the 737 MAX crashes. The 787 Dreamliner, a wide-body aircraft produced in South Carolina, had numerous production flaws that FAA officials worried might result in safety problems. Boeing halted delivery of those jets for nearly two years and took some jets out of service briefly while defects were addressed.

FAA officials discussed whether to use its control of Boeing’s production certificate to limit how many planes it could produce a month, but decided not to do so. Signs later emerged that production was improving.

The Alaska Airlines accident has prompted the FAA to once again stiffen its public posture amid an investigation into the accident. It has capped Boeing’s production to 38 MAX jets a month, and said it won’t approve an expansion of a fourth production line to a factory in Everett, Wash., until it is satisfied the company’s quality-control system has improved.

The FAA said it is sending 20 more inspectors to Boeing’s Renton factory and six more to Spirit’s facility in Wichita, and that it could add more as needed.

Whitaker, who became the FAA chief last fall, said in the interview that the manufacturing problems had “gone on for too long, and I think we need to have a more intensive effort to get this resolved, immediately.”

Boeing said it has increased its number of inspectors in its commercial-jet unit by 20% since 2019.

Calhoun, the CEO, said the company has begun conducting more inspections at its Renton factory since the Alaska accident and already is learning from its mistake. Airlines have said they are sending their own inspectors to the 737 factory, a sign they don’t fully trust Boeing’s pledges to improve—or the FAA’s oversight.

The agency also has increased monitoring of problems with 737 MAXs currently flying passengers. Industry and former government officials wonder whether other defects might have slipped through.

“What about all those hundreds of planes that left the factory without those inspections?” Pierson said. “They’re out there.”

US central bank chair sees three reductions in 2024 while markets price in five

The market’s stubborn hopes of a first cut to US interest rates in March were finally crushed over the past week by strong economic data and firm messaging from Jay Powell, chair of the Federal Reserve.

Beyond next month, however, traders have a different outlook for the Fed’s monetary policy than officials inside the US central bank. The divergence sets the stage for volatility and potential losses if the Fed sticks with its plans.

US interest rates have been perched at a 23-year high since the Fed undertook an aggressive campaign to rein in inflation. When and how fast it begins to lower them from their current level of 5.25 per cent to 5.5 per cent has been a fixation for investors across financial markets.

Powell reiterated on a television show over the weekend that central bankers saw three cuts as their baseline scenario this year, the same message conveyed in the Fed’s closely watched “dot plot” projections issued in December.

But since December, traders in the futures market have only slightly pulled back their expectations — pricing in five cuts over the course of the Fed’s seven remaining meetings this year, instead of a more optimistic six cuts.

And bets on cuts happening earlier have been very hard to shake. Until last week traders were putting better than even chances on a cut in March. It took a definitive statement from Powell in the press conference after the Federal Open Market Committee meeting last week — March was not the Fed’s “base case” — followed by a surprisingly strong US jobs report on Friday and his statements on the 60 Minutes news programme to bring the odds down to 20 per cent today.

“We’re slowly coming into line with the Fed,” said Sonal Desai, chief investment officer for Franklin Templeton Fixed Income. “There was a sense in December that the market could push the Fed to cut sooner. But the data hasn’t co-operated with the market. The data has not been weak enough to pressure the Fed to cut early.”

“Markets finally started listening to Powell after the jobs number on Friday,” Desai said.

Bond markets have swung dramatically in the past four trading days, recording their biggest daily moves in months, as investors have grasped that March is likely to come and go without a rate cut.

The yield on the two-year Treasury note, which moves with interest rate expectations, on Friday rose 0.16 percentage points after the payrolls report, which showed employers added 353,000 jobs in January. The yield rose again on Monday to 4.48 per cent, its highest level in a month.

More swings like that may be in store if the market is forced to adjust to the Fed’s view. After hitting a four-month low in January, the ICE BofA Move index, which maps expectations of volatility in the Treasury market, has ticked up in February as rate expectations have changed.

US stocks, meanwhile, rose to all-time highs on Friday after the strong jobs report, before dipping on Monday. But anticipation of more cuts than the Fed is expecting could also be bolstering prices.

Amanda Agati, chief investment officer at PNC Financial Services, said: “The market is craving the sugar high from additional policy stimulus, but that doesn’t mean they’ll get it. It sets the stage for a choppy first half.”

The persistent tension between what the market is pricing and what the Fed is signalling on interest rate policy has also made it more challenging for corporate borrowers to map out funding plans in advance, fuelling a wave of opportunistic borrowing.

A sharp rally across financial markets at the end of last year created a relatively benign backdrop for companies in the first few weeks of 2024, leading to record January US investment-grade bond issuance, along with significant volumes for junk-rated names.

Market participants noted companies were choosing to issue debt while the going was good — with demand high because many investors had been starved of new supply for months and had cash on the sidelines.

Torsten Sløk, chief economist at investment firm Apollo, said: “I think corporates both in investment grade and high-yield [and in] loans view this as ‘Take it while you can get it’ — and in January, it turned out to be a good idea.”

However, highlighting the increasing challenges of timing such issuance, Sløk added that “the question after the [labour market] data on Friday is whether that window is closing”.

Calvin Tse, head of Americas macro strategy at BNP Paribas, said he does not believe the current gap between the Fed officials’ and the market’s expectations of rate cuts is significant. Traders in the futures market are betting on a range of possible outcomes, while Fed officials are making more precise forecasts.

But Tse’s outlook does diverge significantly from the Fed’s. Tse believes the Fed will start reducing interest rates in May and continue to cut by 0.25 percentage points at each of the five subsequent meetings this year. That’s because he expects inflation to slow dramatically this year, and the Fed will be forced to adjust policy accordingly.

Tse said: “If the Fed doesn’t cut rates, and inflation comes down as much as we think it will, that would mean policy was becoming more restrictive. And Powell has already said that policy is sufficiently restrictive.”

The world's second-largest beauty market will be marked by polarization, a fragmented retail landscape and new consumption needs.

The slowdown continues: 2024 is shaping up to be another challenging year for beauty players in China as consumers grapple with uncertain macroeconomic prospects.

In 2023, the world’s second-largest beauty market registered a modest 5.1 percent growth, reaching 414.17 billion renminbi, or $58 billion, according to data from the National Bureau of Statistics.

The luxury category exhibited stronger growth of around 8 percent, driven by momentum in fragrance and makeup categories, according to Bain.

However, in the year ahead, Bernstein expects the mass market to advance around 10 percent, and outpace the premium segment’s forecasted 5.6 percent growth in 2024.

“Consumption polarization should persist, with the mass segment outpacing premium cosmetics, indicating consumer preference towards affordable and value-for-money cosmetics,” wrote Bernstein’s Melinda Hu. Segment-wise, color cosmetics is projected to grow at 9.3 percent, faster than skin care’s 7.7 percent, according to Bernstein.

A highly fragmented retail landscape, spread across offline retail and e-commerce platforms such as Tmall, Douyin, WeChat Mini Program and Xiaohongshu, is expected to help nimble local players maintain the upper hand over their global counterparts.

Last year, more than 20 foreign beauty brands, such as E.l.f. Cosmetics, Huda Beauty, Benefit and Japan’s Amplitude disappeared from China’s e-commerce market, even though some vowed to return shortly.

According to Qingyan Company, a Chinese beauty research firm, sales of C-beauty brands rose 21.2 percent year-on-year in 2023 to comprise 50.4 percent of the Chinese cosmetics market, overtaking foreign brands for the first time.

Smart e-commerce execution will continue to dominate market narratives in 2024, a shopping behavior that stuck after COVID-19.

“The demand for content creation has reached unprecedented levels across all platforms,” said Franklin Chu, managing director of Azoya U.S., who said brands should take note of Tencent’s WeChat video account as an emerging social commerce player.

Douyin, which stands out in the current social media landscape, also deserves special attention, as beauty sales have surged over 60 percent to $1.9 billion in the first eight months of 2023, according to Shanghai Securities data.

For Isabelle Zhuang, general manager China at Augustinus Bader, 2024 will mark yet another “turning point” for the beauty market.

“As C-beauty brands quickly win over ground from foreign players, shoppers’ habits have been reshaped in many ways and become more mature. That also applies to brands like us,” said Zhuang.

According to the investment bank Jefferies, Chinese consumers are not only trading down and conditioned to purchase only during promotional holidays, but they are expecting services more than products. For Zhuang, that mean reevaluating the balance between online and offline.

Bader has found success with a celebrity method that comes with a localized twist. By working with socialite-turned-livestreaming star Teresa Cheung, sales at the brand scored more than 2.7 million renminbi, or $378,300, in one of Cheung’s multibrand livestreaming session. To better engage offline, Augustinus Bader has hosted pop-up shops in luxury shopping malls and is considering bringing its Skin Lab to China.

Taking a closer look at the market polarization trend, Euromonitor found in a recent survey that Chinese consumers’ preference for lower prices surged in categories such as shampoo, facial cleansers, moisturizers and foundations.

Scalp care, a nascent category in the market, has quickly gained traction as an overall awareness of self care extends beyond the face.

In 2023, domestic leaders invested money and effort in promoting brands in the hair-care category. Bloomage, the largest hyaluronic acid producer turned skin care leader, and Proya, one of the largest beauty groups in the market, have both developed brands that target young consumers who are experiencing stress-related hair loss.

Market forerunners are also doubling down on fresh formulas to engage Chinese shoppers. According to Euromonitor’s Health and Beauty Asia Insights manager Yang Hu, “bio-based materials” and “conceptual medical aesthetics ingredients” are two categories to watch.

“Consumers are placing increased trust in materials derived from the extension of the medical aesthetics concept. For instance, products such as micro-needle serum and the utilization of recombinant collagen hold significant potential,” said Yang.

In December, L’Oréal launched the second generation of the L’Oréal Age Perfect Collagene Royal cream, which included recombinant collagen, an ingredient produced by Chinese company Kinbo Biotech. Bloomage’s research on seven to eight types of collagen is also spurring new solutions in antiaging formulation.

According to L Catterton‘s Asia fund managing partner Scott Chen, some domestic players are even “better equipped than international ones at addressing these needs,” noting a recent investment in Trautec, a domestic manufacturer of synthetic collagen.

New consumption patterns in the Chinese market are also emerging, especially among male consumers and Gen Alpha shoppers.

Euromonitor’s Hu said that male consumers are becoming pickier and want more specialized products, ranging from “basic functionalities like oil control or moisturizing to antiaging and sun protection.”

Teenagers, or Gen Alpha, might not have the spending power, but Hu believes their consumption habits and preferences will influence market trends in five to 10 years. Case in point — Hi!Papa, a personal care company for 3- to 12-year-olds, recently completed a round of series A+ funding from L Catterton.

The usage of generative AI in e-commerce livestreaming could enter the mainstream in 2024, shaking up the key opinion leader landscape.

“Since Austin Li, also known as the ‘Lipstick King’ in China, had inappropriate speech and caused controversy among the public, brands and retailers realized that the AI anchors can mitigate such risk of influencing sales,” said Chu. Last September, two months before Singles’ Day, Li came under fire for criticizing a viewer who said a 79 renminbi, or $11, Florasis eye pencil was overpriced. Even though Li and Florasis quickly apologized, sales at Florasis’ Tmall store fell sharply, according to local media reports.

To avoid human errors like these, beauty brands like L’Oréal Paris, Helena Rubinstein, Olay and Lancôme have begun leveraging virtual hosts for livestreaming.

According to data from iResearch, the Chinese AIGC [artificial intelligence generated content] market is projected to surge almost fivefold to reach 43.6 billion renminbi, or $6.3 billion, by the end of 2024.

Beauty in the travel retail market is also expected to decline. In 2023, sales of cosmetics in the Hainan duty-free market underperformed compared to the hard luxury category.

Based on the latest data released by Haikou customs, for the months of October and November, cosmetics and perfumes contributed 41 to 42 percent of total Hainan off-shore retail sales, which is lower than 52-56 percent for the same period in 2022.

According to Bernstein analysis, a consumption downgrade, consumer boycott of Japanese cosmetics, and crackdown on Hainan daigou, or surrogate shoppers, has exacerbated the issue.

“The decreased Hainan duty-free retail performance actually signifies a return to normalcy,” said Hu. “This is attributed to adjustments in outbound tourism trends, with Chinese tourists increasingly traveling globally rather than solely to Hainan.”

Prada, Gucci parent companies among those spending hundreds of millions of dollars for Fifth Avenue properties

Luxury retailers, flush with cash, are spending big on real estate in the world’s most expensive and exclusive shopping corridors.

In New York City, Prada recently agreed to buy the building that houses its Fifth Avenue store as well as the building next door for more than $800 million. Gucci’s parent company, Kering, is also paying nearly $1 billion for a 115,000-square-foot retail space a few blocks south.

Luxury behemoth LVMH Moët Hennessy Louis Vuitton, meanwhile, is in discussions to purchase the Fifth Avenue retail space occupied by Bergdorf Goodman’s men’s store, according to a person familiar with the matter.

This activity follows a flurry of purchases in Europe, where high-end retailers have snapped up real estate on high streets including Avenue Montaigne in Paris and London’s New Bond Street in recent years.

Luxury’s real-estate shopping spree shows that retailers are using their considerable cash to free themselves from the control of landlords and plant their flags on streets where they want a long-term presence.

“The rents that the luxury retailers were paying on Fifth and in other prime locations were simply astronomical,” said Eric Menkes, co-chair of leasing for the New York-based law firm Adler & Stachenfeld. “There comes a point in time when these retailers looked in the mirror and said, ‘Why am I making my landlord rich?’ ”

Retail rents on upper Fifth Avenue haven’t surpassed prepandemic levels, but they averaged $2,000 a square foot over the past year, making the corridor the most expensive retail destination in the world, according to real-estate firm Cushman & Wakefield.

High-end retailers renewing their leases are often subject to the biggest rent increases, because they don’t want to leave well-known, successful addresses and pay for expensive build-outs at new stores.

“You don’t want to give up that location,” Menkes said. “And your landlord knows that.”

While the most recent eye-catching deals have been signed in New York and Europe, luxury companies are also buying buildings elsewhere. The French fashion house Chanel paid $63 million for a building on Post Street in San Francisco in 2021, the same year LVMH bought a hotel in Beverly Hills.

Chanel selectively acquires real estate “to protect its long-term presence in key cities around the world, and secure prime locations for luxury retail,” a spokesperson said in an email.

While real-estate purchases so far appear concentrated in the most exclusive shopping corridors, luxury retailers are also signing leases in new markets and for bigger footprints to accommodate their swelling collections as well as new offerings such as restaurants and bars.

A surge in shopping for luxury goods powered the world’s largest luxury retailers to record profits in recent years. Sales growth has since slowed, but LVMH, which owns 75 brands including Dior and Hennessy, still reported nearly $94 billion in sales in 2023, beating analysts’ forecasts and sending the company’s stock price soaring in European trading.

“The premium luxury groups have so much cash on their balance sheet,” said Eric Le Goff, vice chairman and head of luxury for the brokerage Retail by Mona. For companies not contemplating acquisitions, “why not deploy the cash into real estate where you know you’re going to be there, hopefully for the next 100 years?”

In addition to cash, well-performing retailers have the option of floating corporate bonds to pay for their real-estate purchases at a lower rate than the traditional real-estate investor could get for a bank mortgage, according to Will Silverman, a managing director at Eastdil Secured, a real-estate investment-banking firm.

“The spread between where they can borrow and where a traditional real-estate investor can borrow, might be several percentage points apart,” Silverman said. That spread has never been wider in memory, he added.

This dynamic could mean luxury retailers are competing mainly against each other for real estate at the most desirable locations.

Luxury companies tend to cluster, so once one deal is signed, “usually that causes others to all jump in and want to be in the market, which then causes demand to increase and prices to rise,” said Andrew Goldberg, vice chairman at real-estate brokerage CBRE.