This accompanying article is a condensed, edited transcript of my latest video presentation. My questions and comments are in bold.
I’m John Persinos, editor-in-chief of Aircraft Value News. I’m also a contributing editor at Avionics International Report. With me today is Richard Aboulafia, managing director at AeroDynamic Advisory.
Richard is a world-renowned aerospace analyst with several decades of experience. He manages consulting projects in the commercial and military aviation field and analyzes broader defense and aerospace market and industry trends.
Let’s get right to it. The aviation sector has survived oil shocks, bankruptcies, and more than a few embarrassing CEO scandals. But can it withstand the one-two punch of high inflation and rising interest rates under a second Trump administration?
You’ve got the very real threat of rising interest rates as a response to likely inflation, which is the inevitable consequence of more trade barriers, maybe a restricted labor supply, and higher demand.
You’ve also got the very real possibility of tariffs being enacted that would hurt a great deal and, of course, further in, stoke inflation. Then on top of that, you have the real possibility of serious defense cuts that have been emerging over the past couple of days that would also badly damage the industry because there are few companies, especially at the supplier level, that aren’t exposed to both civil and military markets.
Are aircraft values and lease rates poised for turbulence in 2025, or will airlines, lessors and aircraft buyers find a smooth path ahead somehow?
It’s gonna be anything but smooth. Volatility will be off the charts, as you’ve seen in a lot of markets and circumstances like this. But there are positives too. Everything you’ve got is a recipe for frankly impeding the production of aircraft. It’s not good at all. In a time of constricted supply, it’s good to have capacity.
Yes, inflation sounds like it’s a threat, and certainly interest rates are a big concern, but on the other hand, investors tend to like to put money into hard assets, as a kind of hedge against inflation. So there might be some upshot from that. In general, probably more bad than good, but the only constant here is volatility.
If Trump 2.0 revives tariffs, how badly will that hammer the Boeing Airbus duopoly? And does that give an opening to Brazil-based Embraer?
The only thing that’s actually been enacted are the raw material tariffs, which are not ruinous for an industry based on value add. But if you actually have the kind of 25% tariffs on cross border, value-add stuff, that’s catastrophic for this business.
It greatly raises everyone’s expense. These are mostly life of program contracts by companies. Will it open up the door for other players? Yeah. Embraer would almost certainly benefit, although it’s not really clear that they’d be able to sell freely into the U.S. market. At the end of the day, for their commercial jets, more than half of their core market is the U.S. So even though they’d be okay on the receiving end in terms of production inputs, the outputs and deliveries of jets might just be hard going into the U.S.
China is the interesting wild card here. I’ve made a career saying they’ve got no chance in becoming significant players in domestic commercial aviation manufacturing. Everything they’re doing is wrong. The only thing that wasn’t dreamt of in my philosophy was the idea that an American administration would kneecap the legacy industry and pave the way for China.
This is true across the board. Whether it’s influence in emerging markets throughout the world by eliminating all forms of U.S. assistance, or in undermining diplomacy or whatever else, America is opening the door to China and that might be true especially in the jetliner world.
Yes, you didn’t foresee the U.S. fracturing the Western alliance and alienating America from its longtime allies in Europe and even Canada, our friendly neighbors to the north. On a related note, the CEO of Airbus said a couple of days ago that if full-fledged tariffs go into effect and clobber the aerospace industry, Airbus would prioritize non-U.S. clients. What do you make of that?
I’m not surprised. At the end of the day, Airbus, just like Boeing, is production constrained, not demand constrained. That is to say they’ve got more eager consumers of their jets than they have the ability to build for some time.
If a customer anywhere outside the U.S. isn’t charging them that tariff, then Airbus would obviously prioritize them.
The pandemic accelerated fleet retirements and hurt aircraft values and air traffic. But now that the economy and airline traffic are rebounding, inflation is taking effect and interest rates are starting to bite. It makes one wonder, with all these cross currents, where are we in the aircraft value cycle? Are lease rates rising? Or is it still a case of too much metal, chasing too few willing buyers?
That “too much metal” thing lasted as long as the pandemic. Ultimately, air travel demand made a wonderful recovery, and that’s one of the happiest silver linings in the entire world these days. Last year, it was double digit. I mean, fantastic increases in demand.
Doesn’t seem like it’s slowing down the thesis that people were spending a higher percentage of their disposable income on experiences and travel. That is proven quite correct, which means, of course, demand for jets has gone through the roof. Book to bill, we’re witnessing extremely strong backlogs. So as long as we’re in that imbalanced environment where there’s basically too much demand relative to supply, that’s really good for lease rates.
Boeing is still grappling with all kinds of safety issues and regulatory oversight. The company’s been losing money. It’s even losing customers. The new CEO, the highly touted Kelly Ortberg, has promised to turn things around. But are you really seeing signs of the change in culture at Boeing that needs to occur for the company to bounce back?
Kelly Ortberg is tremendously promising. He’s the right guy for the job in my view. But six or seven months in, there’s not a lot of fact-based evidence to back up the idea of change.
You had a strike that should have lasted 53 hours; it lasted 53 days. You have a bunch of high-level folks who, well, frankly, are still there that shouldn’t be. You have a few good folks gone. You have, well, very few new people being inserted into the organization.
There are a couple possibilities. One is that Ortberg is basically hamstrung by the powers that be and by a challenge that’s way bigger than anyone expected.
The other is that this will take them a while to line up everything, get the facts straight, and we’re gonna see fantastic results in the next few months. I think there’s a really good chance of the latter scenario. I tend to be an optimist here, but there is the risk that it is the negative scenario.
As we all know, Boeing got into this predicament in the first place by cutting staff and cutting costs to boost profitability, to boost the share price, to afford stock buybacks for shareholders and top executives. It was disastrous for the company. And ironically, it caused the stock price to tank. It was a case study in the Jack Welch school of capitalism. Has that changed at Boeing at all?
If you subscribe to the idea that there are institutional forces constraining Ortberg from making the necessary reforms, then, yeah, you point to the fact that the board is basically the same. He hasn’t gotten rid of any of the bad ones, and he hasn’t brought in any new good ones. And it could be that they’re simply demanding returns without being able or willing to make the changes that are needed.
It’s dysfunctional. It’s kind of vaguely related to DOGE. The number one rule of good management is, you can’t cut your way out of a bad situation unless your business base is shrinking, which no one is arguing here. Boeing’s business base is growing.
You can get rid of people quietly, get rid of units quietly. But the idea of saying, 10% of you need to go so we can minimize net assets, that’s just not great management.
Boeing used to be one of the glories of the American industrial base, respected for its engineering excellence. Let’s hope the company gets back on its feet.
There’s hope. You rightly mentioned Jack Welch, former CEO at GE. I would argue the single most successful aerospace company perhaps in the world right now is GE under its current CEO Larry Culp. I think it’s extraordinary what GE has achieved and continues to achieve. Simple formula: Don’t do what they were doing. Do the opposite of that and you’ll get great results.
Excellent points. Richard, it’s always a pleasure. Thanks for your time.
