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:: September 2011 Letter ::

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Dear Fellow Last Decade Survivors,

Whatís your 9/11 story? Turns out it wasnít some clichťÖmost of us really do remember where we were that day ten years ago. My anecdote, thankfully, isnít at all traumatic. I had lunch scheduled with a friend near the White House. As that area was evacuated, we changed our plans, and as an ever widening radius was evacuated, our plans kept moving too. We wound up at a cafť not far from my house. As we sat outside on a lovely late summer day, a sea of people walked by, trying to get home. Their faces, like ours, reflected the unease one feels when the world changes, and you have no idea what will happen next. All we could do was speculate.

Speculation isnít data, of course. To understand whatís gone on in the world in the last ten years, numbers are essential. Iíll focus on numbers for the part of the world that I cover.

First, on the civil side, all that speculation about a changed environment meant nothing. Iím happy to report that 9/11 had no long-term impact on our industry. The long postwar expansion of civil transport demand continued unabated. Revenue passenger miles grew at a 5% compound annual growth rate (CAGR) in 2001-2011, just down slightly from the 5.7% CAGR in 1991-2001. Any growth rate reduction can easily be ascribed to maturing air travel markets in the US and Europe. OAG recently made the smart observation that the 2008 banking crisis had a far greater effect on aviation markets, with a 9% drop, than 9/11, with a 3% drop. Broader secular trends such as market liberalization, and pricing transparency brought by the internet, had far more profound changes on the aviation business than 9/11. Sure, we had increased security (some dumb, some smart) and new regulations (some dumb, some smart). But fears of a new age of scared passengers balking at air travel proved completely unfounded and were quickly dispelled by data.

Remember too all that speculation about a clash of civilizations, and about a serious threat to globalization? Air cargo shipments, a great measure of globalization, expanded faster in 2001-2006 (a 5.3% CAGR) than in 1996-2001 (a 4.5% CAGR). And again, the 2008/2009 economic crisis saw a much worse cargo shipment drop than the 9/11 aftermath.

The business aircraft market also vanquished the anecdotes. Remember all that post-9/11 chatter about a massive increase in private aviation market interest? Remember all the assertions that security concerns and scheduled air service hassles would cause business travelers to flee to private planes? That was mere speculation, and the data says the opposite. Business aircraft deliveries fell 34% by value between 2001-2003, a decline that was in line with the economic recession around that period. In 2003-2008 when the economy recovered, business aircraft deliveries recovered too, with a record 17.6% CAGR.

In terms of long-term damage to the civil aircraft industry, the terrorists achieved exactly nothing. Passenger demand, cargo demand and business aircraft demand, like most of the civil economy, continued to be affected by economic cycles, not lunatics with box cutters. But the military side of our industry saw sudden and rapid change. Many pundits like me predicted defense budget increases, and this time the data delivered. Between FY 2003 and 2012 US procurement grew by a 6.1% CAGR (or, remarkably, at 16.2% between FY 2003 and 2008).

Yet almost all of this funding went to the immediate requirements of Iraq and Afghanistan. Rotorcraft procurement grew at a 10.9% CAGR in FY 2003-2012. UAV procurement ramped up at a remarkable 21.8% CAGR. Yet funding for tactical aircraft grew at just a 2.3% CAGR. Funding for airlift actually declined at a 1.7% CAGR. Some critics opine that Iraq and Afghanistan were strategic diversions from the USís role as a global superpower; these numbers reinforce that view. UAVs, MRAPs, and body armor are useful when fighting nutjobs with box cutters and IEDs; against a serious threat you need heavier forces. In five years every VFW hall will have at least five MRAPs on its lawn.

The outlook right now for the traditional superpower tools is grim. If weíre lucky, current procurement levels will stay flat, at least in nominal terms. Yet to sustain the F-35 program of record, tacair funding needs to ramp up at a 7.1% CAGR through FY 2016. To sustain the KC-46, C-130J, and C-5 RERP programs, lift funding needs to ramp up at an 11.8% CAGR. Meanwhile, utilization of all this heavy metal went way up over the last decade, putting wear and tear on a neglected air force and navy. (For a useful guide to the challenges facing the USís military, see Nathan Hodgeís ĎGeriatricí US Arsenal Needs Expensive Face-Lift, The Wall Street Journal, September 15, p. 1).

While the US military didnít buy much heavy equipment over the last decade, it did spend enormous sums on Iraq and Afghanistan ($2.4 trillion according to the Congressional Budget Office). Instead of making wartime sacrifices, US citizens were told to go shopping. They were given generous tax breaks (tax rates for everyone remain at or near postwar lows). This created a debt overhang thatís putting downward pressure on the defense budget at a dangerous time. European governments and banks committed similar financial atrocities. The resulting fiscal imbalances and deficits, coupled with lax banking oversight, induced a credit collapse.

This collapse happened in 2008. The bottom half of the business jet market, the half most dependent on external finance, imploded, falling 57.1% in two years (the top half, with much less reliance on credit, actually grew by 1.5%). Thatís the worst market drop Iíve ever seen. And if it werenít for a massive worldwide increase in government funding (through export credit agencies, government-owned banks, and government-owned airlines) the jetliner industry would have suffered a painful drop too. Given the headlines today, weíre not out of the woods on jetliner finance yet.

Back in the land of the anecdote. As my friend and I watched people stream past our cafť table, numbers werenít important. Everything revolved around friends and loved ones, not data. We had quantitative uncertainty, but given the nature of a truly loathsome threat, we had moral certainty. We now have quantitative certainty about the last decade, but complete economic uncertainty ahead.

On the plus side, Iím still working on the same fun job. And Teal Aircraft report updates this month include the C-17, Rafale, Ching Kuo, AH-1, F-2, Avanti, and Super Puma. Have a good month.

Yours, íTil We Get A Better Decade To Remember,
Richard Aboulafia
 

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