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:: July 2016 Letter ::

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Dear Fellow News Avoiders,

It’s been a nice summer. The kids enjoyed summer camp and a beach vacation in the Outer Banks, and my family also had a good time in Northern California. My wife and I visited Napa for a few days. Even Farnborough passed with few hassles, and London seems better than ever.

There’s not much else to discuss about this summer, except, well, civilization is dying. That’s kind of a big deal when you think about it. In this letter, and in August’s, I will discuss what this means for the future of the aircraft industry, in the same way that a financial newspaper’s coverage of World War Three might lead with a story on higher commodities prices.

My personal life excepted, this has been a horrible summer. It’s not just current events; it’s the all-too-possible scenarios that could result from these events. First, Brexit, few supporters of which expected to win (conceivable scenarios: dissolution of the United Kingdom and more EU country exits on the continent, dooming the EU). Then, the Turkish coup attempt, precipitating Erdogan’s well-prepared crackdown on Turkey’s military and non-Islamist civil society (conceivable scenario: Turkey exits NATO and destabilizes). Turkey is now run by a thug who looks like an Ayatollah on Casual Friday. Last, the nomination of a US Republican presidential candidate who likes Vladimir Putin a lot more than he likes NATO (conceivable scenario: Manchurian Candidate).

The broad theme here is a revolt against the elites, a populist reaction to the forces of globalization. This is accompanied by the rise of autocrats (Russia, Turkey), “illiberal democracies” (Hungary, Poland, maybe Austria) and political parties, such as UKIP and France’s National Front. Free trade, free societies, and the post-1945 liberal world order are under siege. For a good summary of this apocalypse, Foreign Policy has one here: tinyurl.com/jozp3j7 (paywall), and Slate.com has one here: tinyurl.com/zlj3dyw. But there are many analyses, all of them bleak.

If unchecked, these developments will impact aircraft markets. I believe they are generally bad for the commercial market, but good for the military market. This month, here’s my thinking on the military side, which should do well for three reasons:

1. Whenever national pride and global instability hook up, that’s great for defense spending. Today’s geopolitical mood both reflects, and helps create, a dangerous world. With Bernie Sanders out of the way, the US political battle is between Trump, who wants to “rebuild” the military and “bomb the sh-t out of” ISIS, and Clinton, who basically wants to do the same things, only with more platitudes about nation-building. Sequestration’s dead, and DoD’s annual procurement budget is headed safely north of $110 billion for the rest of the decade.

This is a global trend. In April, SIPRI reported that global defense spending rose in 2015 for the first time since 2011. The Mideast, inevitably, is at the center of this increase. Saudi Arabia displaced Russia as third biggest spender, hardly surprising as the Kingdom cheerfully applies Trump’s “bomb the sh-t out of them” strategy in Yemen.

Most of all, there’s the UK Government’s big contracts this summer: fifty AH-64E Apaches, nine P-8 maritime patrol planes, and a complete renewal of the UK nuclear force. The House of Commons voted overwhelmingly to build four replacement Trident subs for $41 billion. Even the left agreed – 140 of 230 Labor MPs voted yes, against their leader’s wishes.

These contracts, along with the F-35B’s star presence at Farnborough, reflect a post-Brexit UK need to show that it was still business as usual in terms of government spending, and that even though it was leaving the EU, it still valued the Special Relationship with the US (as an arms buyer and as a strategic ally). But other than the US-UK, many alliances are weakening....

2. Weakened alliances are good for national defense spending too. Can a national defense planner bank on NATO? Between Trump and Turkey, the idea of a strong, cohesive NATO has taken a few blows this summer. Many countries will want to bulk up their own militaries instead. Agree with him or not, Trump’s threat to only support NATO countries that pay their way will serve as a catalyst to higher spending. Coincidentally or not, in August, Lithuania signed its largest ever defense contract – 386 million euros for armored fighting vehicles. Eastern Europe may actually grow into the long-awaited light fighter/used F-16 market we’ve expected for decades.

Similarly, we’ll see fewer cost savings with shared fleets, such as NATO’s AWACS force. In this environment, we’ll see much less hope for shared tanker, surveillance, or trainer fleets. Instead, countries will go their own ways, buying more systems than they would have if they had pooled resources. Self-sufficiency basically equals redundancy, and redundancy is good for defense spending.

3. Expensive national aircraft programs will proliferate. As alliances fade, the era of pan-national programs like Eurofighter or NH90 will end. Instead, we’ll see countries go it alone, particularly as they view their defense industries as a way of promoting national sovereignty. Turkey’s TF-X and South Korea’s KF-X national fighters both stand a better chance in today’s environment. Japan’s X-2 test plane might grow into an F-3 fighter after all. India’s perpetually dysfunctional LCA will go on and on, despite all logic. Even Taiwan is looking at reviving AIDC’s military jet manufacturing capabilities, with a new combat trainer. Dassault and Saab will be seen as single-nation role models. Indigenous programs are generally wasteful and inefficient, but OEM reps will rack up frequent flyer miles as they chase RfPs from Cairo to Capetown.

Shared pan-national R&D programs will trend downwards too. But that’s more related to next month’s letter, on the less happy civil side of the business. Until then, July Aircraft report updates include the Commercial Jetliner overview, plus the 747, E 170/190, UH-1/Bell 525, F-5/T-38, C-27J, H145/UH-72, Dash8Q, and both H-60 reports. I hope you had a great month.

Yours, ‘Til Trump And Putin Sign A Non-Aggression Pact Over Poland,
Richard Aboulafia
 

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