:: February 2017 Letter ::
“God Bless Boeing.” Thus spoke President Trump, on his visit to Boeing Charleston earlier this month. For any business, if a president believes he can bring God’s blessings, it’s best to go along with him. The downside is that any president who believes he can invoke God’s blessings likely believes he can invoke a divine smiting, too. Boeing now finds itself in a dangerous dance with a powerful man who probably doesn’t have their best interests at heart.
First, from the outside, this is indeed a Special Relationship. It’s more than a little ironic that Trump used the 787 – an icon of world trade in terms of manufacturing, customer base, and airline routes – as a great American achievement, but that’s another matter. The Charleston visit capped a wave of Trump praise for Boeing products, particularly the F/A-18E/F Super Hornet (at the expense of the F-35). Most notably, Trump included CEO Dennis Muilenburg on his call to F-35 program manager Lt. General Chris Bogdan (www.bloomberg.com/politics/articles/2017-02-16/trump-s-f-35-calls-came-with-a-surprise-rival-ceo-was-listening). This serious breach of procedure was probably not at all what Muilenburg wanted, but it illustrates that for Trump, Boeing is his new best friend.
I understand how Boeing got here, and why it would want to get away from where it was. Just after the election Trump fabricated a $1 billion cost overrun on Boeing’s Air Force One program, and promised, via tweet, to cancel the order (although there was no order). When told that the program would cost just under $3 billion, rather than his $4 billion figure, Trump quickly claimed credit for saving a pile of money. Clearly, this was both an exercise in self-flattery and corporate intimidation (as with the Carrier factory, Toyota, Ford, and numerous other new Big Government intrusions into the private sector).
Boeing responded the best way it could. It did not “negotiate” with a “businessman”. Instead, it flattered. It stroked Trump’s ego. This was what was needed (CNN’s story on this evolution: www.money.cnn.com/2017/02/17/news/companies/boeing-trump-dennis-muilenburg/index.html). Humorously, when it came to Air Force One, while Boeing praised Trump’s intervention (“We made some great progress on simplifying requirements for Air Force One, streamlining the process, streamlining certification” Muilenburg told Bloomberg), the Air Force said it had no idea what Trump was talking about (see www.bloomberg.com/politics/articles/2017-02-22/air-force-stumped-by-trump-s-claim-of-1-billion-savings-on-jet ) . Meanwhile, Lockheed Martin quickly changed course, stopped “negotiating” and started following Boeing’s flattery. This worked well, with the F-35 going from “out of control” to a “great plane” after Trump “fixed” it.
First, perceived cronyism does the system no good at all. Whether Boeing’s competitors strike back, or whether Pentagon officials strike back, someone is going to strike back at any company that is perceived of as having an unfair advantage, or even the perception of one.
But most of all, populist politicians can turn quickly from friend to foe, especially when – not if – Boeing’s interest’s diverge from Trump’s. I can see four areas of possible tension:
Border Adjustment Tax. Boeing has backed this appallingly bad idea, hoping that export tax breaks will compensate for the higher cost (20%) of stuff it imports. It’s hard to tell if Boeing thinks it will actually come out ahead, or if this is just a way for them to find an accommodation with Trump’s nationalist economic agenda. But most economists also think it will result in a considerably stronger dollar (10-20%). Since 85% of BCA jetliners are exported, this currency appreciation would increase the relative cost of US goods for most of their customer base. If Boeing finds this tax to be a much worse idea than they anticipated, the result could be friction with a key Trump America First objective.
Airline Protectionism. Trump is the best chance for the US major airlines to stop the Gulf carriers, and Norwegian, and anybody else, from gaining more access to the US market. If Delta and the others succeed and Open Skies are pushed back, key foreign carriers could retaliate by switching from Boeing to Airbus. As I noted last month, the strong majority of 777X orders are from the three Gulf carriers targeted by these airline protectionist moves.
China Import Tariff. While running for president, Trump threatened a 45% tariff on all Chinese imports. So far, there has been very little difference between Trump the campaigner and Trump the president. A move like this is just a matter of time. It would immediately produce a trade war. An obvious target for a China retaliatory move would be jetliners, with orders shifted from Boeing to Airbus. About 20% of BCA’s jetliner output goes to China. By some accounts, Trump’s anti-Air Force One broadside happened because Muilenburg spoke against trade barriers; if the company pushes back against a Trump China tariff (as it must) it could be back to Square One with Trump…or worse.
Super Hornets To India. The Indian Navy and Air Force have large fighter requirements, and the F/A-18E/F will go after both. This will involve substantial offset work – major work packages at the least, and perhaps an in-country final assembly line. Will Trump understand that this is the price of doing business there? At his Boeing visit, Trump reiterated his campaign pledge that a company that lays off American workers to move to another country will face a “substantial penalty” when trying to sell to the US. Trump has been eagerly (and falsely) taking credit for renewed USN Super Hornet purchases; he might just decide to bring God’s blessings to Lockheed Martin and the F-35 instead.
The overarching theme with these likely conflicts is globalization. Boeing is a global company. Free trade and open borders are essential to its future – selling jets across borders, to airlines moving people across borders. The Trump Administration is all about America First. A clash between Boeing and Trump is basically inevitable. The company may then find that its new best friend becomes its new worst enemy. Random tweets like Trump’s Air Force One “cancellation” can temporarily hurt a company’s share price; a concerted anti-Boeing vendetta is a far graver threat. To put it another way, hell hath no fury like a politician scorned.
February Aircraft Binder updates include the Fighter Overview, 777, 787, F-16, A350XWB, and both Challenger reports. I hope the year has begun well for you.
Yours, ‘Til Marine Le Pen Blesses Airbus Too,
© Richard Aboulafia 1997-2006, All rights reserved.