RichardAboulafia.com 

:: January 2020 Letter ::

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Dear Fellow Listicle Fans,

It’s time for my almost-annual list of good and bad aviation developments in the previous year. This was not the best year. And, since I waited until early February to write this, we can incorporate an awful January into the calendar of atrocities that was 2019. So here goes. And there will be no mention of 737MAX. Except tangentially. First, amazingly, a few good things:

1. Persistently cheap financing. This has been on my list for a few years now. The Effective Federal Fund rate was once expected to be 3.6% this year; instead, guidance is now 1.6%. And financiers are still very fond of jetliners. Thanks to cheap cash, there aren’t a lot of other places to seek returns, but for the most part jetliners are a good place to park cash. Unless you screw up and finance A380s or something.

2. Resurgent legacy US fighters. In 1990, there were four legacy US Cold War fighter lines; three are still in great shape (we miss you, F-14). Last year, the F-16 got its biggest order since 2000 (Taiwan). The F-15 was in last year’s USAF budget for the first time since FY 2001, and might stay there for the new decade. The F/A-18E/F got a third MYP contract in March. While post-FY21 Super Hornet funding has been dropped from the FYDP request, that merely means that Congress will have to resume inserting money for them. They’ll probably come through.

3. F-35B. Once dismissed as an overpriced, vaguely Baroque USMC-only luxury, the F-35B suddenly looks golden. Squabbles over random islands (real and artificial) and an emphasis on survivability make the STOVL JSF extremely relevant for Asia. Last year Japan announced plans to buy 42. South Korea said it was looking at a buy, along with its A models. Singapore recently signed for four firm and eight options, and could get up to 60. It certainly fits in with the country’s emphasis on alternate basing – perhaps that casino in the harbor could host a squadron.

4. A321neo. The brilliantly successful default mid-market jet, fast approaching 3,500 orders, or more than three times total 757 output. It’s poetic, or something, that Airbus has just announced that the latest line for this very relevant plane will be on top of the Toulouse burial ground of the too-stupid-to-live A380.

Four good things. Sadly, there are many more bad things from 2019; I’ll keep it to six:

1. Traffic. What the hell happened? We were zipping along for an above-trend decade, with 6.5% year-over-year growth in 2018 continuing through February, but in March growth fell to just 3-4%, with no recovery since (and thanks to this damn coronavirus you’re about to see some really grim numbers). Yet there’s no economic cause behind the March downshift. It isn’t all because of that well-intentioned Swedish girl. Hopefully, the post-coronavirus recovery will provide some kind of growth catalyst. Or not.

2. The China market. China was the epicenter of the traffic drop, falling from 12.2% growth in late 2018 to 5.3% in late 2019. Jetliner imports fell ~50%, and not all of this was the MAX – Airbus deliveries fell around 12% too. This was the first China market decline in…ever. For 20 years, whenever we’ve talked about single aisle production rates, we’ve been discussing China’s growth rates. Now, they’re in decline, perhaps for a few years, and coronavirus won’t help.

3. China-US relations, with aerospace implications. The ripping sound you heard throughout 2019 was the sound of two giant economies starting to decouple. The implications for China as a market, as a producer, and most of all, as a major part of the world jetliner finance industry are enormous. We need to pause and ask ourselves exactly where we are heading with this whole tech/trade war with China. And the increasingly ethno-nationalist Chinese Communist Party needs to do the same. But they won’t. The consequences for the aviation industry will be profound.

4. Boeing new product development prospects. New CEO Dave Calhoun was right to shelve the NMA. But this means that Boeing will finish the decade without creating a clean-sheet new jetliner product, making this only the second decade without a launch in company history. Looking at that middle market, and at the A321neo, it’s very obvious that Boeing needs to do a large single aisle, or some kind of new jet. What does it mean if they don’t?

5. The Twin Aisle Hangover. Pretty much every twin aisle saw a rate reduction warning or announcement last year. That massive 2011-2015 surge left the industry with capacity for years, particularly with the Mideast Superconnectors reaching the limits of growth. And I was right about the A380 being killed by airline route fragmentation, but I didn’t see fragmentation relentlessly pushing average jet size downward. Soon, every transoceanic route will be served by an A321neo XLR or a 787, and nothing bigger. Our twin aisle forecast had been flat; it’s now slightly down. And what was once a 50-50 single aisle-twin aisle market is quickly becoming 65% single aisles (by value).

6. Bombardier’s deconstruction. For thirtysomething years they were the third or fourth biggest prime in my universe; now they’re hanging on by a thread. Last year, the CRJ unit was sold to Mitsubishi, joining the Dash 8Qs on the list of ex-BBD properties; they’ve just added their remaining A220 share to that list as well. As I’m writing this, there’s still the hope that the company will stay in the business as a pure-play business jet OEM, a unique beast. But this will only be possible if they can dump the train unit instead. If they hadn’t done the CSeries, they’d still be a big and healthy aviation player. Yet the A220 looks better than ever. Thanks for the great jet, Canada. We’ll remember your sacrifice.

The last big trend of 2019, neither bad nor good, was Gigantism. Endless mergers are a response to the endless deflationary price pressures in the jetliner biz, along with Wall Street’s relentless emphasis on scale and cost-cutting. The creation of Raytheon Technologies, an aerospace supplier mastodon and the third biggest aero company in the world, was followed by L-3Harris, which created the seventh largest defense prime. Then there was Woodward-Hexcel. That one, by the way, could have been created by picking two names at random out of a hat; it’s hard to see the connection.

Gigantism isn’t necessarily motivated by logic or strategy. Companies just want to get big to survive. But given the year we’ve just had, who isn’t motivated by survival?

Yours, ‘Til Purell Sales Drop Again,
Richard Aboulafia
 

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  ~  Last updated on January 08, 2006