Dear Readers,
The past six weeks have seen more changes to the world and to our industry than since the Cold War ended. For the US, Vago Muradian might have put it best: it’s a Superpower Suicide. This includes three big macro changes impacting aviation and defense:
1. The US is exiting the Western democratic alliance. The Trump administration has indicated that the US will abandon its Western allies. Worse, it is cravenly threatening Denmark and Canada (and Panama, and probably others, soon) for no good reasons whatsoever. It may also betray Ukraine, and align the US with Vladimir Putin‘s Russia, while spouting Kremlin-provided lies. There’s a strong chance that this will be followed by a decision to abandon Taiwan and US allies in the western Pacific, with a US accommodation with Xi’s China (good CSIS analysis here). Europe may get its act together and save Ukraine against Trump/Putin, but if Trump and Xi get together nobody’s coming to save Taiwan.
Industry impact: Now that the US has shown that it can pivot from friend to enemy in no time, why would anyone buy its weapons? Understandably, there are now valid questions about a Kill Switch. There will be some purely transactional customers in the Mideast, but Europe, Canada, and the UK, will increasingly go their own way, probably followed by many Pacific allies (and soon-to-be former allies). Nuclear weapons will proliferate along with weapons systems devoid of US content.
Also, what would a US-Western decoupling look like for an aerospace industry that’s tightly integrated across the Atlantic and with Canada? The most successful joint venture in history, the CFM engine consortium, happened because the US and France were on the same side during the Cold War. What if they’re no longer on the same side?
The F-35 is in a class by itself in terms of impact. A product of the goodwill and trust built up between the US and its allies since World War 2, the F-35 is about to go from the biggest weapon program in history to something much smaller, as that goodwill disappears. Denmark, tragically, is stuck with its F-35 fleet, but Portugal is canceling plans, probably followed by Canada. Who’s next? Germany? Poland? Per below, the F-35 will be under siege at home, too.
Upside: Potentially great for many non-US players. European defense companies will win big, particularly ones with large space and ISR portfolios. French industry is a particularly big winner. As I’ve noted it’s vertically integrated and largely free of US content, so it’s the only full-service alternative to the US defense ecosystem. As Europe develops its own nuclear force without US reliance France is really the only game in town – it’s the EU’s only nuclear power and its nuclear capabilities are the best the Western alliance now has. Eurofighter and Rafale will do great, followed by GCAP and FCAS. Also, China wins big, particularly with the abandonment of US global hard and soft power (solid analysis here), which will strongly boost COMAC when it goes global (and, Unlike Boeing, they’ll be able to import things without paying a very heavy tax).
2. US defense priorities, and the US defense industry, are being hit by volatility, or worse. Stated plans call for drastic changes, with an 8% cut for each service with cash to be diverted to missile defense, nukes, certain ships, and whatever the new and inexperienced (but very investable) defense tech companies offer. Congress shows no signs of standing up to Trump. A weak Defense Secretary has no power or ability to advocate for services or programs. The replacement or elimination of qualified military officers will hurt too, along with the elimination of analysis capabilities (goodbye Office of Net Assessment). The same dunderheaded thinking that got rid of Boeing’s strategy department has now infected DoD.
Industry impact: Anything for expeditionary warfare or alliance warfighting is extremely vulnerable. Expect serious cuts to tactical aircraft, rotorcraft, ground vehicles, and anything that isn’t nuclear-related, or missile defense, or built by a new defense/tech company. The V-280 is at very high risk of cancellation as is NGAD. Elon Musk’s hatred for the F-35 won’t help its case but the program’s deep Red State roots will likely prevent outright cancelation. Since government oversight is being gutted along with transparency and legal institutions (getting rid of inspectors general, etc.), waste, fraud, and abuse will increase, as will contractor profits. If the US abandons its allies and makes friends with former enemies, defense spending will fall heavily. This will also help pay for big tax cuts.
Upside: The new defense/tech contractors, with their investment firepower and vertically integrated production models and fast development tools, might be what the industry needs. That Golden Dome, however, is merely a massive resource sink.
3. The economy is getting hit hard, and in serious danger. All of the administration’s initiatives so far create the perfect conditions for a self-inflicted recession (perfect summary here). The S&P 500 has somehow lost $5 trillion over the last three weeks. Layoffs are up, consumer confidence is down, and preliminary GDP numbers are terrible. Worse, tariffs (real and threatened) and economic uncertainty increase the likelihood of longer-term stagflation and general malaise. A planned government cryptocurrency purchase scheme will create a nasty investment bubble which will one day burst.
Industry impact: Airline guidance is falling and will likely fall faster. So will corporate profits, impacting business jet demand. Higher inflation and interest rates, and tariffs and retaliatory tariffs, will all weigh against US industry competitiveness (great tariffs overview here). Inflation, higher interest rates, tariffs, and retaliatory tariffs will also clobber an already fragile industry supply chain. In the longer run slashed scientific and research funding will also hurt the industry.
Upside: Fuel prices may come down if the US relaxes sanctions against Russia. Concerns about titanium supplies and prices will diminish if cheaper Russian milled product comes back online (the prospect of this could explain western producers’ reluctance to invest in additional capacity). The industry will benefit from lower labor costs, which are the only costs that really come down under stagflation, although serious education and research funding cuts will impact the talent pipeline.
I hope some or all of this is wrong. But if I’m right there will be dire consequences for the aviation and defense industry.
Yours, ‘Til Better Times,
Richard Aboulafia