December 2022 Letter

Dear Fellow Colleague Thought Leveragers,

Okay, THAT was an interesting year. Summarizing it in one of my two-page year-end letters seems impossible. Thankfully, for 12 months, I’ve been part of a great team at AeroDynamic Advisory. These smart people have created the best list of the A&D industry’s biggest winners and losers. First, Teamsourced Winners, which I’ve taken the liberty of ranking:

1. Defense primes, etc. Where to begin? Mike Cisek cites a completely new budget environment, with unprecedented demand for export platforms, particularly the F-35. He also cites NATO as a big winner too, after years of Putin toadies questioning its existence. Glenn McDonald notes that missiles and munitions makers have it particularly great. True, if sad.

2. Pilots and labor. “The power dynamic has shifted greatly between pilots and airlines over the last 30 years, and pilots’ leverage has surged,” notes Martha Neubauer. Klaus Mueller adds, “The A&D workforce is gaining 10-15% better salaries thanks to Post COVID labor shortages. And, industry management now needs to care for workers at all levels – labor is not only a number and a cost burden anymore. Loyalty and day-to-day treatment, benefits and workplace attractiveness can be key levers for aerospace companies’ success.”

3. The Aftermarket. Not all of it, but Mike Stengel points out that the narrowbody aftermarket is extremely strong, a function of fast RPK growth (outside of China) and disappointing new deliveries. The engine aftermarket is great too, with greentime availability thinning and shop visits resuming. He also points to growing OEM aftermarket pricing power.

4. Bell/Textron. Kevin Michaels notes that the V-280 is an impressive win by itself, but it also saves Bell, since most of its other military programs are ramping down, fast. I’d add that the FLRAA victory is also good for Textron, one of the last horizontal conglomerates standing, with UTX and GE now restructured or restructuring. It’s now harder for activist investors, or anyone, to demand a break-up.

5. Bombardier. Kevin points out that in 2022 they reduced long-term debt by $900 million and grew their backlog to $15 billion. Aftermarket revenue is growing steadily, to a targeted $2 billion by 2025. They’ve also created a promising US military unit. The first pure-play publicly-traded business jet prime has been proving that it can indeed go it alone, for now.

6. SpaceX. Elon Musk’s oafish Twitter mismanagement is clobbering Tesla, but not SpaceX. Glenn points out that SpaceX dominates the launch market more than ever, and Starlink is disrupting the telecoms market too.

And now, 2022’s Teamsourced Losers:

1. Russia. Aside from the political and social catastrophe or Russia, Klaus understatedly points out that 2022 was a bad year for Russia as an arms exporter and as an aerospace nation of any kind. “It will also be a bad decade, and perhaps a bad forever,” he adds.

2. China. It turns out that repression and incompetence don’t work so great for governments. Jonas Murby points out that PRC aviation has been stuck in Zero-COVID hell; a likely Covid resurgence will further delay its recovery. He also notes that despite the C919’s arrival, China’s dependence on western technology for their delayed aircraft is more glaringly obvious than ever. I’d add that Russia’s Ukraine war lessons aren’t encouraging for the PLA.

3. Boeing engineers. Martha, a former Boeing engineer, points out, “How depressing to work for a company that just said they’re not going to do a new commercial jet for a decade.” Well said. CEO Dave Calhoun’s demotivational management style might not be working.

4. Boeing Defense. As Mike C. points out, the bleeding just doesn’t seem to stop, with another $2.8 billion in losses in the third quarter alone. Every other defense contractor is rolling in cash. Big leadership and organizational changes look useful, but the serious problems are with program contracts and the bigger company culture issue.

5. eVTOLs and other startups. Glenn points to lower valuations, slipping timelines, and even more market skepticism. Jonas adds that entrepreneurs now face higher debt costs, and investors now have even shorter planning horizons. Lilium may be the next casualty.

6. Boom. Taha Siddiqui notes that Boom’s recent haphazard, Hail Mary engine deal made them look even less likely to succeed. As Lincoln said about fools, It’s better to be silent and thought to be engine-less than to open one’s mouth and remove all doubt.

7. Co-axial compound rotorcraft. It isn’t just SB>1’s FLRAA loss. As Andreana Izotov points out, after decades of trying there aren’t a lot of other opportunities to develop and build Co-ax designs – FARA looks like a total pipedream for many reasons.

Finally, stuff that’s in the middle:

1. Cargo conversions. They’re hitting record levels, points out Mike S. But he also points out that demand is slackening, and he’s putting the market on bubble alert.

2. Rolls-Royce. Kevin points out that the Indianapolis unit (Allison to history fans) had an incredible year, with the B-52 re-engining and V-280 wins. But back at home, Derby is still hostage to twin aisles, the only remaining depressed industry segment. I’ll weigh in on net winner: they’re not bankrupt. In 2020, the ghosts of 1971 haunted Rolls.

3. SAF and the Environment. Martha, an optimist Midwesterner, says, “We’ve seen a huge shift in focus this year from short-term COVID-recovery to long-term strategic planning and how to address our industry’s emissions problems.” Klaus, a realist North German, points out that despite all the attention, there’s been little investment in large-scale SAF production.

That’s 2022. Let’s all hope for a happier, more peaceful 2023. My best to all for the holidays.

Yours, Until We Get a Year With Nothing But Winners,

Richard Aboulafia