Dear Fellow Idea Consolidators,
As they say, if you think you’re the smartest person in the room, you may be in the wrong room. After my second year at AeroDynamic, I’ve concluded that I’m clearly in the right room. Thus, I proudly present my second annual teamsourced list of this year’s A&D industry winners and losers (last year’s list is here). Winners first:
1. India. As China ramps down as a market and as an industry partner, is India emerging as a serious alternative? Jonas Murby and Martha Neubauer vote yes. Martha opines, “Air India and Indigo placed orders for a combined 970 aircraft this year. Airbus and Boeing are ‘returning the favor’ with Airbus signing an agreement with HAL to help establish an A320 MRO facility in Nashik and Boeing announcing a $100M infrastructure and pilot training investment in India.” Jonas adds, “India also is a global center for aerospace engineering and has an increasingly capable base of indigenous suppliers well regarded for quality and delivery.”
2. The Workforce. Same as last year. Glenn McDonald comments, “Pilot wages have increased sharply over the last few years. While painful in the short term, these increases are necessary to rekindle interest in a career that has recently fallen out of favor. Also, Spirit AeroSystem’s new labor contract and the wage increases at many Tier 1s and smaller suppliers are a harbinger of a similar reset with manufacturing. The disparity between higher wages at relatively unskilled services jobs (i.e. Amazon warehouses) and aerospace manufacturing was unstainable. Again, these changes are painful in the short term, but are necessary for an industry that has been falling behind the curve on wages for a decade.”
Agreeing with Glenn, Mike Stengel notes, “Labor leverage is likely to continue, with Boeing IAM 751 negotiations coming up in 2024.” Jonas adds that “huge career potentials await as retirement wave will continue.” Slight dissent from Alex Strehlow: “I’ve spoken to people affected by hiring freezes at Boeing and Blue Origin. There’s still plenty of opportunities, but spread somewhat unevenly.” Alex also points out that with ATC, “it seems there isn’t a concrete resolution in sight for the workers.”
3. SpaceX. Also a winner last year. Highlights, from Max Weber: “In 2022 they accounted for 34% of successful launches globally; today it’s around 45%….Elon Musk claims that they account for 80% of the mass to reach orbit, and while he says a lot of nonsense, this is probably close. That means 80% of everything launched to orbit in 2023 was on a Falcon.” Max also points to successful booster re-use, and to Starlink: “There are currently over 5,000 Starlink satellites in orbit, and 2,000 were launched in the last year.” Lastly, Max notes that SpaceX recently hit a $180 Billion valuation.
4. Next-Generation conventional engines: Andreana Izotov makes a smart case: “This year the industry came to a consensus that even with the most optimistic technology roadmaps no alternative propulsion will be viable to power large jetliners until the late 2040s, at the earliest. Since we can’t rely on battery or hydrogen engines for the next jet generation, CFM’s RISE looks like a winner.”
5. Business Aviation…mostly. Kevin Michaels points out that fractional and charter users and operators have held up quite well, with 2023 seeing some impressive orders too. In September, NetJets signed an order for up to 1,500 Citations over 15 years. Mike cautions that “utilization and used-jet availability patterns are showing signs of normalization.”
6. Aftermarket parts. Mike comments, “OEMs continue to maintain strong pricing power on aftermarket material due to inflationary environment, coupled with low used material availability and higher inventory levels as customers move from a ‘just-in-time’ to a ‘just-in-case’ mindset.”
Next, three things that saw very mixed fortunes in 2023:
1. Sustainability and SAF. My colleagues went back and forth on this. Andreana comments, “As the industry gets more literate in sustainability terminology and hones in their BS detectors on ‘green’ practices, the era of broad greenwashing is hopefully coming to an end. Aviation is still rife with overexaggerated claims about their ‘sustainable practices’ like airlines touting their deep commitment to purchasing SAF, while only paying for it out of the marketing budget.” Klaus Mueller agrees, citing the eclipse of “aerospace’s ambition to become net-zero, and to be the clean, high-tech, attractive industry which catches every top-engineer from university.” Alex again dissents, “Among my peers, sustainability has been a very common theme for projects and a large motivator for my generation of students.”
Re SAF, Klaus pours cold biofuel: “Reality bites – every gallon needs to be produced first.” But Martha cites new government incentives: “In Europe, the EU officially adopted the RefuelEU SAF mandates that will ramp up from 2% in 2025 to 70% in 2050. In the US, the IRA SAF credit of $1.25/gal began on January 1, 2023. Both these initiatives helped de-risk SAF facility investments.”
2. Embraer. Klaus makes the point that the company’s decision to not launch the E-3, or indeed anything new, and that its sales of E-Jets have stayed rather sluggish, all mean that it has “no ambition to lead the segment.” But the company’s share price did great last year.
3. Air cargo. Mike comments: “The segment was one of the most resilient during the pandemic, but spent 2023 with demand levels well under 2019 levels as ocean freight normalized, bottlenecks eased, and growth in e-commerce stagnated. Those who thought the COVID-era dynamics would perpetually continue are learning a hard lesson. On a positive note, air cargo demand is rebounding and is nearly back to 2019 levels by the end of 2023, possibly benefitting from new shipping restrictions in the Red Sea and Panama Canal.”
Finally, one clear loser in 2023: P&W’s Geared Turbofan. Glenn, Jonas, Mike, and Klaus all voted on this unwelcome development. Glenn summarizes: “The GTF has had continual and escalating quality issues culminating in a serious raw material quality escape that will result in a $6B+ charge for RTX and P&W’s equity partners. Also, the engine is still losing money on a recurring basis (the LEAP will soon be at breakeven or better on the OE side). A GTF retrospective may even show that with development costs, OE losses, warranty issues, and maintenance costs higher than expected, the entire business case may have been marginal. In the long term, will RTX be willing to invest in the new generation of gas turbines we think the industry will need in the 2030s? I wouldn’t be surprised if we look back in 20 years and see that the GTF was the domino that forces an RTX sale (of Pratt) and further consolidation among the engine OEMs.”
Since this letter ends on December 31, 2023, it includes no reference whatsoever to the US’s troubled national jetliner champion. But that company might just feature prominently in next year’s list. Until then, my best for a more peaceful, saner 2024.
Yours, Until I Find Myself In A Room Too Smart For Me To Comprehend Or To Exit,
Richard Aboulafia