Dear Fellow Horizon Gazers,
This month’s letter has a straightforward and simple goal: to predict the future. The extraordinary events of the past few months are creating a different world, impacting our industry profoundly. After a steady diet of reading every article, briefing, and tea leaf out there, I’ll go country/region by country/region, with a quick look at implications for aerospace.
1. Russia. In ten years, likely even more of a corrupt fascist hellhole, with sealed borders and a miserable economy. If Putin goes, the likely replacement is a militaristic nationalist. The only upsides are likely re-integration into the world energy and finance sectors when the Ukraine war winds down. Also, Russia will keep selling raw materials to the world. That’s all it has. Oh, and investors and financiers will avoid the country like a radioactive pit.
Military aero implications: Devastating, for many reasons: Russian military products have a serious image problem, not just because of bad performance. India this month shelved a Ka-31 helicopter contract, due to doubts about execution, supply chain, and payments. And it turns out Russian defense contracting is even more corrupt than feared. Civil aero implications: Same. Russia’s efforts to create purely local jetliners are doomed (the Westernized MS-21 and Superjet are now dead, of course), again due to corruption, and a heavy dependence on the West for key technologies, like semiconductors. Russia’s jetliner market, already miserable, will find it hard to buy jets since nothing will be financeable – sales will be 100% cash only, even after sanctions.
2. China. The biggest wild card. Some opine that China will be strengthened by the Ukraine war. I don’t get that. It turns out that the PRC’s best friend in the world is a psychotic failure. That can’t feel good. Nor can the West’s resurgent unity. China won’t abandon Russia, but it won’t help it in any way that jeopardizes trade relations with the West. But President Xi seems to have concluded that autarky, repression, quashing private enterprise, and global belligerence are all good things. The Communist Party National Congress later this year will likely cement Xi’s grip. Some opine that the PRC COVID lockdowns are an assertion of state control rather than a sound public health measure; that sounds about right. As with Russia, China will face a big brain drain problem as talented people emigrate.
Military aero implications: Good, for domestic and export markets. But China’s ability to take advantage of Russia’s weakness by selling higher-end defense equipment is constrained since few countries are foolish enough to want a strategic relationship with China (as I’ve written). As I’ve also written, hopes for a Russia-China aero alliance are futile too.
Civil aero implications: Good and bad…mostly bad. Xi and Co. want a more statist economy, so the serious air travel growth downshift we saw before the pandemic will continue. Goodbye to the world’s biggest and fastest jetliner export market. Meanwhile, the PRC will continue to increase local content on their superficially Chinese jetliners, largely to make them sanctions-proof. If you’re a Western supplier on a Chinese jet, you won’t be on that jet in 4-10 years. Financing jets won’t be a problem, but capital outflows from China are a macro concern. The AVIC companies are about the only defense companies in the world, other than Boeing, to see stock price declines this year.
3. The US. Looking good, except for political instability. The only true full-service superpower, in economic size, diplomacy, and hard power. But if the America First crowd returns, the Western alliance, and indeed the future of the Free World, are at risk.
Military aero: Great times ahead, as the Arsenal of Democracy. Strong domestic budgets, and exports. A growing lead in volume and in technology. Civil aero: The market looks good, but the industry’s future is greatly complicated, or imperiled, by Boeing’s top management. Unlike with Russia, regime change at Boeing could be very helpful.
4. Europe. Looking good. NATO and Europe are more united than any time since the Cold War. Finland and Sweden joining NATO is great news. Post-Brexit UK still has a strong European role. France will likely keep rejecting Putin’s candidates. Hungary’s Orban and Turkey’s Erdogan are the only dark spots, but hopefully they’ll be kept marginalized.
Military aero: Excellent. There’s a crazypants basket case just to the east. All they can do is weapon-up (and stick together). That benefits a defense industry with relatively limited bandwidth – the big question is how much of the increased weapons budgets will come with national production requirements, and how much will go to direct imports, like Germany’s announced F-35 and CH-47 buys. Civil aero: Continued strong market. On the production side, Airbus will likely have 70% (or even 75%) of the jetliner market in a few years, with European (and US) suppliers benefiting. Across the board, Europe is a big aero winner.
5. India. Uncertain. Moving toward the US and the West, but unable to quit Russia. Rising authoritarianism means unwelcome political risk. And having Russia as its top arms supplier is a bit like getting all your communications and home entertainment kit from Radio Shack.
Military aero: More money for domestic weapons, but no evidence that HAL can deliver. The Indian military will be saddled for years with a mix of semi-sustainable Russian equipment, some dubious home-grown stuff, and smaller quantities of vastly better imported weapons. Civil aero: Still a growth market. Still nowhere as a civil producer, but if they favor the private sector over HAL then India could grow its structures and MRO business.
6. The World, overall. The next ten years will see slower economic growth and slower trade growth. Financing will get more expensive. Defense budgets, will grow, there will be a greater risk of major and minor conflicts. Climate change, high energy costs, resource wars, scary emerging technologies, and general dystopianism are likely to worsen, too.
Military aero: It’s a great time to be in defense. For investors, defense is defensive. Civil aero: For air travel demand, slower economic growth isn’t good. Higher trade barriers aren’t good. Tighter financing isn’t good. Expensive fuel and increasing environmental concerns aren’t good. Isolated aero ecosystems like the ones Russia and China want aren’t good. Expect slower commercial growth than over the past few decades, although business jet demand will likely stay strong. And most departure scenarios I can think of are good for defense, bad for civil.
Ray Bradbury said, “I don’t predict the future. I prevent it.” There’s a lot I wish I could prevent.
Yours, ‘til McDonald’s Reopens In Moscow, Richard Aboulafia