Dear Fellow Multiple Industry Cycle Survivors,
Reviews of the month of May are in, and they ain’t great. “We’ve gone down the dark timeline,” was one. “Like microdosing hell,” was another. But good news: despite how nightmarish it all seems, and despite the likelihood of further conflict, inflation and economic damage, I think our industry will be fine. Permit me to explain.
The US war with Iran continues, with Iran determined to outlast the US. It has little to lose by doing so. The closure of the Straits of Hormuz impairs 10-15% of the world’s oil supply. The Trump administration could back down, bribing the Iranians with billions in frozen assets in exchange for a ceasefire and a Hormuz reopening, but that would bring the ire of Republican Iran hawks and Israel, and be contrary to Trump’s self-image. The Trump administration can’t re-start a full-scale war, since it would risk more damage to the Gulf states – aside from their growing disenchantment with the US, they’re big investors in Trump Inc. And neither escalation nor backing down would be good for Trump’s people in the midterms.
So, TACO (Trump Always Chickens Out) is vying with NACHO (Not A Chance Hormuz Opens). AeroDynamic Advisory is largely in the NACHO camp, although some ships (around 10-15% of normal traffic) are getting through, with help from the US Navy. We project 2026 RPKs will decline 1.5% from 2025, compared with our pre-war 5% growth view. High fuel costs, higher inflation, and reduced consumer buying power aren’t good for travel, although the relative strength of the US economy, coupled with a more secure fuel supply, means US travel demand will likely stay in better shape. In early June, IATA downshifted to 2.1% growth this year, but with warnings of worse outcomes in that NACHO scenario.
Avitas aviation guru Adam Pilarski and I discussed the situation over lunch. “There must be some way out of here,” I said. “Apparently not,” he kindly spoke. But he also pointed out that the airlines have learned to make money despite traffic declines. Ongoing economic bifurcation was good for premium and higher-fare passengers, and airlines were doing well by focusing on them. Airlines that didn’t wind up like Spirit. “We’re going back to the way things used to be,” he said. “And it didn’t take Greta Thunberg to get us there.”
While low-cost carriers are in varying degrees of trouble (as are the three Gulf Superconnectors, but they’re insulated by government support), I agree with Adam that most airlines should be fine. I’d even add that inflation is a great pretext for any industry to regain pricing power after years of yield declines.
Then there’s jetliner demand. I feel even better about this. We’ve been supply constrained for the past 3-4 years, and airlines are losing patience waiting for their jets. This undersupply problem is worsened by the war. When demand slackens and fuel is expensive, airlines have a time-honored playbook: they get rid of older, thirstier jets, and keep taking newer, more efficient ones (downsizing jets helps too). This playbook explains why jetliners were the only major industry in the world to see accelerated growth during after the 2008 Great Recession. I might not want to be in the CRJ/A340/767 overhaul business right now, but total MRO demand is doing fine and was even in danger of overheating anyway.
So, new A320neos and 737MAXs can’t arrive fast enough. I’d also expect this war to get the industry re-focused on Next Generation Single Aisle (NGSA) jets and related new technologies. It’s one thing to dawdle along with increasingly deferred plans when fuel is stuck around $60-70/bbl; $100 and beyond, like the sight of the gallows, focuses the mind. In fact, the current generation – A320neo, 737MAX, CSeries/A220 – were all launched just after the shock of 2008’s record high fuel prices.
Our -1.5% traffic scenario calls for the current situation – limited hostilities, very limited Hormuz traffic, higher prices, supply/demand readjustments, etc. – to keep going. But there are many other possibilities. A ceasefire (of unknown duration) and Hormuz reopening would greatly increase oil flows – looking at futures prices, markets are clearly expecting this outcome. But another sustained round of air/missile/drone strikes would mean a worse economic and air travel outlook.
Speaking of kinetic outcomes, there’s defense. A greatly empowered Iran (the likely outcome no matter what scenario unfolds) will boost regional defense spending and weapons imports (if not necessarily from US suppliers). Meanwhile, as the US increasingly abandons its allies in the Western Pacific (along with Europe), defense spending will keep rising there, too (again, not necessarily from US suppliers; notably, the Global Combat Air Programme is the first time Japan has worked on a fighter with non-US partners).
Ironically, one reason for the US’s Pacific abandonment is that the US’s massive expenditure of missiles and munitions in the war with Iran has given China more leverage with rare earths – weapons inventories are now in much greater need of replenishment. The US now has a very weak hand to play with China, which was on full display in Trump’s visit there a few weeks ago.
So, here we are. The world economy is teetering. The US’s strategic position has been very badly weakened. But between rising defense demand, and a strong jetliner market, our industry is in great shape and poised to stay there. It’s a light path in the dark timeline.
And speaking of the frayed Western alliance, I’m spending the week in Berlin, at ILA. I’m looking forward to hearing different perspectives on fuel, air travel demand, and weapons production ramps. And getting an earful in general.
Yours, ‘Til We Run Out Of Mexican Restaurant Menu Item Acronyms,
Richard Aboulafia