Can Aerospace Shrug Off Trade Wars and the MAX?


The boeing seven three seven max fiasco has dominated headlines as aircraft grounding has affected airlines and production slowdown repsonses supply chain president trump continues to escalate a trade war with china putting u._s. Aerospace exports particularly civil aircraft at potential risk the u._s. government's budget deficit has hit a trillion dollars this year and there are words about a global economic slowdown and yet the aerospace and defense industries so far it has remained surprisingly resilient hitter discuss that are michael bruno aviation week senior business editor and in the moscow our executive editor for defense and space ace michael. Let's start with you because you just wrote an article at painted a radi bullish outlook for the centers for you want to explain yeah <hes> joe and jen good to talk about this. It's it's a very interesting picture to me. Because it seems counter intuitive. There were all of these issues that are iraqi pie in our daily brains the ones you've listed joe everything from the max to trade wars and if you just kind of did a sentiment poll you'd think everyone everyone was thinking the end of the world was near but i read about two analyst reports <hes> over the past several weeks and the analyst reports aren't just this their own musings. They're based on their own interviews with ceos and others from across the industry and it's pretty unanimous. Everybody's still expects growth for this year and next year and his mind boggling that is they've got some really good reason to buy jenn. It's it's hard to argue that the trump administration has not been good for defense spending. What's the environment like now. There's been a budget agreement that takes us to the election in two thousand twenty or are we out of the woods all-clear well. We're better than we might have been a few months ago but we're. I don't think we're out of the woods yet. The there's still a poisonous atmosphere. That's very pervasive in washington. What we have right now is an agreement over the the amount of money that the federal government can spend in twenty twenty an in twenty twenty one. That's a big milestone because it gets us past. Ask the twenty eleven budget control act caps it kind of somewhat settles that issue but still we don't have have any appropriations bills that have been passed yet into law so until that happens. There's always the dark potential attention cloud of a government shutdown of a continuing resolution of more fights to come but in the meantime time until any of those doomsday scenarios actually emerged defense is one of the leading reasons why people are expecting growth for not just this year it next year the budget agreement what it's done is it's provided certainty in what the business sector wants more than anything else is certainty the direction of where business going then they can plan and they can make their investments and changes and cuts or whatever they need to do in order to keep rewarding shareholders percents fake holders and the budget agreement provides the certainty not just for two years. It's a two year budget agreement yes but federal outlays which is the money that actually <unk> gets written by the treasury department that goes to contractors and other people federal outlays tend to lag budget authority by in two years so if you've got a budget agreement that sees you through fiscal twenty twenty one that means you pretty much with the federal outlays are going to be going all the way through twenty twenty three four years from now and i mean you think we're going to have a presidential election. You very well could have a u._s. Recession as well as a world recession recession between now and then and yet the defense sector has got really good clarity into what looks like italy's a modicum of growth over the next two to four years pointing out lawmakers have have agreed on how much money to spend basically. They said we'll just borrow it. All grandkids is pay for it someday but they haven't agreed exactly how to spend it right. I mean the president's already shifted some money from defense to pay for the wall aw that he wants to build a mexico so are are the do you see any potential fights brewing or even none of the government shutdown over how to spend all this money yes i do. That's the short answer. I need. You mentioned the border wall. There is an lingering disagreement with with the trump administration's tactics and making that happen <hes> their their propensity to what is called called reprogram money or transferred between accounts without consulting with congress. Were asking for congress after they've decided to do something lawmakers. I really don't like that so at the same time there's pressure for politicians to come to an agreement because we are getting into an election year so so there is some pressure for them to make a deal to make this so it can go either way and then looking to next year a lot does depend on the <music> outcome of the election and that is really a wild card we don't know but the presidency may be in play the control of the senate and house a lot of that will determine the future puts and takes underneath that top line which programs get funded in which don't although you know within the defense budget you can pretty much say that there will be support for certain areas like hypersonic hypersonic missile defense those kinds of programs. I'd say probably have a strong cancer getting funded regardless of the changing political winds. There's one big dad. Jensen jen and i are both a former congressional reporter recovering congressional reporters and there's an old saying tale about how nothing's agreed to until everything it is agreed to so whether it's a wall or some other unrelated topic something could emerge that pops up and holds up defense in at the end and everybody in washington knows that's a reality. It's a fact of life that won't change. Speaking of something. Emerging blew the commercial side the industry large large jets commercial jets has not seen a downturn since two thousand three. It's even led some people to predict. The industry is now recession proof <hes> what what could come out of the blue that could sort of handicap commercial aerospace or even send a new downturn. Oh wow well. How much time do we have on his podcast. Because the you know the the mind wanders with possibilities and the thing about you know we could list several roll things and one of them is the trade war goes south overnight between china and the u._s. I think that's on the top list arrive on most people's tops of their lists and the reason is is because the chinese market represents about a quarter of the commercial aircraft craft backlog at the two major o._e._m. Owing an airbus and if suddenly that is used as a weapon in an economic war that you don't just replace a quarter in fact there's no one else you gotta start finding martians or somebody on another planet. Who's going to buy some of these aircraft because there's nobody else in the world. Who's who's going to step in and buy the equivalent of what china is expected to buy and so that's a big one. You've got other things however there used to me this rule before we got into this endless cycle that you referred to you know this greatest expansion since two thousand three the old rule in commercial aircraft or craft used to be g._d._p. Was a precursor to air traffic to air passenger traffic volume and when g._d._p. He's fell around the world. You would see within about six to eighteen months lag in air passenger traffic and air passenger traffic is what what would drive orders and so there was a natural succession and if one started falling it was just a matter of time until the next point. A lot of people say things are different now. Look for for all kinds of reasons. They look at other indicators beyond just national g._d._p. Around the world but we haven't tested this yet <hes> <hes> it remains to be seen whether we get another recession whether smaller great whether that's actually true and then there's all kinds of small things that could pop up you could see a major cyber security flaw emerge overnight that could perhaps down the supply chain. Maybe not take it down and whole all but if everybody's getting more and more digital in their operations and suddenly you find there's a flaw. You're not just going to develop new plants overnight and bring in thousands of workers who are going to make things the old fashioned way without computers. That just isn't going to happen so i mean there's all kinds of scenarios that could doom things but i'd say at at the end of the day people are worried about china yeah yeah when you talk about things coming out of the blue i mean the the max grounding certainly came on the bill what he saw that the the only thing that's limited is not that many max have been delivered yet right right and had this happened in three years airlines like southwest might all of a sudden have to avid aircraft it could be disastrous for the industry also it's a max remains a hit. It remains a bit of a theory and hear me out for a moment. It's it's a bit of a theory based on an unproven assumption and what i mean by that is the max is all about meeting the growth in air passenger traffic. That's that's expected over the next several years that is based on middle classes continuing to grow well that theory about middle classes growing and continuing to use discretionary spending to buy commercial airline tickets to travel around the world has yet to be tested by. I am major recession so we are thinking that maxwell continue to go on next year and the year after that boeing and airbus are going to sell major numbers of venero bodies and even a few wi- bodies and everybody's still gonna make a lot of money in the end but this is all the first time any of this has been tested jeb. We're gonna wake you up. Stop talking a model. It's commercials what about defense and you talked about. It depends on the election but hasn't defense spending it also always been driven by the threat yes and no i mean it is driven by the threat but what we've seen really since two thousand thousand one since the nine one one terrorist attacks is is generally record high levels of defense spending so even when you had a downturn in the the obama years and they reigned in defense spending a little bit it wasn't <hes> wasn't pure downturn and so so that's been kinda turned on its head mainly because the threat level has been high regardless of where you go in the world if you're fighting terrorism in the middle east now now you know the national defense strategy is more geared toward near peer competitors like china and russia so <hes> so yes that is true but in a in an era where there are threats everywhere you have to be able to adjust the budget otherwise <hes> someday hey you deficits and debt might catch up with you as a nation okay. It is is pretty scary world out there. I mean your team writes. All the time about china's and russia's carr's efforts in hyper sonics about the vulnerability do a space pearl harbor u._s. Space assets are attacked wiped out a lot of a lot of meat certainly defense a lot of neat yeah i. I think there's one other thing and that's interesting about this gentleman. It could be worth explaining for a moment about how despite despite whatever growth the defense budget is gonna have they still clamor for more and they say they need it because they've got growth needs that petr beyond just inflationary adjustments so they need what three percent a year over inflation just to stay to maintain their operations as they are so one reason. They're always screaming as they're never getting real growth. They're only getting inflationary growth so that's right i. I still think we're on course for a reckoning. I mean if you look at the national debt. It's it's a short matter of time before. We're spending more money on interest interest on the national debt than we are in defense. If interest rates tick up. That's a huge problem. Too is in your spending a lot more so you're either going to raise taxes which congress hasn't done in years or or you've got to find the money somewhere and if you have a u._s. Recession you wound up. You wind up in almost every the u._s. Recession having the government increased benefits to the population to support them through the recession and so that's more money going out the door yet another pressure on the budget the trade war with china are they gonna help out there. You go so michael with you or the question. Things are feeling. I'm pretty good right now. But is it nineteen twenty eight for this industry rian nine hundred twenty eight where everything was roaring before the stock market collapsed in the great depression. Ah yeah you know if i can answer that question. I wouldn't be here. I'd be on wall street playing some big numbers and making even bigger numbers <hes> and that's the problem. Is you know not too fancy too much philosophy talk here but there's there's always been this this known unknown. We know that the good times can't go on forever and you know that things happen and changes come and can the question is when does it happen and nobody right. Now says they really think they see it happening in the next six to eighteen months but just about all of these same people say kind of happen so now the now the best guesses are sometime in the early twenty twenty s. You're going to see a real significant hip dip in commercial aircraft orders and you may even see a rise in the cancellation of commercial aircraft orders so that that would be the testing ground but for the next eighteen months things are looking at were end on that positive upbeat prediction hold you to it. Michael comeback fared in a few

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