TARIFFS and AVIATION TRADE: What will happen?

On April 2^nd, the U.S. president announced a “Liberation Day” of punitive tariffs on most imports into the United States. Financial markets have gyrated, some of the more extreme positions have been walked back but many of the provisions have remained. We’ve taken some time to digest what all this might mean. We outline our thoughts below.

Generally, in the near term, we think some sort of normalcy to the previous regime will prevail, i.e. aviation trade will continue to remain free of tariffs as before. However, we expect a lot of uncertainty while things get worked out. We expect this will result in two things. One, production will not decrease this year, although it might not push up as much as was earlier expected. Second, some aircraft deliveries will be delayed through the end of the year that will be pushed into next year.

The subsidiary to One above is that OEMs will shoulder a lot of tariff expense in the short term; they may be able to mitigate it to a certain extent but will find it hard to pass on completely. Boeing, RTX and GE are already penciling in cuts to their bottom line as a result.

That’s the short term. Over the longer term, separate from the tariff issue, we think there’s a real danger in the now known antipathy of the current administration to our Canadian and European allies, not to mention the rest of the world. Our concern here at Teal is that not only is the U.S. brand is being severely damaged, but Boeing’s is being taken along with it, doubly so as Boeing was facing headwinds from previous missteps anyway. This has led us to take a second look at Boeing’s longer-term market position. Even if there isn’t an overt driver slowing down U.S. exports, such as tariff walls, there is a palpable sense of increasing reputational damage of doing business with U.S. companies. While the U.S. is a good source of its own commercial aircraft demand, it isn’t the only one considering that three-quarters of the world GDP resides outside its borders plus a lot of it is growing faster than the U.S. If the world got carved up for Boeing to be exclusive US and Airbus the rest of the world, well, Boeing will be delivering a good deal fewer aircraft.

As a way of illustrating what it all means, we decided to model it out. As a starting point, we do not believe the current political turmoil will materially affect our forecast for aircraft demand over our 10-year forecast time span. We do think, however, that it affects the competitive dynamics. Taking into account the realities of production constraints, our analysis suggests that Boeing could lose $68 billion (2025 dollars) in sales over the next 10 years over what we were forecasting at the beginning of this year. On the flip side, Airbus will gain more than the same amount while we also expect a slice to go to COMAC. For those keeping score, this brings down Boeing’s share of unit deliveries from 41% to 37% over our 10-year forecast period and the dollar share dropping from 45% to 40%. Subscribers will be able to access the details when we post our updated forecasts in May.

Yes, Boeing has a huge backlog, but it also has vulnerabilities. A lot of those orders have been subject to lengthy delays which would give airlines a pretext to cancel. Airlines are also starting to feel uneasy about their future prospects which may cause a few to defer. An economic slowdown could also mean bankruptcies and resultant cancellations. We’re also seeing a general reluctance by European, Canadian and Chinese (plus Hong Kong) carriers to purchase US made aircraft, making it harder to replace any cancelled or deferred production. Another drag on sales is the inferior appeal of the MAX product line compared to the A320 family, specifically the A321neo and XLR.

For its part, Airbus is in a great position to invest in its production capability and ramp up production. We wouldn’t be surprised to see an A320 family production line opened in India, and/or additional lines at their existing sites from what are being currently considered. We also think these dynamics give more incentive to Airbus to launch the A220-500, which could help address part of the production needs for the 150-seat segment that the MAX 8 currently inhabits. Supply chains will need time to catch up, which will probably slow the ramp up somewhat. In the meantime, airlines can keep flying their older planes for a while longer.

It could be worse for Boeing, as Airbus is constrained by its even larger backlog and limitations to how quickly it can ramp up production capacity. By our reckoning, Boeing’s ace card will be available capacity vs. Airbus’s sold-out production line, which will keep production going at sustainable rates. But this isn’t a recipe for financial excellence as we would expect Boeing to have to offer greater concessions than Airbus in order to sway customers, and lower production figures suggest less efficient use of resources than would otherwise be the case. Once Airbus’s new production capacity is in place, Boeing’s capacity advantage will disappear.

The implications of all this are clear. A less xenophobic stance by the United States to the rest of the world will help Boeing steer clear of the worst of possible outcomes for its future. Boeing also needs to address its weakness in the narrow-body space. A quick fix would be for Boeing to come up with a direct competitor to the A321neo and XLR; perhaps a further MAX stretch with a new wing and lengthened undercarriage. As we write this, none of this seems to be in the cards, but we can hope. For our part, we will now maintain two sets of commercial aircraft forecasts – a base case and a tariff/reputational case - until it becomes clearer as to which of the two prevail. Perhaps the reality will lie, as in so many things in life, between the two.

Before we go, we’ll just touch on the other segments we follow, Business Jets, Regional Aircraft, Rotorcraft and Utility. A lot of the dynamics we cite above will probably get experienced by those segments but just to a lesser degree. We’ll talk about those next month.