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:: December 2018 Letter ::

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Dear Fellow Aero TrendWatchers,

Big theme for 2018? How to put this gentlyÖThe world got worse. Itís tough to quantify the world getting worse. But it did. In Germany, Angela Merkel announced that she would quit her job as the worldís Adult In The Room. France looked good, until, suddenly, a mob of people in fluorescent vests started throwing rocks. Yellow vests. What is it about France? Itís always with the haute couture. Even Britain got much worse, and looks set to get more so. As a card-carrying Anglophile that hurts. We booked a flight to Heathrow in February, because we want our kids to see London before Marchís Brexitocalypse (my wife pointed out the pound would be cheaper in April, but we then realized that restaurants would only have local mutton and turnips).

Unfortunately, our beloved industry is at the center of this trend, which Iíll dub Global Worsening. The biggest single military jet export market is Saudi Arabia. The biggest single commercial jet export market is China. Things got much, much worse, both within these countries, and with these countriesí relations with the West.

First, in Saudi Arabia, Mohammed Bin Salman (MBS, or Mr. Bone Saw) went from suave reformer to psychopathic murderer faster than a Religious Policemanís car chasing a woman driver in Riyadh. Regional experts have posited that we might be dealing with a Saddam Hussein-in-training, and Western governments are debating arms sales policies to Saudi Arabia. Germany has already cut them off, ruling out another Typhoon tranche.

Canít see the comparison? Letís go back to the Ď80s, and not for a fun MTV retrospective. The US was basically a de facto Saddam ally. The US didnít sell Iraq arms, but it did provide intelligence, encouragement for their Iran invasion, and financing. Like Saudi Arabia, Iraq was a very big Western arms market. Fun fact 1: The UK offered Iraq a Tornado production line. Fun fact 2: Saddam was the biggest single export customer for Dassaultís Mirage F1. But he went off the reservation, gassing his people and invading Kuwait. Thatís really not all that far from starving Yemenis and blockading Qatar.

The only upside: Qatar has reacted to the Saudi blockade by buying lots of F-15s, Rafales, and Typhoons (and, predictably, by moving closer to Iran). But if the UK, France, and the US follow Germany, sales to Qatar are not enough to compensate for the loss of Saudi sales, particularly sales of precision-guided munitions. In the US, Trump wonít cut off the Saudis, but the Senate might. More importantly, the next president, Democrat or Republican, likely will too, if MBS stays on his current nasty trajectory.

Then thereís China. Itís not just the biggest jetliner export market; as of 2017 (and in 2018) itís the biggest jetliner market in the world, eclipsing US airlines. Itís now about 25% of Airbus and Boeing worldwide deliveries and headed higher. Those expecting me to launch into a diatribe about the Trumpís Administrationís bellicose yet incompetent trade policies are only half right (simple remedy for Trumpís trade people: work with allies, not against them). The Chinese Government has somehow become a bigger problem than Trump.

While China has been reasonable and restrained with counter-tariffs and other retaliatory trade measures against the US, its government spent 2018 pestering Canadian expats, causing more trouble in the South China Sea, throwing Chinese Muslims into labor camps, and coercing developing countries into taking on tons of debt for ill-advised infrastructure projects. And, they ramped up their cyber-espionage efforts, attempting to seize proprietary and secret information without any shame.

President Xi Jinping also spent 2018 making it clear he was President-For-Life. And, in a speech this month seemingly designed to panic markets and banks, President Xi praised state-run enterprise, Marxist-Leninist doctrine, and permanent Communist Party rule. ďLet contemporary Chinese Marxism shine even more brilliant rays of truth,Ē he said, un-poetically ignoring the hard lessons of the last century. As with MBS, hopes that Xi would be a reformer and market liberalizer look set to be dashed. Xiís manipulation of Chinese nationalist losers can only be compared to Trumpís manipulation of nationalist losers. In a few years, the US may resume being a reliable trade partner and world citizen. China probably wonít.

That emphasis on state-owned enterprise and heavy-handed commie interference in the economy is good news for Chinaís national jetliner programs. Like any government industrial products, they will continue to be miserable; perhaps even as bad as the awful ARJ21. They will also be un-exportable, outside of Laos. If you are a Western supplier on these jets, you wonít be in a few years. Local content with copied technology will replace your components, making these jets even worse. Itís what a Marxist economy does.

Meanwhile, there will be greater Chinese government pressure on airlines to buy local jetliners rather than superior imported ones. A local A320 production line and a local 737 completion center wonít be able to compete with brilliant rays of Marxist-Leninist truth.

In short, 2018 saw China and the US move towards a repeat of the Soviet experience: The West goes its own way with aviation, and China creates inferior clones, arriving a generation late. The ARJ21 is an inferior E-Jet/CRJ, two decades late. The C919 is an inferior A320neo, a decade late. The CR929 will be an inferior 787/A35XWB, a decade late. However, since the domestic China market is much larger than the old USSR market, they might be able to make autarky work for some time. At least for single aisles on domestic routes, that is, since twin aisles on international routes would compete with Airbus and Boeings, guaranteeing disaster for Chinese carriers stuck with a CR929.

Yet weíve seen this Soviet movie before. It doesnít end well. And while the story unfolds, the world aviation business suffers.

In conclusion, the long-term future of the worldís biggest jetliner market, and the future of the worldís biggest export fighter market, were suddenly put at risk in 2018. But enough negativity. I wish you a very happy holiday season, and letís all hope for a better 2019.

Yours, ĎTil Global Bettering Kicks In,
Richard Aboulafia
 

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