Podcast: What Tariffs Mean For Boeing, Airbus And Comac

Editors are joined by Wall Street analyst Scott Mikus to break down how global trade turmoil affects OEMs.

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Transcript:

Joe Anselmo:

Welcome to this week's Check 6 podcast. I'm Joe Anselmo, Aviation Week's editorial director.

For decades, the global aerospace industry has operated under an umbrella of free trade that was largely taken for granted. Sure, Boeing is American, Airbus is European, and Comac is Chinese, but all three companies use components sourced from a vast supply chain that spans the globe, from engines and fuselages to harnesses and brackets. That way of doing business is now caught up in an escalating trade war between the US and China, and a confusing set of on again/off again sanctions imposed by the Trump Administration on nearly 90 other nations.

What happens to Boeing, Airbus, and Comac if free trade as we know it ceases to exist? Joining me to discuss the ramifications are Michael Bruno, Aviation Week's chief business editor; Jens Flottau, who heads our team of commercial aviation reporters from Europe; and with the Wall Street angle, a special guest, Scott Mikus, the director of aerospace research at Melius Research.

Michael, as you noted, this is changing by the day, sometimes by the hour. My understanding as where we are as of this podcast recording, the US is imposing a blanket 10% tariff on all imports. The so-called reciprocal tariffs that range for 20% for the EU to 46% for Vietnam are on pause until July. But there is a 145% tariff on many goods from China, though it seems smartphones and laptops have been temporarily exempted. And China has retaliated with its own steep tariffs on US products. Did I get that right?

Michael Bruno:

You're about 90% there, that's a really good understanding, compared to what's happening. There's also the steel and aluminum tariffs that are going on separately. It's not quite 10% on every country across the board, because remember, Russia and North Korea, and a couple of others, were exempted from that list.

Joe Anselmo:

Scott, US posted a trade surplus of $114 billion in aerospace last year. So, if the United States gets in a trade war with the rest of the world, it would seem that Boeing, which is so heavily dependent on exports, would stand to lose a lot. The lead story in The Wall Street Journal yesterday, the headline was, "Boeing is Hit From All Sides in Tariff Turmoil." You have looked at this pretty closely. How exposed is Boeing?

Scott Mikus:

Yeah, this is a good question. We're really entering the period of the great unknown when it comes to this tariff situation and the ripple effects it could have for Boeing with the supply chain. Then also, demand for commercial airliners.

Boeing's executives, at a recent conference, mentioned 80% of their commercial supply chain spend is US-based, 90% of their defense spend is US-based. If we look at their most recent sustainability report, they spent about $43 billion on their supply chain in 2023. The 2024 data isn't yet available. But if we just assumed the higher production volumes, also there's some inflationary pressures, if Boeing was planning to spend $50 billion on its supply chain this year, and 80 to 90 percent was sourced from US suppliers, roughly $5-10 billion of that could be subject to tariffs. You'd apply what you think is a tariff rate and that could get you to a reasonable financial impact to Boeing.

But the nuance is what happens within the supply chain. Like you said, Joe, it's a multi-tiered, global supply chain. Suppliers obviously want to pass those through. It's not clear if they have explicit language to pass that through to the other sub-tiers. I've seen Howmet sent a letter saying that if their customers don't accept the cost increases from tariffs, they might declare force majeure. We don't know if other suppliers will also follow suit.

The one good thing though for Boeing is that it ended 2024 with about $88 billion of inventory. If we exclude things like 777X and 787 for production, and unamortized tooling costs, and what's called early issued sales consideration that's lumped into that inventory balance, Boeing still has north of $60 billion of inventory on hand. Luckily, that should help them buy some time. We hope that cooler heads do prevail here, but we also have to think what is the revenue impact as well?

We saw Ryanair and Delta Air Lines say that they're not going to take deliveries of new aircraft that are subject to tariffs. Obviously, China's told their airlines to stop taking delivery of Boeing aircraft as well. There's a lot of variables and a lot of unknowns. Companies will be reporting next week and I don't think we're going to get a ton of clarity. Maybe we'll get some more clarity at the Paris Air Show, though.

Joe Anselmo:

Jens, as Scott noted, Delta's CEO, Ed Bastion, last week said that his airline will not take delivery of new jets this year if there's a 20% tariff on those. All of their deliveries this year, 43 jets, are coming from Airbus. Even though Airbus isn't as exposed as Boeing, they are exposed, aren't they?

Jens Flottau:

Yes, they are exposed. Obviously, there's big customers in the US, that's one angle. Delta, United, JetBlue, Breeze. The one piece of good news on the Airbus side is that obviously they have local production in the US. A220s are built in Mobile. There's an A320neo line in Mobile. There's going to be a second A320neo line opening in Mobile in the fall. That was always planned long before Trump was elected president for a second time. That's really unrelated. It turns out to be a good thing potentially. It's also part of the broader production increase.

I've been trying to understand what's going on, like everyone. Trying to come to a conclusion where I see the biggest impact. I guess, and this is not only an Airbus thing, it's broader than that, I think my two main points of concern are, one, the supply chain. Basically, this has the potential to worsen the disruption among small suppliers particularly, which then would lead to delays, just simple chaos in aircraft production at large for everyone, for Boeing, for Airbus. Because this is, as Scott said and Michael said, this is a global business. That simply has to play out in the coming weeks and months, depending on what the ultimate tariffs are going to be like and whether there's going to be retaliation at that magnitude.

The other big thing I see is simply the broader economic picture, a potential recession in the US, slowdown internationally. The impact on world trade, globalization at large. Aviation has hugely, hugely benefited from open global trade. The growth rates that we've seen over the past decades, particularly the 2010s, would not have been imaginable without it. If that's in any way reversed now, that would have an impact on air travel demand. We're seeing it in pockets already, domestic US. I'm sure, I'm convinced we will very soon see it across the Atlantic. International arrivals into the US are down already in March. If it continues, we will see it globally.

Michael Bruno:

I want to [emphasize] what Jens is saying, demand destruction. That is the big, bad boogeyman looming in the dark corner of the room that everybody is really, really afraid of. Because we have these backlogs and that's great. And we have the built up inventory, which hasn't been so great if you're in need of stability for production of new parts because you're a sub-tier provider. But overall, the industry was finally starting to come out of the COVID-19 pandemic problems it was having. We were now finally looking, this year going forward, of real production really ramping up.

Underlying all of that is this just incredible demand for commercial air traffic. It's still incredible demand for large commercial aircraft, for business aircraft. There's just demand, demand, demand. The absolute worst thing that could happen to the industry, probably not tariffs, and probably not increased taxes on the cost of doing business. The absolute worst thing, and Scott I'll ask your opinion on this too, but demand destruction. People stop flying because the economy goes down and it's just harder to get aircraft sold because there are fewer airlines or more distressed airlines. That's the worst-case scenario. That's typically what happens in downturns.

How long it lasts remains to be seen. It's just a rule of thumb. You want to know how commercial traffic's going to go, you take GDP and you multiply it by one to two times. That's how you know how much commercial traffic is growing in the next year or so. Well, when that GDP figure goes down, commercial traffic goes down and everything else can go with it.

Scott Mikus:

Michael, that's a really good point. When you look at the global financial crisis, obviously the economy had a downturn globally. Deliveries from Boeing and Airbus actually held up fairly well. Boeing had a down year in 2008, but it was actually due to the strike. At that point though, the real backstop for the industry was China. China was taking delivery of every single aircraft that it could get its hands on.

Another thing when we think about a potential economic downturn, you typically see a decrease in commodities prices. Also, energy costs as well. Although your revenue might be coming down, your input costs for your materials and to run your factories typically comes down. If this is a recession induced by a global trade war with tariffs, you could see commodity prices stay the same, rise, or maybe not fall as much as you would in a typical recession. At which point, if you're a small sub-tier supplier, your revenue gets hit, but your input costs aren't going down. You might have employees that are asking for wage increases to cover higher costs of consumer staples, like food, energy, and whatnot.

So it could be a very tricky problem for the small suppliers or ones that are in precarious financial situations. The poster child for this that's the most visible is Spirit AeroSystems. They're being acquired by Boeing, but Spirit serves both the commercial and defense markets. If we were to just assume a scenario where they weren't being acquired by Boeing, they were already losing cash before this trade war. If all of a sudden they had to start paying tariffs, they would be losing even more money. That could impact defense programs, like the B-21 bomber, the V-280, the CH-53K, P-8 Poseidon, KC-46. So there's also a national security component here that you would hope policymakers would be more thoughtful of.

Joe Anselmo:

Scott, I wanted to ask you about Boeing's exposure to China. Their 20-year forecast still looks at China as the big market, but they've really deleveraged their backlog and they're not that exposed to China. If Boeing didn't make any more deliveries to China for the next five years, that wouldn't crush the company, would it?

Scott Mikus:

No, it wouldn't. To your point, China stopped ordering a lot of Boeing airplanes during Trump 1.0 when he initially started slapping tariffs on Chinese goods. Boeing is under-indexed to China, say the way Airbus is.

When we talk about this situation with our clients, and not just China but this whole trade war dynamic within the aerospace and defense industry, it seems that the outcomes can be very binary. Where, all of a sudden, global trade grinds to a halt, we have aerospace suppliers declaring force majeure, employees are laid off, furloughed, you have an economic recession.

On the flip side, if you're an optimist, you hope cooler heads prevail, the US and other countries agree to drop tariffs and trade barriers. At the same time, the Trump Administration in negotiations pushes other countries to reduce their trade imbalance with the US. An easy way to do that is to order aerospace and defense equipment from US companies like Boeing and the defense primes.

In that scenario, you could see Boeing receive more orders from high growth parts of the world like India, which orders a lot of planes from Airbus, and maybe as part of a grand bargain with China, China starts ordering more Boeing planes. Maybe the Trump Administration uses the threat of limiting parts for the C919 to effectively kill the program. In exchange, Trump Administration lets those parts flow, China orders more Boeing planes. They could end up ordering more 737s and 787s.

So, things could turn out good. But just in the near term, uncertainty reigns supreme.

Michael Bruno:

If I could just follow up really quick, those pessimism and optimistic views, they were there in the first term basically. These are scenarios that, for whatever reason, didn't play out in the first term. I’m not saying they can't play out in the second term, but they're not necessarily new strategies just because of the tariffs.

Scott Mikus:

Correct, that's very true. It seems like both sides are also very dug in here, between the US and China as well.

Jens Flottau:

I just want to highlight one point about China, and this is the order situation. It's true that there's very few orders for Boeing aircraft. There's also not that many for Airbus, actually. China is under ordered at this point, which means they are heavily relying on leasing aircraft. They will soon have to decide whether they're going to continue taking 737s or 787s on lease, or tilt towards the Airbus order books of the lessors.

The other angle is what's ahead in terms of orders, they are negotiating big orders with Airbus right now. That will solidify Airbus' position in China going forward. Don't forget, over the last several years, China's been around 20% of the world commercial aircraft market. So at this particular time, it's not a great idea to be confronting China in this way.

Joe Anselmo:

Jens, I find the Comac angle to be a fascinating wrinkle in all this. The C919 entered service last year. It uses LEAP-1C engines made by GE in the US and Safran in France. There's a ton of other US-made content on that aircraft. That's going to be a big problem for Comac if the Chinese government applies these hefty tariffs to those products, no?

Jens Flottau:

I would say it depends a little bit on how long this drags on. Apparently, the Chinese have built a significant stock of engines, for example, in anticipation of export orders for the C919 that haven't really materialized at the pace that they had hoped. Which now is good news for the program indirectly, because it means that there enough engines available in stock for the near term. We also don't really know how fast the ramp up is going to be. The numbers for this year are fluctuating. It's 20s to 50s for the C919, so it's hard to give a precise answer on that one.

Joe Anselmo:

Scott, we talked about the aircraft builders, but let me go down one level to the engine makers. Obviously, you have GE and Pratt & Whitney in the United States. How exposed are they to all these trade frictions?

Scott Mikus:

They're very exposed because a lot of their profits come from the aftermarket. They generally don't make money on their commercial OE sales to Boeing and Airbus. And their spare part sales are to MRO shops all around the world. Although it may be a decent size of the revenue, it's an even greater share of their profits.

The question here with the aftermarket suppliers is they've enjoyed a healthy pricing environment over the past several years, because air traffic has been growing extremely strong. Boeing and Airbus have also been late on deliveries, so airlines have been retaining older aircraft and engines longer than they would like.

Now, we're going to have tariffs go into effect, they'd like to cover those tariffs. They may need to implement an outsized price increase. So, when we think about standard spare parts price increases, it's inflation plus 2-3% on top of that. But then, if you get hit with a 10%, 15%, 20% tariff rate on top of that and you want to cover that as well, that's an extremely high price increase for an airline to absorb when bookings are also soft and demand for travel is softening. Airlines may just decided, "You know what, it's not worth it, doing this engine overhaul," or, "It's not worth doing this C-check or D-check. We're just going to scrap this plane entirely."

Jens Flottau:

Can we just go back into this chaos aspect of this? Particularly on the supply chain side, they went through COVID, they rebuilt, but they were able to rebuild slowly in the current set up, in the set-up that they knew. Now, the tariffs are threatening to change that set up, so there's structural change if people were trying to avoid tariffs. I just don't see how that can be accomplished, how that can be done.

The alternative being, as Scott says, the absorption of costs, but I also don't see how that is going to be done. And in the near term, the least that's going to happen is significant delays and the simple processing of all of that, the figuring out of how much you pay for a component that has probably crossed borders several times in the manufacturing process.

And just one little anecdote on the airline side, maybe to show to what extremes people are going, or thinking at least, to avoid tariffs and to deal with this. There are 15 787s not yet owned by Lufthansa, but to be delivered to Lufthansa. They're parked in Charleston (South Carolina) because the seats aren't certified yet. Lufthansa is now looking at, "How do we get them over to Germany without having to pay tariffs?" One thing they're looking at is. “We fly them over the Atlantic once, every one of the 15, land in EU or in Germany, fly back to Charleston, and then get the seats certified whenever, in the next six months or hopefully this year. The other scenario they're looking at is having them registered Switzerland, where they also own an airline, for one day, then re-register them in Germany to avoid EU counter-tariffs. That assumes that Switzerland doesn't impose any counter-tariffs on Boeing aircraft.

There's probably hundreds of examples like that, that show the chaos, and the uncertainty, and the ... chaos is probably the right word, that people are having to deal with right now.

Joe Anselmo:

Yeah, I was at the MRO Americas conference last week in Atlanta and I heard dozens of stories like that, scenarios like that, Jens.

Michael, final question. Elon Musk has Mr. Trump's ear. He's suggested that maybe the US and Europe should just have completely free trade, no tariffs at all. Any possibility that, in a few months, this industry could be in a better place than where we started?

Michael Bruno:

Of course. There is a non-zero possibility that suddenly, everyone's holding hands and singing Kumbaya, and the tariffs have been eliminated and Europe and the US are united like the end of World War II again. It's all great, and we're all going to go tackle China together.

I sound very facetious. It is a potential outcome. I think if you polled four-out-of-five dentists right now, they'd tell you that that's not going to happen. The expectations of that kind of thing ... We're not talking about the defense sector at all here on this podcast, but over in the defense world, they think there's a zeitgeist changed about whether Europe can depend on the United States as an ally anymore in large ways, or small. Small ways being providing weaponry. Large ways being are they going to remain a member of NATO and come to Europe's aid if necessary?

Those kinds of conversations are happening in parallel with what's going on with tariffs. So, the idea that tariffs are just going to get eliminated, somehow magically, I don't personally see a path to this. But there is a potential that this gets resolved if Mr. Trump wakes up and decides to just totally reverse his mind, he could try to take that step. But I'm not sure other countries are going to match necessarily anymore. I think there's been an indelible step in a direction for this entire industry. The question is to what degree? How does it adapt to this new regime?

But this new regime is here. What I'm sensing from, either everybody from really smart people like Scott who cover it, to individual executives, to supply chain workers is everybody thinks it's a new world and we're just trying to figure out how to live in it.

Joe Anselmo:

Scott, any final thoughts from you?

Scott Mikus:

What I would say is I think Kevin Michaels said this very well, is that the industry should get more vocal about the potential impact here. It's blue collar workers whose jobs are on the line if trade ends up grinding to a halt. It's also a national security issue as well. I think that getting this situation resolved in an orderly and timely fashion is paramount. So, I would really encourage executives, labor unions to be much more vocal about the potential long-term impact of a trade war on the aerospace and defense industry.

Joe Anselmo:

Okay. Scott, thanks for joining us. Jens, Michael, thank you for your time. Scott, on a personal note, we want to offer our condolences to you. Your business colleague Rob Spingarn passed away. I knew Rob for two decades. He was one of the best aerospace gurus on Wall Street and we will certainly miss him.

Scott Mikus:

Thank you. I appreciate that. We definitely miss him.

Joe Anselmo:

That is a wrap for this week's Check 6 Podcast. A special thanks to our podcast producer in London, Guy Ferneyhough. If you haven't already, be sure to subscribe to Check 6 so you never miss an episode. If you found today's discussion helpful, consider leaving a rating or review. Better yet, share this episode with a friend or colleague. That's all the time we have for now. Thank you for your time. Join us again next week for another Check 6.