Insight: Wednesday 22 January 2020: Entering the Turbulent Twenties

As we begin the new year and what will likely be called the “Turbulent Twenties” by the time the decade ends, let’s examine several socio-economic trends and their potential impact on the industry. First, we foresee several lasting impacts from the MAX crisis: The MAX crisis has pushed out the potential end to the industry up-cycle - We’ve enjoyed a record-setting period of continued growth for the industry, which was interrupted in 2019-2020 by the grounding of the MAX. With the lower production rate for narrow-body aircraft, has the potential for a capacity bubble in the market been deflated before it could begin? We believe the MAX grounding may, in the end, have a positive impact in extending the current up-cycle in commercial aircraft, with MAX deliveries for 2019 spread out through 2022-2024 to counteract a potential downturn before the next major replacement cycle. Boeing needs a 737 replacement sooner rather than later - The reputation of the MAX has been damaged so much that even Stephen Udvar-Hazy of AirLease is calling for Boeing to change its name. Boeing will need a replacement for the MAX by 2030, or perhaps sooner, if the company is going to avoid losing market share to Airbus over the long-term. Timing may depend on emerging engine technologies. Competitive timing has been changed - Airbus, with a leadership position at both the low end (A220-300) and high end (A321neo/XLR) segments of the market doesn’t need a new model while Boeing’s unsuccessful 737-7 and 737-10 will need replacements to effectively compete, as the MAX is essentially a one-model dominated family, the 737-8. Airbus can wait, and play leapfrog against Boeing’s new offering(s). The single aircraft type airline business model will go the way of the dinosaurs - Southwest, FlyDubai and other 737 only LCCs have now learned the downside of having all of one’s eggs in one basket with the 737 MAX. They need a second type, and the A220-300 or A220-500 would be an excellent fit for Southwest, albeit a strong blow to Boeing. Many other LCCs could follow suit, recognizing that the risks of losing market share and growth opportunities outweighs the long-term 1% operating cost differential of a second fleet type. The supply chain is consolidating in its own defense - We are now seeing mergers of non-complimentary products that simply raise the size and program diversity of the supply chain to ensure that they can better resist excess pressures and cost reductions from OEMs while withstanding production disruptions. Programs like partnering for success will be more difficult for OEMs to sell in the coming decade. Expect increased certification scrutiny - The next airplane from Boeing, the 777X, won’t have as easy a time becoming certified as the 737MAX. The FAA was fooled by “Jedi mind tricks” once by Boeing, but won’t be again. We can expect a more rigorous, thorough, and more expensive process in future certifications, perhaps including a longer timetable for key tasks. It has become clear that the existing process must be improved, and unlikely that Boeing will be able to push through recommendations without further questioning and increased oversight in the future. While the MAX is overshadowing other issues in the early part of the decade, multiple trends will impact the industry. Anti-globalization and trade isolationism abates - The trend towards globalization and “bigger is better” is being re-thought around the world. Brexit is an example of what happens when the perception that central authorities become more important than the people they represent results in change. The trade policies of the Trump administration in the US, while decried by free traders, have had an impact on global economic growth and conditions, with the US-China relationship remaining the low hanging fruit. We expect additional trade turbulence to continue during a second Trump term, but eventually a return to more open markets. The current WTO spats between the US and Europe will negate each other and return stability to trans-Atlantic markets once the next decision is announced in favor of Airbus Economic instability - Negative interest rates in Europe are unsustainable, and the bubbles created by the derivatives markets will eventually break, taking several major banks with them. A restructuring of central banks and the global economy could become a necessity, as nations re-take sovereign control over their currencies and markets from privately held institutions. We look for country by country restructuring of the economic system as they reach crisis proportions. With the ECB and Federal Reserve systems running out of bullets to maintain stable economic growth, there is a potential for instability in the coming decade that could negatively impact global GDP growth. Environmental awareness - Flugsham, or flight shaming, has had a measurable impact on flight traffic in Scandinavia, as environmental awareness has taken hold. The industry, however, appears to be on track to deliver a 50% reduction in pollutants from 2005 levels by 2050. The grounding of the MAX, a more efficient new technology airplane, has had a major impact in keeping older aircraft that are less environmentally friendly active, with a substantial carbon impact. While research indicates minimal impacts of human activity in climate change when compared to solar output and global cloud cover, the environment represents an opportunity for politicians to increase taxes in a manner in which citizens will not as vigorously object to grow governmental power. Electrification - While electric propulsion for large jets is not currently feasible, smaller aircraft are pioneering technologies that could be applied to larger aircraft. The most realistic starting point for all electric aircraft will be the Urban Air Mobility market that will transport passengers from city centers to airports or other locations. With more than 200 companies proposing different UAM models, the interest and innovation aspects of this market are clear, and will result in a shake-out over the next decade. For larger aircraft, hybrid solutions may become possible for small turboprops this decade, but we remain years away from energy storage devices with increased battery capacity and a decrease in weight to make fully electric flying feasible. New materials and processes for airframes - Carbon fibre composites have become commonplace in aviation, but new materials, including nanotechnology and quantum physics-based products are emerging. These new materials include carbon nanotubes inserted into thermoplastic materials to create a new generation of composites that can be produced out of autoclave. Initial tests indicate these materials are six times stronger than today’s thermoset composites of the same weight. It is also likely that these materials can be adapted to additive manufacturing, making it possible to create unique parts with superb strength to weight ratios. This technology could potentially replace conventional composites for the next generation of aircraft, providing additional weight and fuel savings. Thermal technologies for engines - Thermal resistance is critical to aircraft engines, the cores of which are running hotter and hotter to provide more thorough fuel burn and improved environmental performance. Ceramic Matrix Composites have been pioneered by GE and are becoming mainstream. A new range of proprietary metal coatings, including technologies that are utilized in ultra-hot military application, could be adapted to civil engines to reduce metal surface temperatures in engine how sections. How fast, and how impactful are the two questions to be answered before 2029. Automated avionics technologies and self piloted vehicles - The promise of an automated aircraft is still years away, but advances in automation have already resulted in auto landing systems for Piper and Cirrus light aircraft, augmenting Airbus and Boeing research on larger aircraft. The potential to reduce the pilot shortage by moving to single-pilot aircraft still has a long way to go until passengers and unions would be comfortable, but by the end of the decade, technology will have advanced a long way. With the automobile industry needing to solve more difficult problems (e.g. heavier traffic and idiot drivers) resources directed towards AI and autonomous vehicles will be significant, and could have carry-over effects for aviation. Perhaps the UAM market will also become the automated operation testbed for the industry and its collaboration with Silicon Valley. The “Turbulent Twenties” will likely result in major changes for our industry, so be prepared for a bumpy ride.

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