The Vertical Space

#92 Richard Aboulafia: Supply chain bottlenecks and the New Aerospace Order

• Luka T • Episode 92

Share episode

Welcome back to The Vertical Space for our second conversation with Richard Aboulafia, an insightful voice on all things aerospace and defense.  This episode dives deeper than ever into the aerospace and defense supply chain: globalization, vulnerabilities, titanium, rare earth elements, and why Tier 1 integrators may be losing their place in the industry. 

We explore how shifting geopolitics, material dependencies, and evolving national strategies are redrawing the map of the aerospace and defense industrial base. Richard breaks down why Europe is accelerating its push for industrial sovereignty, how China’s role in rare earths and Russia's role in titanium are creating ripple effects, and what the decline of Tier 1 integrators means for the rest of the industry. We also unpack the promise of Collaborative Combat Aircraft, new defense spending priorities, and ATC modernization. This is a wide-ranging and nuanced discussion on the forces disrupting aerospace as we know it, and where the opportunities lie in the new aerospace order.



Richard:

Other than those rare earths, China plays no role whatsoever in the aerospace supply chain. None. And as a matter of fact, we play a huge role in the creation of their own national aircraft programs, and we could kill those anytime we want. Unfortunately, you could see how this could spiral. There are so many ways where we could just start saying to each other, we're gonna make it worse for you. Obviously they hold a lot of our debt. That's not good.

Jim:

Hey everybody welcome back to The Vertical Space and our second conversation with Richard Aboulafia, someone we could talk to each week he has such fresh thoughts. In fact, Richard does participate in an excellent podcast entitled Defense and Aerospace Report Podcast, the Business Report, which I encourage you to check out. I try to listen to almost all of them. Richard is The Managing Director of Aerodynamic Advisory, a boutique aerospace and defense management consultancy. Listen to his initial comments on globalization as well as on the aerospace and defense supply chain. This is the deepest dive we've ever done on every level of the a and d supply chain. So for those of you who are freaks for supply chain deep dives, this will be raw meat for you. To be frank, I was not only impressed with Richard's commentary, but by the depth and the quality of the questions Luka and Peter were asking, relating to the supply chain. I really like the discussion on the administration's priorities and defense. The new focus areas, players and ideas, and a good discussion on the value of the collaborative combat aircraft. We discussed the defense industrial base, Europe creating their own ecosystem and how everything has changed as it relates to the industrial base and the opportunities that may be created because of these changes. After a bit of a sobering discussion around these changes in the defense industrial base, we were looking for a pick me up, so we decided to talk about air traffic modernization, and it was a bit of a coincidence that just before we published this podcast, that on May 2nd, United Airlines announced that they were unilaterally canceling 35 round trip flights per day from the Newark schedule starting this past weekend. As Scott Kirby said,"it's now clear and as the FAA tells us that Newark Airport cannot handle the number of planes that are scheduled to operate there in the weeks and months ahead." I think you'll enjoy that part of the discussion. Richard wraps up the conversation with an update on his writings from his August, 2024 newsletter titled,"there's much about the tech industry that I don't get," and you may be surprised by his update. By way of background, as I mentioned, Richard is the managing director of Aerodynamic Advisory He's a fellow of the Royal Aeronautical Society. He is also a special advisor on aerospace and defense at Eurasia Group. He also writes publicly about aviation defense with regular columns in Aviation Week and Space Technology. His articles have also appeared in Foreign Policy, Forbes.com and the Wall Street Journal. He has a master's degree in War Studies from King's College, University of London, and a Bachelor's Degree from George Washington University. So many thanks, Richard. And to our guests, I am sure you'll be delighted with his conversation with Richard Aboulafia as you profitably innovate in The Vertical Space. Richard Aboulafia it's a great pleasure to have you re return with The Vertical Space. Welcome.

Richard:

Oh, thanks so much for having me back, Jim. It's, it's great to be on.

Jim:

So here's a question that some people have trouble answering, but my guess is you'll be able to answer it easily. what is something that very few in the industry agree with you on?

Richard:

Yeah. Goodness. I think, I think there's, still, perhaps a fervor for some of the more arcane forms of advanced air mobility, quote unquote. You know, it's hard to tell, but it just seems that there's a lot of hope for, whether it's eVTOL or Boom Supersonic or, or any of the other advanced concepts. I think people think that a lot of people think that there's a revolution upon us, for whatever reason, maybe related to the advent of AI or what have you. And, and I'm still pretty much a, gee, this doesn't go well for most of these. that, and I, I. Yes, it, it sometimes seems that, people aren't always aware of the necessity of globalization. They think that maybe more could be done on a domestic basis, and I get that, you know, whether it's because of, you know, a desire for greater levels of defense sovereignty or just the inevitable rising tide of protectionism and whatever else. But this is an area where, hey, I, I'll probably just have to adapt to the new reality. The good old days of Tom Friedman and, Francis Fukuyama are going away and, I, an early nineties dinosaur like me is just gonna have to change.

Jim:

Your comments on advanced mobility haven't changed a lot in the last couple of years since we talked last. perhaps they've solidified even a little bit

Richard:

Yeah. And, and there's, look, you know, there's some that'll survive. There's some interesting experiments, certainly some interesting technologies, but I still think we're on the same, highway to oblivion for an awful lot of players here.

Jim:

On the globalization. Richard, are you just bending to what you think the reality of the world is, or do you think this is the right path to be on? What are your thoughts? What do people not agree with you on and what are your recommendations?

Richard:

Yeah, I mean, in, in an ideal world, we would have this globalized, super efficient system where there are only a couple of OEMs and they're dependent upon interlinked global supply chains. And of course people would buy best value from money globally on a military aircraft basis. Wouldn't need offsets, wouldn't need new programs to develop the national, this, that, or the other. But we're going very much in the opposite direction. And there's a tremendous loss in economic efficiency associated with, you know, replicating the wheel in 20 different countries or whatever else, and not having free trade across borders. So, I'm afraid it's, it's happening. We're moving to a different universe. And it, it feels like the, the dream of the nineties and to a certain extent, even the two thousands is kind of going away and listening to the new Cure album, Songs for a Lost World and feeling it, I guess you could say.

Luka:

We've never really had in this show an overview of the four or five tiers of the aerospace or aviation supply chain. So maybe Richard, if you don't mind, providing a high level for those in the audience who might not be totally familiar with what the supply chain looks like, what are the different tiers, how are the profits distributed along that chain?

Richard:

Yeah thanks for that Luka. It's, it's, it's an interesting, thing to describe right now because we're in the middle of all this flux. But, you know, you've got your major systems providers, particularly the avionics and engine folks who are increasingly or have become part of these, these mega corps that span the globe. Like, well, General Electric, RTX, or, Safran or folks like that. And then you did have, the rise of first tier integrators, people who did aero structures, The best example of which was Spirit, but also GKN, Leonardo, the Japanese heavies and, and several others. And my, my friend and colleague Kevin Michaels was the first to sign the sound, the alarm on that saying, this is a failed industry. And it's increasingly looking that way. You know, most spectacularly with Spirit being reabsorbed both into Boeing and Airbus, Airbus backing away from its divestitures of major aero structures businesses, GKN walking away from a bunch of aero structures stuff, leaving kind of the Japanese heavies, but even they don't have the sort of prospects they might've enjoyed years ago said that whole first tier thing is kind of going away, replaced, by more direct work between the primes and the second and third tier folks. And that's an interesting and evolving landscape.

Luka:

Richard, just to interject here, what was the reason for having tier one integrators? And, just to clarify, you're talking about that layer that sits in between the subsystem and system suppliers that, you know, make landing gear or hydraulic systems or avionics, folks like, Collins or Honeywell or Safran, Thales. So between folks like that and the OEMs, which put all of these things together. So in between the tier one integrators would be those that are integrating larger subsystems or entire aircraft sections.

Richard:

Well think of it. Think of it less as sort of parallel rather than on top of, you know, parallel. One side, you've got major technologies and components and systems. On the other side you've got the half of the plane that structures and it used to be, I'm grossly oversimplifying, but back in the day you had these sort of direct links between Boeing, Airbus, Lockheed, whoever, and various people who made panels, you know, doors, what have you. But someone got the bright idea some years ago to just give massive design and integration responsibility to major providers of aero structures. And that's how Spirit was carved outta Boeing, GKN of course, now Melrose took that, ran with it. Leonardo did more and more, the Japanese heavies did more and more. Now, one big debate, whether this was pre-ordained to fail or not,

Luka:

Right. What was the rationale for establishing that tier?

Richard:

Yeah, great question, right? I mean, part of it was it becomes somebody else's problem and we don't have to worry about this anymore. It's also a great way of seeking what Boeing used the term and still does Return On Net Assets, which of course means your returns look better when you minimize your assets. So of course if you've got somebody doing the giant, messy work of actually building major aircraft sections, you can focus on stuff at the top and your RONA looks better and investors like that. And it works. And then the problem is, well, two things. One, of course, a structures companies have minimal aftermarket business, 1% maybe. So in the event of a downturn, there's no counter cyclicality from aftermarket business. The other is that Boeing decided to use them, and to a lesser extent, Airbus, but Boeing especially said, wow, look at that. Let's use them as an ATM and started beating them up for margins. So through programs like Partnering for Success and whatever else, they just said, well, you, you have decent margins. We want them. And it was kind of like what General Motors did back in the nineties. And people at Boeing didn't learn from that experience. Lamentably. I mean, there were even stories of them going through factories and saying. Oh, okay. There's all this, extra metal that falls to the fore. That's our scrap, not yours. Basically, they were doing everything they could to crush them and they might have even gotten away with that. But then came Covid, then came the Max shutdown, a whole bunch of indignities that basically destroyed them as an investible sector. So investors said, yeah, your great idea, it's, radioactive from our investor standpoint, and now it's all going away, being absorbed back into the, the primes or, you know, just made to kind of diminish in importance in the context of broader industrials, like say Mitsubishi heavy industries.

Luka:

How is that changing the, product at the end? What is the impact on the way that OEMs, develop, certify, build if all of a sudden this big chunk of the supply chain is gone?

Richard:

Yeah, it's an interesting one. I would argue that it was another level at which you'd find investment cash for new technology. So, for example, the, Japanese heavies played a key role in developing the composite aero structures needed to make the Dreamliner happen. And I think companies like Spirit and and Vought, Triumph, what have you, were really interested in helping to make the next generation of jets happen too. So basically more of the future R&D bill and risk now accrues to the folks at the top. Which maybe makes that less appealing. You know, in a lot of ways I think it reflects and helps shape a business that's kind of commodifying and maybe we'll see less innovation as a consequence. That's why your question's interesting. Unfortunately, I think when you remove these folks as risk sharing partners, there's less risk taken.

Luka:

Yeah. Interesting. Okay. So that's, the, tier one integrator levels. What about upstream where you have, subsystems or components or even upstream of that raw materials. What does the supply chain look like there? Where are the bottlenecks? Where are the, single points of failure?

Richard:

Yeah, there's no shortage of those. My colleague Mike Stengel likens it to playing a game of whack-a-mole, you know, semiconductors, whack coatings, whack interiors, whack, you know, milled titanium product whack, and they just keep popping up some over and over again. titanium castings and forgings are a recurring favorite. And, um, there you've got so many different challenges. Obviously when Russia went offline in the aftermath of their war on Ukraine, that complicated things,'cause an awful lot of, not just raw material, but also milled product castings and forgings came from Russia too, and everyone was afraid of Russia coming back online, so maybe they didn't make quite the investments that were needed to ramp up. So pricing's been excellent. I mean, Howmet being one of the very biggest players, I think they've, they've had 30% margins lately. And now on top of that, you of course got tariffs. Oh dear. That makes things that much worse. And Howmet is the most fascinating example of what happened because in the aftermath of the tariff announcement, they came up with saying, we think we're gonna declare a force majeure. A force majeure is when you say all contracts are null and void because of act of God, will that hold up in court? I don't know. But they have the market power probably to just say, you want these castings and forgings here as our price. It's renegotiating all, everything. Existing pricing is null and void. So this is gonna be really interesting to watch. That's probably one of the biggest watch areas in the supply chain. But hey, you know, if you don't like that area, wait five minutes, it'll change. Kind of like Midwestern weather or something. There's plenty of complications out there. We've never seen anything like this, you know, as, Eurasia group points out, the tariffs even now are the highest we've seen in a hundred years. And you have to go back to the, the great catalysts of the Great Depression to come up with tariff numbers like this, Smoot Holly Act and that kind of thing. And of course, we've never had Russia offline. You know, that's interesting. One of my favorite historical factoids is that the SR 71 was built in part by specialized Russian titanium, you know, they're happy to sell the stuff and we didn't mind buying it.

Luka:

Right. I mean, it just seems whatever part of the supply chain you pick, there are issues, right? Even the tier three, the component manufacturers, folks that do, you know, various things like wire harnesses or fasteners or, tubes, bearings, whatever. It's not uncommon for these to be small and medium, sized enterprises that are, troubled with labor, troubled with, investment, highly dependent on skilled labor, which is, in greater and greater, short supply. And a lot of these, as I understand, contracts are sole source because of certification, long times to qualify each of the supplier. And my question is, is the current environment, you know, fertile ground to make some, really, interesting moves that perhaps should have been made in the past.

Richard:

Yeah. You know, the, the current environment in a lot of ways is, is absolutely terrific ground for M&A work, in part because the regulatory guardrails are coming off with, you know, the, the Trump administration, but also because there's a lot of interest in making these changes, some of which, as you say are, are probably gonna be useful. The big complication is for the labor intensive stuff. Some of it, you know, we don't hugely depend on Mexico, but it's, it's 8 billion a year or so, something like that, I believe. And tariffs again. And what does that mean? And then all of a sudden, well, USMCA compliant, okay, what is, what does that mean? And is there the federal workforce in place to administer all of this? Particularly when you have drawback credits for further exports of these things, nobody knows. So, in other words, if you want to M&A to work as it should, you gotta have a little clarification here.

Luka:

How are these bottlenecks in the supply chain distributed geographically? Obviously you mentioned the, you know, titanium, in Russia, and I think up to maybe half of all of the aerospace grade titanium products has been supplied by Russia historically. We can probably add the rare earth elements from China, with an even greater market share. But what about some of the other systems, subsystems, raw materials? How is the geographic distribution there?

Richard:

Well, everything tells its own story, doesn't it? You know? There's nothing like titanium in terms of risk and percentage from Russia. The, the sponge, the raw material, it's a little more diversified. But that milled product was yeah, pretty heavily Russian. I've never been to Novosibirsk where those giant presses are, but people tell me it's just, it's like going to another planet. Just weird as heck. Rare earths, oh my God, that's, that is such a wild card. No one knows. Nobody knows.'cause 85% of the refining is China and the Chinese have said, oh, it's a card we could play. And they're playing it and. Here again, I, I don't quite know what the administration's playbook is here. I'm not sure they have one. And of course, there's a lot of infighting with people like, Scott Bessent and, and even Elon Musk saying to, you know, Howard Lutnick and, Peter Navarro. are you guys idiots? You know, they're, yes. They're using words like idiots, so no one knows how this plays out. Rare earth are a huge wild card. The only possible upside, or, you know, good thing is that you can't have end user your certification for rare earth materials. So as long as you don't alienate your allies in Canada or Europe, they'll be acting as proxies for you. Of course, if you do badly alienate them, say by threatening their territory or imposing tariffs on them, they might not be willing to act as proxies for you. So there are huge challenges there. Everything else, you know, don't forget, America is still the big gorilla here in terms of aerospace output. We have an$82 billion a year trade surplus with the world. So an awful lot of the other stuff, it's U.S. Or it's with, high cost producer countrys like, you know, at the European Union, Britain, Canada, Japan, folks like that.

Luka:

Yeah, another silver lining here for the US at least, that it still does have significant reserves of both titanium and rare earths. But it's one thing to have these resources in the ground. It's a totally different story from having the capability to process them and qualify them and make aerospace grade systems out of them. I, I was really surprised to hear also that, even though the US does have, again, titanium mineral reserves, it does not currently produce titanium sponge. And when it comes to rare earth elements, even though the US produces about 15% of global rare earth concentrate, they usually ship that concentrate to China for separation and refinement.

Richard:

That's right.

Luka:

and so that's, so that's really representative of the, you know, let's outsource all the dirty, labor and environmentally quote, dirty work, elsewhere. And It seems like it's the same, tune that we're hearing in consumer electronics, in the drone world, in robotics, in automotive.

Richard:

right. That's exactly right. Nobody knows everything is geared towards a globalized world. Deglobalization is not really possible here. so, you know. Everything that the US is working with right now on tariffs, I, I feel reasonably good that eventually what you'll see within the next 75 days, however many are left in the 90 day period, it's gonna be settled by the Trumpies coming out and saying, look, we just solved the problem that we created, and it goes away with the big exception of China. They seem to mean it with China. So whether it's China as a market for Boeing or China as a rare earth producer, or China as you know, producer of all the games and toys that'll show up or not show up on Walmart and target shelves this Christmas, I, this is a, this is huge. I

Jim:

Wow, so you don't see a resolution with China Richard?

Richard:

No, I, I, I, I don't, because I. Ideologically, it seems like the, the Trumps would be okay with settling with other folks, on, on their terms. You know, that is to say we lose, but we claim victory. However, China that appears to have a special place in their hearts as a place that we don't cave in. Maybe, maybe rightly. You know, I I, there were a lot of issues with China that needed addressing. I would argue they were better addressed with allies and friends. but I don't see an easy way out here.

Jim:

Are there issues in aerospace that have to be resolved with China?

Richard:

You know, a Boeing CEO once told me years and years ago in the event of a trade crisis with China, we are the designated hostage. That has stuck with me ever since. And it's true. I I don't think there are. Other than those rare earths China plays no role whatsoever in the aerospace supply chain, none. And as a matter of fact, we play a huge role in the creation of their own national aircraft programs, and we could kill those anytime we want. Unfortunately, you could see how this could spiral. There are so many ways where we could just start saying to each other, we're gonna make it worse for you. You know, obviously they hold a lot of our debt. That's not good. And I think it was James Carville who said, after reincarnation, I wanna come back as the bond market so I could intimidate people.

Peter:

Okay. Just to keep the rare earth conversation framed though, what is our long-term national objective with respect to rare earths? What direction are we trying to go?

Richard:

Great question. You know, as Luka pointed out, there is this bifurcation between extraction and refinement, and I think there are relatively straightforward paths towards extraction. Australia and whoever else have expressed interest in ramping up. There are places in the US to ramp up, but refinement, that's another story and that takes a lot longer. And you know, here again as with titanium, you've got this problem that if you make a big investment but all of a sudden the cross border stuff gets solved, you're toast. So you don't make that investment. You know? And I'd love to see an administration or the administration that had public private partnerships that said, hey, if you make this investment, we will guarantee X number of years of output at X price. But getting to your point, Peter, that's exactly the conversation we should be having that I don't think we're having.

Peter:

Right. I mean, it's, it's, it's an intersection between national security objectives and economic objectives. And rare earths are just a really, crisp example of where we're confronting a conflict between them and, we can produce rare earths here, here domestically we have in the past, as we discussed, there's plenty of raw supply. You know, all of the refinement processes are understood. There is just a decision to be made. Are we going to do it and are we gonna keep in mind the rationale by which we do it? Because it may bring economic jeopardy, but it may achieve a national security objective. And I just don't know if, if the consensus has been built around it. And I certainly don't see that the communication has been clear on what direction we want to go and why, because I've been hearing about rare earth's, I mean, for 15 or 20 years now, and the topic has come and gone and it feels like we're just going around in circles on it.

Richard:

That's exactly right. It's a classic illustration of the, well, I think it's Michelle Walker who wrote a terrific book called The Gray Rhino, sort of the cousin of the Black Swan. The Gray Rhino, is something that's charging at you. If you took the time to look, you'd say, Hey, I'm being charged by a gray rhino. Rare earths appear to be one of those Gray Rhinos.

Luka:

Richard on the titanium side, are you aware of, any, efforts to requalify some, domestic US titanium sponge suppliers or otherwise, you know, the processing of titanium? Where is the U.S. in, catching up or executing on the strategy of, managing without dependencies from Russia?

Richard:

Yeah, well, on the raw material side, I don't think we have to worry. You know, the, there's, it's more diverse than than Russia. Some comes from Canada, some comes from Kazakhstan, A lot comes from Japan who have really ramped up. But the mill product, the castings in forgings, that's an area of concern, no question. And I'm not aware of any kind of strategy or plan. You know, one of the other titanium companies, and there are several others that, of course, other than Howmet have gone a bit long on melt as one CEO told me. And that's welcome. But even if you go quote long on melt unquote, and I, I applaud this, this executive for doing that, you're also getting really good margins because that Russian stuff is online and you're not willing to make the huge investments needed to replicate that Russian capability. Now, not everybody has stopped buying the Russian milled product. Boeing made a point of not doing it, but some others didn't. And, certainly within Airbus they've got some, and certainly even some people who are suppliers too, the US ecosystem still use it. So it's, it's not completely offline. It's just one of those things that the absence of it full bore has inflated prices and put a question mark about, availability.

Luka:

And on a typical wide body, there's what, maybe 10, 15% of titanium by weight?

Richard:

Yeah. 787 is 15, A350 about the same. And others somewhat less. So it probably averages out to somewhere in that zone. And remember, we've been at a low production rate for the seven eight especially. So no one knows what this looks like when we ramp up, right? That's a challenge.

Luka:

Over the last couple years since the start of the war in Ukraine, how has this supply gap of titanium been covered? Has that been through stockpiles and Japan? Some other, countries or where is it mostly coming from?

Richard:

Well, it's a, it's a mix of stuff, you know, it's certainly stockpiles. Absolutely. You know, in the, after the start of the, I, I guess it was 2014, the Crimea war, people ramped up their stockpiles of the stuff. You've had people ramp up, you know, again, we do have castings and forgings producers here, of course. It's just that, you know, we don't know what this looks like when we get to full rate. And already you've got, well, you know, again, Howmet's margins speak for themselves. For that matter, their position on pricing moving forward. You know, we've got great prices. if you're going to increase them with tariffs, we're not paying those tariffs. Have a nice day.

Luka:

What part of the supply chain is mostly responsible for long lead times in aviation?

Richard:

Yeah. It's gonna be the engine folks, right? I mean that's, that's an awful lot of it. I mean, and the engine ecosystem supplier base ecosystem is every bit as complex as, as I'm sure you know, as, as the airframe side. So you know, if an engine shows up three to six months before an aircraft gets delivered, or some depending on the aircraft, depending, obviously narrow bodies, it's a little smaller, I think. You know, you've got that engine, those long lead items for that engine, somewhat well before that, way before that. So those are the, those are the longest things maybe for combat aircraft radars, you know, some of the advanced materials that go into the antenna and whatever else.

Luka:

There's a bit of a joke in the industry that, you know, I'm sure you know, but the farther away you are from the passenger, the better the margin and the more value is accrued. Do you see that changing in the aftermath of, this tier one integrator layer being absorbed elsewhere in the chain or more broadly, how do you see the profits along that aerospace supply chain being distributed?

Richard:

Yeah, good question. You know, I mean, obviously the castings and forgings folks have changed their place in the world or had their places changed in their world for them? One exception to what you just said, which is funny and true is is of course interiors and after years of feeling pain, boy, they've done rather well. Part of it of course is the rise of premium interiors and people wanting to refit stuff. And of course the advent of medium, almost long range narrow bodies that have the kind of big seats that we used to associate with front of cabin on wide bodies. So there's that. But you know, everyone was using those aero structures folks as, somewhere between a punching bag and an ATM that had to change and it has changed. And also, you know, don't forget people with a heavy dependence or heavy, shall we say, fortune of aftermarket reliability typically with, with legacy stuff. You know, there's an awful lot of companies that are, well TransDigm and TransDigm wannabes that have just done great. Relying, you know, it's like, what if we could clear away all that new build stuff and just rely on MD 80 luggage compartment latches and whatever else, and why they've, they've done great. And there are a lot of other companies, of course, particularly out of the private equity side of the industry, that have been fed up to, to effectively, you know, create little mini equivalents with high margins.

Jim:

Richard, what else, should we be talking about as it relates to the supply chain that you think is relevant for our audience that we haven't asked you about?

Richard:

Well, I guess the biggest is that we do have these megalith companies. you know, you, you remember just RTX alone is sort of fascinating. You know, it's Goodrich, BE, Pratt and Whitney, Roar and all these other countless numbers of companies rolled into this thing along with Raytheon and Collins, of course can't forget Collins and Sun Strands buried in there and it's huge as is GE and Safran and and Honeywell and others. And what if we do move to an environment where there's less border crossing? And indeed, quite a few people who frown on border crossing and indeed a greater, you know I guess investor sentiment towards, well, actually we don't like it when you allocate capital. We like to allocate capital, which is sort of what drove, you know, horizontal conglomerates, like UTX outta business. What if the world changes on them or is changing on them? I, I, you know, I don't know, but we have a supply chain that's very much set up for the happy, globalized world that I'm kind of pining for the loss of.

Luka:

Is there any technology that you see contributing to the reshaping, consolidation of the supply chain, whether this is digital engineering or broadly digital transformation? Is that a tailwind for making the entire supply chain more efficient, integrated agile, or do you think that those are, so entrenched and rooted processes and entities that it will take decades to move the needle?

Richard:

Well, as you know, everything in this industry takes decades. But still, it's an interesting point. I mean, there are some things that should be tailwinds, whether it's in, you know, model based systems engineering, or whether it's additive manufacturing. Slowly, slowly, slowly, maybe these things are changes. I, I would actually look to, you know, even though I have my thinly disguised concerns about AAM, the new defense contractors here in the U.S., which the Trump administration loves and is willing to divert lots of cash to, and maybe for good reason. I mean, there's some interesting capabilities that they might bring to the table. And what's their message? Well, it is heavily oriented towards vertical integration. Gigafactories, you know, we're gonna build this gigafactory with Anduril I believe in, in Ohio. And it'll kind of resemble the Venetian arsenale. You raw materials go in one end and out comes, a collaborative combat aircraft with everything done in the interim. I tend to think a lot of this might be risky, if not oversold, but there's some interesting experiments and of course they're looking at Space X as the kind of, you know, the progenitor of vertical integration successfully. So, but, you know, SpaceX builds boutique production numbers, couple launchers here, a couple launchers there. The idea of building hundreds of something that's on a, on a vertically integrated level through a gigafactory, that's going to be an interesting experiment, but who knows, A lot of potential, a lot of risk. We'll see.

Luka:

Where's the risk mostly coming from?

Richard:

Not knowing what you don't know, right? I mean, how many, how many parts does it take to build a, an aircraft or a weapon? You know, the answer, is all of them. You know, if something doesn't show up in your gigafactory and you don't have people who are experienced supply chain professionals who know how to really manage it, that's one of the great black arts, isn't it? You know, supply chain management. And, if you have this sort of SpaceX, Gigafactory vertical integration mantra, you might not know that it, it isn't that easy.

Jim:

Richard, talk a little bit about the administration priorities on defense. You know, the new players, the new ideas, what you've called the Wild West, relating to new concepts and new players.

Richard:

Yeah. There's a couple of broad trends and themes. I would focus on a few of them. First is what you just said. Absolutely, Jim. The belief that, you know, legacy contractors have gotten complacent and we need to give, the, Andurils and Shield AIs and Kratos's and whoever else, Palantir of course, a chance. And so there's a significant percentage of the budget that will be diverted towards them. We'll see. I understand where this is coming from. I understand the experiment. I really do. There's risk, but you know, it's bizaro. I mean, Palantir has what, 3 billion in revenue last year, tiny fraction. And yet in terms of market capitalization, they're the biggest contractor on the planet. So in terms of attracting investor cash, can't beat it. Second theme: home alone, I. We're getting away from expeditionary warfare. We're getting away from alliance warfighting, anything that involves deployment, and towards home defense systems. That means systems that only the US will buy, like the F 47 or B 21, Golden Dome to magically protect us. And that to me is unfortunately doomed. But there's a lot of belief in it. it's, it's, you know, away from the F 35, The Army is not gonna do well in this context. The Marines may or may not do well. Expeditionary is not what people want. We're gonna see about the strength of, well, the, you know, the historically strong congressional Marine lobby, your alma mater, Jim, what, you know, they've historically survived thick and thin, but we don't know this time, it's not quite the, the, the bench strength that used to enjoy in Congress. That's gonna be a challenge. So systems more designed for America first in the U.S. you know, or North America, everything else not so much. and then of course, just to focus on the, the priorities in addition to Golden Dome or whatever you want to call it. It's nukes gonna do great. you know, the way to think about GBSD, the ICBM replacement is, it's a, a giant real estate program that also has missiles and the real estate is all in red states, so it's gonna do great. And munitions obviously doing great ship building, particularly submarines gonna do great. So the administration clearly has its priorities. The good news is, they are increasing the top line, you know, the 050 function, which includes Department of Energy, it's everything national security, that's Pete Hegseth's trillion dollar budget, and that represents a, a significant increase.

Luka:

You mentioned Golden Dome and your skepticism around it. Is the skepticism rooted in, you know, the complexity of defending against the range of threats, or is it about geographic coverage or something else?

Richard:

You know, the best way to put it is it's shooting a bullet with another bullet. My God, with enough guns trained in the right place and enough possible massive investments, who knows? Million Monkeys and a million typewriters, greatest novel ever written. But everyone I speak to who really knows the physics behind it say, yeah, it's, it's not a thing. And the Israeli Iron Dome system hugely successful, and the idea of saying, let's do that, it, oh my dear God, the systems they're defending against in Israel are not intercontinental. They're not space, they're not coming from space. They're not guided even. Not at all guided. They don't have multiple independent reentry vehicles. They're not hypersonic at terminal velocity. They're, it's, it's, it's just absurdly easy not to denigrate the Israeli achievement. It's Iron Dome is great, but the idea of saying that works so can, this is just absolute cloud cuckoo land.

Jim:

I recently read the Kill Chain, and it seems that it's almost, they're taking their strategy right outta the book, doesn't it?

Richard:

Yeah. No, that, that book got a lot of traction. Of course. you know, in a theoretical sense, sure. But boy, the challenges are just seemingly insurmountable. Now maybe, just maybe, there's a way of, and this is the sort of outgrowth of SDI back in the day. There's a way of, you know, developing some kind of regional coverage that does harvest some of the enormous investment being made. And, you know, to this day, to be fair, there is a greater level of coverage from systems like Patriot or THAAD or whatever else that certainly were possible back then. But the idea of homeland defense that can really protect us from a, a concerted nuclear attack, from a peer adversary. I, I, I have yet to meet anybody who knows anything about the technology, who says, oh yeah, that's doable.

Jim:

Is there any part of this new world that you particularly like and you think they should double down on?

Richard:

You know, I think we're all kind of intrigued by the Collaborative Combat Aircraft possibilities. as a way of redressing the power imbalance, particularly in the Western Pacific. What kind of baffles me is that CCA made enormous sense when we were getting close with our Pacific allies and the idea of saying, we're gonna double down on our capabilities in the Western Pacific. And, you know, and CCA was the only way forward, hence Australia being one of the earliest adapters with a Ghost Bat concept. But we appear to be pulling back everywhere. and the idea of close defense relations with everybody in the Pacific seems to be sadly going away just as it is with Europe. So, sorry, what are these CCAs for? I guess the question haunting CCA has been less about technology development, and more about deployability challenges. And, I I, I, I can't help but wonder if there's a bit of a disconnect between national strategy and technology development, but just looking at it from the technology standpoint, it sure is intriguing you know, the idea.

Jim:

There's more and more you read even the last couple of days about China being a little bit more aggressive towards Taiwan, and this strategy seems to fly in the face of the ability to be able to project power forward.

Richard:

That's that's exactly right. That's exactly right. You know, and, but maybe there are ways forward for CCA that allow for more, shall we say base independent deployability options air launched, for example. You know, one of the more interesting aspects of, the, House and Senate Armed Services Committee reconciliation bills that came out a few weeks ago for the 25, basically taking the FY 25 defense budget that Biden proposed and bringing it in line with Trump priorities, produced 150 billion increase. Very welcome. Nice. But one of the biggest chunks, 4.5 billion to accelerate B 21 procurement. That is really interesting.'cause of course, that's the kind of long range system that compensates for the absence of expeditionary capabilities and maybe even there's something to be said for air launched CCAs working with B-21s in the future.

Jim:

Richard, talk about the defense industrial base. You know, Europe creating their own ecosystem. No US content.

Richard:

Yeah, that concerns me a lot. Everyone in Europe right now, understandably, is rattled by the whole Greenland thing, by the whole Canada thing. And the idea that the US is now potentially even an adversary rather than an ally. And it's driving a completely different way of thinking. And frankly, the biggest stock price growth, you've seen in the world is Europe, both for suppliers and for primes right now. And certainly the funding that's going into these pan-European initiatives and indeed global initiatives like the Global Combat Aircraft Program, pretty impressive. I was hoping that the world would stay in that happy Robert Smith, The Cure world for a bit longer, and US companies would be able to compete for systems and technologies contracts. But it, it sure doesn't look like that now. And meanwhile, more and more, I think the emerging producers that want their own level of sovereignty are thinking that way too. You know, the Koreans have announced that they don't want to be dependent upon us for an engine, so they'll be an engine for their KF 21 fighter. The Turks have just said, yeah, we're, you know, the Khan Fighter, we're gonna make our own engine. So everyone wants a greater level of supply verticality for their own national defense priorities. You're gonna see more and more of that. This, this gets back to the, the start of our conversation. You know, this, this lost world of globalization where people go their own way and with all of the inherent inefficiencies of wheel duplication, these guys aren't gonna build in a better engine than a a GE or Pratt or Rolls Royce motor. They're just not. But it's important to them that they have their own capability and again, economically wasteful. but it's what they feel they need to do.

Jim:

What argument would you make where this is in the best interest of the U.S.?

Richard:

We were doing great, you know, we were dominating the arms export market. We were using it both with hard and soft power. Think of a giant, you know, spectrum that goes from USAID through arms sales all the way up to alliance war fighting. we were doing great. We've decided we want to abandon everything and just stay at home alone. And that's, even if that were to be reversed tomorrow, the damage done by the past a hundred or so days is gonna stay with people for a very long time. And I, you know, I, I won't say whether we should or should not have done it, but from the standpoint, I spent a lot of time in Europe. I was there last week and I spent a fair amount of time in Asia and and certainly I spend a lot of time in Canada and everything has changed everything.

Peter:

I mean, it almost reminds me of the rare earth's situation, but in the opposite effect, because if we dominate aerospace propulsion and other parts of the aerospace industry economically as a country, then we're effectively, you know, profiting from that. And that contributes directly to our national security. But if we relinquish that, then we're gonna be back in a situation where we're funding that type of supply chain and leadership for national security without it being globally profitable. Because there will be sources all around the world that are neck and neck competition with.

Richard:

That's exactly right. You know, I've spent the last 30 something years poo-pooing China's prospects in aerospace, and all of a sudden they seem pretty good. You know, we, they're getting out there and it's not just on weapon sales. Most importantly they're saying, Hey, Japan, South Korea, Australia, we're the reliable partners on trade. Not those guys. We're not imposing any tariffs Work with us. And that will lead to, frankly, a greater level of aerospace success than I ever predicted.

Jim:

What, opportunities are there for smaller technology companies today that most people aren't talking about based on this supposedly new reality?

Richard:

Yeah, great. Great question there, Jim. I, you know, I think a couple of things. One, for the emerging producers, it's a really long road to get to where they want to be, and I. If we can reassure them that, hey, okay, we've got a few issues on trade, sorry about that. but we're still, we still have the best tech in town. You need us, please work with us. similarly, the emerging defense technology companies led by Anduril and whoever else, they don't know what they don't know. So they're an awful lot of legacy tech companies that can say, well, maybe, you know, you might need something by way of an emergency power backup system that's not in your gigafactory. Can we work with you on that? And given the amount of cash being put into them, the, the guys at the, the tech company tops by both investors and the Pentagon and whoever else they've got cash to spend. So it might be a classic case of, you know, don't pan for gold. Sell blue jeans and buckets to the guys panning for gold.

Jim:

And one more last question on this topic. Who are the winners and losers, Richard, that may not be obvious?

Richard:

Well, I would, I would put that down, Jim, as, as, exactly who, you know, some of the, you look at the, the long road to create this incredibly complicated supply chain and the technologies that have been built up, whether it's APU or flight controls, I would argue some of those folks, especially if they're not part of the giant tier one integrators that have their own risks and pitfalls. You know, I would argue that they're still the potential big winners. But boy, what's going on in Europe right now? Especially France. I mean, for years I had said, oh, France, what a backwater. They're adorable. You know, they do some interesting stuff, but they're never going to scale up. And now they're like, really? You want somebody you can work with who's reliable and has pretty good tech? It's us. So, you know, for years, my favorite example is the Rafale fighter, which is every single nut and bolt on it is French. I think the pilot's drink holder comes from somewhere else, nothing else. And for years it was one a month and there were no export orders. The export order book is now in the hundreds. And no longer one a month, they're getting up to three. I'm told there are rate exercises to get up to rate seven per month. France Inc is going nuts and scaling up and a lot of other folks out there in Europe land are following in their wake. so I think across the board, I just look at Europe and I think there's a lot of, a lot of potential winners here.

Luka:

Obviously, if anything these last couple months, can be, best described as uncertain, and it's the uncertainty that is killing, investment decisions, plans, what alliances are worth investing in. And I'm trying to understand how volatile this entire situation is still, and, and are we calling shots perhaps a little too early? I.

Richard:

I sure hope we are right.'cause right now it looks grim. I sure hope we are. I mean, but you know, and from my perspective, I, I. Oh boy. I mean, I grew up in a world where my dad was a GI in World War ii and his message to me was always, he wasn't a college educated man, but he was a very smart man and you always said, you gotta have allies. And he was based in Britain after he was, wounded in the, in the war. And I went to grad school in Britain with his full encouragement. He was always an Anglo file because of it, even though he was not exactly well traveled. And, you know, there's nothing like the special relationship. How we have found a way to piss them off is beyond me. And then there's Canada, which is, you know, kind of British like, and I, I don't know how this happened. I do not know how it happened. I don't know how we reversed course, but I don't see a whole lot of people talking about reversing course and that concerns me greatly.

Jim:

Yeah. Your views towards China have, I have found the most surprising. You don't see a way out. You, you tend to think they're gonna dig their heels in, even though in the last couple of days, even China has mentioned, we would be willing to talk if you bring down the tariffs immediately, but I'm a little surprised that you don't necessarily see a way out.

Richard:

Yeah, I mean, and that everywhere else I think the administration will cave, Canada being the most interesting one. Mark Carney getting elected. I mean, he would, he had a 25 point disadvantage going into this election, and he wound up with a three point lead purely because of the Trump factor. So he was elected to not compromise. It would be political suicide for him to compromise. Similarly, president Xi in China has dedicated his entire political legitimacy to lamentably confronting the U.S. It would be political suicide for him to compromise. Now, with the Trumpees I think there's an off ramp with everywhere else, and that you're seeing that with cars, you're seeing, I think you'll see it with aerospace, but they were elected in part to confront China. They just don't know how to do it. I don't see a way out of this.

Luka:

Richard, when you talk to colleagues in Europe, what vulnerabilities or concerns do they see in the supply chain that is different than the US perspective? Obviously the titanium issue from Russia. I think everybody can agree that this is a big concern, but as it relates to China, I think the European continent is still in some level of soul searching as it relates to the posture with respect to China. So in what way, is the concern about the supply chain different in Europe?

Richard:

Yeah. Right. I mean, part of it is just sheer bandwidth. I mean. One thing that's great, and one reason that they're still buying American weapons is that if you need bandwidth, if you need output, if you need weapons, we're kind of the only game in town. I mean, you know, like I talked about, Rafale getting to three a month and then on to who knows what. Last year they, I think they only delivered about 18 or something. Even our howitzers, I think they're just doing a couple a month or something like that. So. Everything, everything needs to be scaled up and they're starting to make those investments. Interestingly, the New York Times had a great piece about weapons investments in Ukraine, they basically said, Hey, why not help make them a weapon center of excellence? That makes good sense. And Rheinmetal and others have put factories there. Makes great sense, but it's gonna take such a long road because everything was hollowed out. And at the end, end of the day, Luka, hey, all of this comes down to people, right? That's the ultimate bottleneck: training good technically qualified people in a continent that isn't famous for a real labor surplus and for people who might not have the best sentiment towards defense, to start with. So that's really the bottleneck. They don't even know, I can't even answer your question. They can't answer your question. And because in large part because they're not there yet. Right.

Jim:

All right, men, I'm gonna try to make a segue here and I'm gonna try to turn the guns to, actually, for the first time ever, has ATC modernization been a pick me upper, but, could we talk a little bit about ATC modernization? So let me ask this first of all. I mean, a good friend who used to be part of a previous administration said if something's not done in the first 100 days, it's unlikely to happen. And, you know, back in President Trump's first term ATC modernization came up really early. It didn't continue, but it did, came up really early. First of all, what do you think is the likelihood of it happening? And number two, what are your views on it happening? How important is it?

Richard:

Yeah, well, let's start with the, the specter of Doge sending a bunch of 20 year olds to go hack away with chainsaws at a resource constrained demoralized system with the mantra of move fast and break things. What could go wrong? Really, I, I can't see anything that would go horribly disastrously wrong. So hopefully the worst of that is over because there were a lot of really demoralized people at the FAA and you don't want that running the show for an air traffic control system. We need modernization. We've known that for years and the way forward. We've known that for years too, you know, led by the Australians and New Zealanders, who've led the way, you know, and here's a problem. The, there's a fundamental contradiction. I, I think, in, in how this has been approached. One is that it needs to be privatized to help pay for it because that's, that's the mantra. And I, I get that. The problem is that this is an a i, I'm not gonna criticize private jet users. I love the private jet industry. My coworker and well, my co-managing director and great friend Kevin Michaels and a little plug here. We're writing a book about the history of the business jet industry be published next year. Please look for in your bookshelves if there are such things. I, you know, I love it. But on the other hand, they don't like user fees. And you can't have privatization without user fees. and it's, and to be fair, it's not just business jets, it's, it's, you know, the people who like to fly in a Cirrus and that's the heart and soul of American aviation. I love it. So I, I get where they're coming from, but you're gonna have that tremendous tension between privatization being seen as necessary for modernization, and people who really don't like user fees because they think it hits them disproportionately. there are many other challenges in conundrums, but you know, this is why the FAA has been okay for years with its system and its approaches and because in part, because it's, it's pretty good from a user fees per, they're getting a really good deal and they have to, and they haven't privatized. And also in part because of that. So I don't know how to, to reconcile this.

Jim:

To the lay person or to maybe some of the people listening right now, they may have a little trouble understanding. You know, I understand privatization. I understand that there's a funding problem, for example, in the system. What's the end benefit to the traveler from ATC modernization?

Richard:

Well, obviously, you know, there are so many, Jim, as I'm sure you know, I mean, you think about it. How many delay, what percentage of the delays out there are the result of an overloaded system? I, I would make the point safety would, but we had, we, up until the terrible tragedy in January here in DC we, we had this incredible record of safety and I hope we still do despite the pensions and strains thrown at things, particularly the workforce, I. So, but nevertheless, you want to keep on ahead of that curve in terms of safety. But still, I'll primarily focus on avoiding delays and you know, never forget, we're still growing. Air travel demand is still growing, even in a mature economy like the U.S. So you want to be able to cope with that. You know, I mean, this year we're projecting I think five and a half percent growth in terms of, you know, passenger miles. You keep doing that year over year, you need a new and better system.

Jim:

So what's the likelihood of it happening in the next four years or in the next three years? what form of modernization would happen?

Richard:

Not looking great, it just isn't. I just don't see the leadership. I'd like to, I'm not sure I see it, you know, it. Brian Bedford at the FAA. Good, good, good, good, good choice. Yeah. No disagreement there. Um,

Jim:

think that, oh, good.

Richard:

yeah, no, that, that, that, that's good. Does he have the kind of latitude, and support? I, I have my doubts. because above him, a notch in, in the cabinet is a bunch of, frankly, billionaires TV stars and billionaire TV stars. I have my doubts.

Jim:

ATC modernization is gonna be hard work, and you're gonna get fully behind it, and you're also gonna have to deal with the, the organizations who will fight it tooth and nail, some of which you've mentioned, or at least the constituencies you've mentioned. Okay.

Richard:

That's great.

Jim:

And I thought that was gonna be a pick me upper. That didn't, it didn't. No. I gotta say that what I do, like, I enjoy, I'm glad that you are pro, I'm glad that you think it has to be, you know, that has to be done. But what you're saying is the likelihood of it happening is, is not probably in this administration.

Richard:

No, it's kind of like Trump 1.0 with infrastructure week. I remember that.

Jim:

Right.

Luka:

So Richard, what does fill you with joy in the industry these days?

Richard:

Well, first of all, don't forget fundamental market demand. You know, like 37 years as some kind of market analyst. I could joke, I don't have a job anymore. Markets are great. I mean, maybe that'll change in the in with a recession, but I don't think so. It looks like fundamental demand is really strong. And on the defense side, that's crazy good. Both at home and abroad. I. Crazy good. I'm concerned about the changing mix of stuff, but hey, from a market standpoint, I, I mean, we used to stay up late at night in the nineties and two thousands, worried about the next downturn. I, I don't see any negative numbers. I just don't,

Jim:

What about with the, impact on commercial with the tariffs?

Richard:

Well, you know, here again, you just gotta have faith that they'll declare victory and repair the damage they caused. If they don't, we're screwed. But, you know, I think this is true for so many other parts of the economy, whether it's cars or consumer electronics, and they've been, they've been kind of walking it back, you know, again, 75 days to go. And, but, and, and if this does happen, it's, it's disastrous. So, you know, I mean, I'm a little concerned that when all of these tariffs were announced courtesy of Chat GPT, that it took the bond markets of all things to slap them back into reality. You know, you can have a conversation about social policy. You can have a conversation about defense policy. You can have a conversation about the stock market, and then there's bonds. Oh yes. You thought you could have a conversation with people who buy our debt. Oh, that's adorable. And it, it took that to change, and it might take that again, but at least there was one final mechanism designed to circumvent incredibly stupid behavior.

Luka:

So you said that, in the years past you used to worry about the downturn or, the markets, retrograde movement as opposed to now. At the first principle level, what has changed?

Richard:

Yeah. Great, great, great question. You know, have we achieved escape velocity? And the one thing they teach you in school for this is, never say it's different this time, right? I mean, but, but first on the defense world, that's obvious, right? That has changed and that's pick up the paper and if there is such a thing anymore, and I, I have one, believe it or not, I, I understand where people are coming from. You know, we're living in a, fragmented world of hostile nations that it's, it's takes you back to the 18 hundreds, or worse. okay. On the commercial side, I just really think that that mantra that people today are spending a higher percentage of their disposable income on experiences rather than goods, it's been true. It's been proven correct. And, you know, is that always gonna be the case? I, I don't know. I remember a few years ago, it was the whole, you know, the Greta Thunberg environmental movement. Okay. I like the environment, but let's face it, that didn't go anywhere. People still kept flying. We've seen a couple of economic shocks that might have produced momentary disruptions, but people kept flying at a higher and higher percentage. We've had the arrival of amazing business telecoms. Well, like the one we we're looking at each other, you know, talking right now that, and has it affected demand for travel? Not one way. Not at all. So I guess my answer to your question is just that demand for travel has proven to be more robust and indeed has accelerated more than anyone thought it would.

Luka:

Okay. And so on the commercial side of things to accommodate the growth in the market, without the benefit of modernizing the ATC system, without the benefit of, building new infrastructure in some of the busiest metro areas, new runways, et cetera, what levers does the industry have to, accommodate this additional growth?

Richard:

Great question. Great. Que, and this has been one of my sort of soapbox, you know, got an answer here already, which is that we've been on a global basis so heavily dependent upon the hub and spoke system for so long, and I would urge you to look at numbers for the A321 Neo. It is the biggest single jetliner program in my lifetime, not because it's terribly great, it just happens to be in the right place at the right time. Everyone is retooling towards a smaller jet, single aisle of course, with the more, most range you could get, in this case about 4,500 nautical miles. So what's my message here? We've been used to a world where if you want to go to the, Hey, take a holiday in the south of France, you go from, I don't know, Washington DC to Paris, and then you take a plane to Nice or whatever. Well, what if you just had more and more, A321 Neo routes that take you where you wanna go, and you put less strain on those major hubs? You know, I was never an Iceland air backpacker, sadly. so I made it up until about two or three years ago without ever having flown across the Atlantic in a narrow body. But I gotta tell you, I've been flying a lot across the Atlantic lately. It's always in a narrow body, and there's 5,000 of these 321 Neos on order beyond that. Everyone has a strategy like this. And, you know, recently I, I went to Portugal on a 321 Neo, I couldn't fly direct to Portugal. Now you can, lots of countries now had, and I think we're seeing the transformation of a system away from tremendous strain. You, you think about it, if I fly, through Charles de Gall to get to Nice I'm landing and taking off twice as many times as I would if I just flew direct.

Luka:

When you talk to airline executives, how do they see this, change? On the one hand, it's gotta be a big risk to take to say, you know what we can fill, two aircraft every day, flying from Washington, DC to Nice, as opposed to, a very well known density of traffic between DC and Paris. The appeal, makes sense, at the surface, but how do you actually execute it in a way that makes business sense and is the least risky path?

Richard:

Yeah, it's a great question and it's two steps forward, one step back, you know. All right. We tried Philadelphia Dubrovnik. I think someone did try that. You know, some of it doesn't work so good. Some does, and the point is that for an awful lot of these routes, it's virgin turf. So you study the flow numbers to the greatest extent you can. You study the macroeconomics. A colleague of mine did a kind of, you know, city pairs relative to GDP and population growth. I think he crashed his computer doing this. It was fascinating to see lots of dots flickering and all this other stuff. And, you feel your way along doing your best to model with, with, you know, simulations and whatever. But I suspect there'll be a lot more successes than failures.

Luka:

Kind of full circle to advanced air mobility, but is that, an argument in favor of regional air mobility and, having the, freedom to explore with a lower, cost basis?.

Richard:

Well, the problem is critical mass. You know, I mean, the price of admission for critical mass in the air transport business is, I don't know, somewhere in the 50, 70, 90, a hundred seat range diminishing, or depending upon your perspective, you know, attenuating, if not two to four. Yeah. Until we have true autonomy, and even then, I'm not sure about that. There's just a critical mass that accrues to numbers.

Jim:

In talking about the ATC modernization and you bring up one of the benefits would be reduction in delays. And if you wanna deal with ATC modernization to address Luka's really good question, what do you do today? And short of it, you've got to deal with New York. It's all about, it's all about New York. And so it's awfully difficult to deal with New York without ATC modernization, but that's what you gotta focus on. And there's a lot of people with some good ideas, but at the end of the day, it comes down to New York.

Richard:

It really does. That is one really constrained bit of airspace. Absolutely. And lots of government activity too. Really complicated stuff.

Jim:

I think it's like 70% of our delays in the country are because of New York. All right, I'm gonna move on So for our listeners, if you haven't read Richard's monthly newsletter, it's terrific. So please do so. Now, Richard, back in August of 24, you mentioned there's much about the tech industry today that I don't get. Cryptocurrency seem useless to me except for pure speculation or, or criminal activity, AI. So talk about that, your newsletter and talk about what you don't get, and have you changed your mind at all in anything?

Richard:

Yeah, thanks so much for asking, and thanks for the, generous reference to my, newsletter. The, the part of my job that doesn't pay anything is the part I love most, which is maybe a, a comment on, on so many things. I, how, you know, I still don't get, I mean, cryptocurrency is just speculation, criminality, and frankly, a way of getting people to give you things that shouldn't be in the full light of day for politicians and whoever else that's emoluments of, I think it's called in the Constitution. Not good. still don't love it. A lot of what's being done, with new technology in our industry is either wheel replication without an eye on what really caused the problems in the past. I'm thinking here of Boom, you know it, oh, dear God. Or a way of inserting technology as an answer to a question that nobody asked. What stops you from flying in a helicopter? It's not the turbine engine. It's not the piston engine. It, it doesn't make that big a difference if you replace it with a battery. It really doesn't. There are various market circumstances and air traffic circumstances and whatever else that play a bigger role. So a lot of this just looks like mis investment. The one thing I am kind of not at all surprised, but surprised by the speed with which it went away. I, I suspected hydrogen was foolish. My people who were smarter than me at Aerodynamic told me, yeah, this looks pretty bad. And boy, that went away hopefully for a good long time. What a really dysfunctional manifestation of technology.

Luka:

Was it a coincidence it went away with the European funds drying up for it?

Richard:

Good point, great point. Yeah. You know, it's, I think someone once said about, high speed civil transport, the day anyone spends their own money on this, sell their shares. But hey, even governments coming in line and realizing that, I think it shows something. One thing I have to say I'm giving a bit more attention to is AI. I've been using it more. My colleagues have been using it more to find answers to questions. It's getting better. I. I'm still not a huge believer in the singularity, but hey, what do I know? there's clearly something going on there. Is there a business case that justifies the many hundreds of billions being invested in it? I don't know. It's not my industry. I'm, I'm curious about that, but it does appear there's more there than, than I might have suspected.

Luka:

What, use cases for AI do you see in the near term?

Richard:

Well, you know, anything that refines predictive diagnostics is always welcome from a safety and logistics standpoint. That's for sure. Obviously anything that accelerates the pace the iteration, of design and whatever else, certainly welcome. And there's tons of stuff we just haven't thought about that. I'm still not a, not a huge believer. I'm, I'm not like, oh my God, this changes everything, but hey, there, there's, there's more going on that I, I think, might justify some of the massive investments, if not all of the massive investments being made.

Jim:

Richard, as we start to wrap it up, we asked you last time, maybe a similar question, who are the people you listen to in the industry? Who are the people that when they talk, they're people you listen to?

Richard:

Yeah. You know, I mean, who are the real leaders these days? I, the very best CEOs, of course, for, for a long time frankly, I think we had a bit of a leadership vacuum, in, in so many ways led by Boeing in the wrong way. The wrongest of all ways. But more and more there, there's some, some impressive folks out there. I'm thinking in particular, Larry Culp at GE, he's like, wow, that guy's pretty inspiring. You know? And, and also at Boeing, I think, you know, Kelly Ortberg quiet man, and I think he's made a bunch of missteps, but he's also said some really smart things that are really worth paying attention to.

Jim:

Oh, that's great. You think well of him and, I believe you may have mentioned Alan Mulally in the last,

Richard:

Oh yeah.

Jim:

we had. You were a big fan of Alan.

Richard:

Of course, but you know, he's, part of the, last generation that did so great and then gave way to almost what you might call a demographic talent bathtub in the post Allen and post others world. but I, I guess the point is that there's better people that have come back online that I think are making a difference. I think in terms of the people who are sort of in adjunct spaces, me, you know, to a certain extent I've got a kind of, you know, bias towards my own pals, but, you know, some great people on Wall Street these days who were hugely important to listen to. My great friend Ron Epstein over at Bank of America. In terms of, you know, it's Joe Anselmo and Aviation Week, you know, and all the people who work and, but truth in advertising, I have a column in Aviation Week every five or six weeks. And, you know, Vago Meridian, and on his podcasts, many podcasts, hugely important. A lot of the folks out there who are, who are just, you know, hugely worth listening to.

Jim:

Terrific. And that, and that weekly podcast is terrific. Richard, would you like to summarize the last 90 minutes? Is there anything else you wanna leave with our listeners?

Richard:

That's very kind of you to ask. This is the best industry on the planet and we've got a lot of macro challenges both on the political and industrial and economic level, but we'll pull through. The last thing I want to see is anybody getting discouraged by what will hopefully be temporary circumstances, because this is an industry that contributes the very best things in the world. We keep people safe, we transport them where they want to go, so stay the course. Stay the faith.

Jim:

What a great way to end it, Richard. Thanks so much for joining us.

Richard:

Such a pleasure. Thanks, Jim. Luka. Peter. Really great to be here.