Podcast: Airlines And Aftermarket React To Tariffs

Listen in as editors discuss market details as the tariff war disrupts the aviation industry, leaving airlines and the aftermarket facing uncertainty.

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Transcript

Lindsay Bjerregaard:

Welcome to the MRO podcast. I'm Lindsay Bjerregaard, Aviation Week Network's managing editor for MRO. And if you've been watching the news recently, you'll know that just about every industry is in a tailspin over the uncertainty of the Trump administration's tariffs, and the MRO industry is no exception. So joining me today to discuss how these tariffs could impact the aftermarket are Lee Ann Shay, executive editor for MRO and Business Aviation, James Pozzi, Aviation Week's MRO editor for the EMEA regions, and Christine Boynton, senior editor for air transport. So Lee Ann, James and Christine, thanks for joining.

Well, Lee Ann, let's start with you. I know you spoke with a few sources last week at MRO Americas about their perspectives on tariffs, so what have you been hearing?

Lee Ann Shay:

Thanks, Lindsay. I jotted down a few notes, and they fall into six buckets. So I'll start out with just a couple of the first two. Supply chain is the big one. At MRO Americas, people were talking about tariffs, but they weren't overwhelmed. I'm back in Washington D.C., and it feels much more overwhelming, and I don't know if that's because of where I am or just the changes since we left Atlanta. But the aerospace industry is just such a connected industry that relies on a global supply chain. Aircraft and engines contain parts made from around the world, and lots of times, each component contains many parts in itself. And switching suppliers is not easy, switching suppliers is not fast. It can take a year or more to set up and certify a new supplier, so these things just don't happen overnight.

In the last day or two, China has retaliated for the tariffs and is stopping the flow of some raw material, and that's a big deal. Just look at what happened after Russia invaded Ukraine, and Western allies stopped sourcing titanium, and some of the big suppliers were in a good position, but that had a knockoff effect. So will we see increased teardowns just to adapt to some of these supply chain issues? But on the flip side, we also know that some of the companies that control those aircraft and engine assets that were designated for teardowns are not moving them across borders because of the tariff uncertainty. So there's just a whole lot of moving pieces and the industry needs transparency, and there's just not.

Lindsay Bjerregaard:

It's interesting you bring up the teardowns perspective, because there was a lot of talk about that last week too. I was just thinking, particularly because of the extra-high tariffs on China, what is the impact going to be on Airbus and Tarmac Aerosave's, new Airbus Lifecycle Services Center? Are US-based companies not going to be able to utilize the USM coming out of there, or will they lose access to a chunk of potential spares for Airbus aircraft that way? But yeah, there was a lot of talk about as well, if a company buys an entire airframe or an engine, they don't necessarily know where all of those individual components and piece parts come from, and it impacts their decisions on where they ship those parts, where they get those parts repaired. So absolutely, an interesting point.

Christine, you wrote a great article last week about airline lessor and MRO perspectives on tariffs, could you tell us a little bit about what you've learned?

Christine Boynton:

Yeah, absolutely. So everyone is just still trying to understand really what this means for their business and any cascading impacts, because it's still such a fluid situation. We had the tariffs detailed on the April 2nd Liberation Day, we had the 90-day pause, bringing some countries back down to a baseline level, and meanwhile, as Lee Ann notes, we've seen the back and forth with China continued. So it really feels like a lot has happened in a short amount of time.

And some interesting perspective I did hear at MRO Americas was one panelist taking stock of really the general atmosphere amid the tariff announcements, and he said he did feel anxiety in the atmosphere during two days at MRO, which he did not feel at the Aero-Engines Conference in Fort Worth in late January. So it's just that uncertainty, if you don't have a clear vision of what the challenge is, how do you confront it, how do you measure the impact? And MRO Holdings was one of the panelists talking about wanting to better understand what is ahead and looking for transparency from its supply base, while also wanting to provide transparency to the airlines. So CEO, Greg Colgan, said, "What do you do with tariff charges? Is it a line item? Is it put into the part price?" For his supply chain, he wants it identified. He's looking for as much transparency as possible to be able to have a specific number of the impact to the business.

So really, just to overall sum up what I heard from different panels at MRO last week, and actually at the CAPA Airline Leader Summit the week prior, which came just after Liberation Day, is that companies are in a wait and see holding pattern of sorts. And at MRO, I heard concerns around the timing as well, that while the industry was maybe nearing an inflection point on those stubborn supply chain challenges, with tariffs entering the picture, now what, how does that affect their recovery? If 2025 was looking like it could be a year of stability to improvement, what does it look like from here? So companies did voice hopes that the current uncertainty could be short-lived in nature and ultimately not too disruptive. But now, here we are, at the start of the first quarter earnings calls for US airlines, and it'll be interesting to hear their assessments of the situation and really what they're doing to prepare or respond.

And I know this is an MRO podcast, but as Lufthansa Technik put it at MRO Americas, nervous airlines are not a good thing for the MRO industry. So we'll see what they say. Delta was first to report its earnings for the quarter, and it pulled its full year guidance, citing broad economic uncertainty around global trade, with growth largely stalled and impacts most pronounced in the domestic main cabin. It is also seeing softness in corporate travel, though international long-hauls proving more resilient. And it did note that most of the goods-related items in its procured supply base are sourced in the US directly, but they're still prepared to actively manage their second and third tier supply bases. Now, there is one thing they won't do, and they were pretty clear on this, they will not pay tariffs on Airbus deliveries in 2025. CEO, Ed Bastian, said they will defer any deliveries that have a tariff on it.

So United is about to host its own earnings call in about 20 minutes from when we're taping right now, and in their NCC filing from this morning, they've actually provided two versions of their guidance for 2025, one in a stable environment and one for a recessionary environment, stating that, quote, "Its outlook is dependent on the macro environment, which the company believes is impossible to predict this year with any degree of confidence."

Lindsay Bjerregaard:

Thank you, Christine. And I suppose by the time this podcast comes out, your article from United's earnings will be out too, so if you're listening, make sure to check that out. James, what about you, what reactions are you hearing in regards to the tariffs?

James Pozzi:

Well, I echo what Lee Ann and Christine have said, really, there's definitely a wait and see attitude. Everyone is working hard to understand what these tariffs may mean long-term. I think a consensus already is though that it wouldn't be welcomed, it's making some people nervous, others are playing it cool still, of course. Someone actually amusingly complained last week to me at MRO Americas about the term pausing becoming a buzzword already, much to his chagrin.

So anyway, let's look at some of the insights I got from last week in, of course, Joanne Selmo's panel on the supply chain, they have some interesting insights already, starting with Boeing, of course. So William Ampofo, who is the SVP for parts and distribution services across the business and the supply chain, and it's Boeing Global Services Division, he said there's concern from their side. They can't predict at the moment what this will mean long-term, but he said they're naturally concerned, and he advised to being prudent and sizing any potential risks to the operation. He did ponder a potential cost escalation for parts in its supply base. He said that there's some suppliers that are fighting, of course, the term force majeure, and possibly looking at sub-charges and opportunities to pass those along. But he did stress it's very early stages since this hasn't particularly materialized yet.

Interesting from the OEM side, of course, because obviously we've already heard already about various costs that this could incur, raw material supply, of course. But for the aftermarket, a lot of these OEMs, of course, have their aftermarket networks. What happens, for example, thinking about more to the engine side, like a PBH agreement, for example, there's so many different elements to that, crossing multiple countries and parts of the world, which tariffs could cause a headache for.

So let's look at some of the, maybe on the parts side, HEICO, of course, another US-based company, parts supplier. They're also waiting to see. But they find themselves in an interesting position, where they have operations not just in the US, but also some operations in Europe, which I'm quite familiar with. So Patrick Markham from HEICO who spoke at MRO Americas last week, he said how the aerospace industry has largely historically been tariff-free. This is something relatively new for the industry to be dealing with right now, he said.

He used the example that moving material, for example, from one side of the Atlantic to the other without posing fees has been a long-standing thing, but now there's a new scenario potentially, where if there's warehouse facilities in the UK or it's somewhere else in Europe, he asked the question, does it make sense to not bring these parts across to the US if they're going to go back over to Europe? How do you deal with all of that, this potential new landscape? That said, he was quite bullish about the industry's resilience in the face of tariffs, and he thinks whatever scenario plays out, it will adjust and it will figure out what costs it will incur and how to make this work.

A few other elements of interest from the airline side, actually, of course, PSA Airlines, a regional carrier who operate flights in the US, of course, on behalf of American Airlines, they expressed immediate concerns about cost escalations in the labor market, which a market you know very well, of course, Lindsay, that's obviously very inflated as it is right now, especially in the last few years since the pandemic. PSA also do heavy maintenance on their aircraft down in Mexico, and they use some engine overhauls all the way over in Germany, so obviously there's an environment there of importing labor, and the surcharges that could happen there would directly impact its bottom line. So that was a view of Michael Bruhn, who is vice president of finance and supply at PSA.

Going back to the supply chain, which we've mentioned before, it's still pretty fragile, I think it's fair to say ,despite the recent improvements over the last few years, everything from raw materials that go into the components, was cited as an example, and this could bring fresh disruptions to that. And that's far from perfect, as it is, the supply chain. It has improved, as I said, it's got a bit smoother, but it's still far from smooth.

And just finally, I think we obviously mentioned teardowns earlier and retirements, of course, which is quite interesting. So JetBlue had some interesting insights as well at MRO Americas. Steve Roberts, who's managing director of engine programs and materials at the airline, he thinks airline maintenance strategies could change in a tariff environment. He predicts the possibility of repair versus buying activity increasing, where carriers may look to repair existing rather than buying new for various things like parts, for example. And also, continuing the push, which I've seen a lot in recent years, towards DER repairs and PMA parts, push into that market, which, of course, airlines have been more susceptible to that in the last few years.

And the USM market, which has spiked in prices significantly in the last few years in terms of costs, this could increase further, of course, naturally with tariffs. So that's not going to be a particularly welcome thing either, because as we know, we've done plenty of coverage of the USM market, and that's certainly in an interesting place right now in terms of costs and availability. So yeah, that doesn't seem like that'd be welcome either. But he also, worth adding, he said teardowns will likely become more lucrative in a tariff environment, and of course, localized repairs as well, that could be a natural reaction, this push towards nearshoring and localized repair networks.

Lee Ann Shay:

I'd like to jump in here. I agree with what James is saying, and our industry, this is a big headache right now for everybody, but our industry is very resilient. We got through the pandemic, SARS, financial crisis, 9/11, there've been several major market disruptors. But depending on how long this lasts and how it rolls out, there's going to be some change. But I think it was just yesterday, lessor Azorra forged a deal with Delta and Delta Material Services, which DMS is tearing down what we think is the first teardown of a production-standard Airbus A220-300, and that's not necessarily related to tariffs, but I think it is an example of a creative solution that serves both people who need the engines and the parts, and just the way that deal was structured is a little bit different. So will we see some new sort of agreements in the near-term as all this shakes out? I absolutely think so.

Lindsay Bjerregaard:

Yeah. And I think one more thing to note when it comes to teardowns in USM, one of the concerns that got brought up last week at MRO Americas was that when a company acquires an airframe, like an A220 or something else, they don't necessarily know the value of those parts right off the teardown before they've undergone inspections to assess their condition, so it's hard for these companies to assess what the value of that is and then what the potential tariff impact of it would be. David Chaimovitz, the CEO of Setna iO, basically said he expects a lot of cases to go into the courts about this, so I suspect this is not the last we will hear about it. Was there anything else anybody wanted to point out related to tariffs that we have not discussed?

James Pozzi:

Not so much about specifically tariffs, but worth mentioning, I think, Lindsay, around the time of this podcast going live, I think just shortly after, myself and Lee Ann will be in Hong Kong at Aviation Week's Aero-Engines Asia-Pacific event, and I know in the prep calls I've done for panels and some of the people I've been speaking to beforehand, there will be quite a lot of interest in tariffs there. And it'll be interesting to see what another region, a very big and growing region, an active one, obviously lots of trade with the US, that could be interesting to see what some of the key players, people and companies out there are saying about this issue, because, of course, the proposed tariff lists that were released a few weeks ago, some of those countries in the region were featured and hit by heavy tariffs.

I think one of the low-cost countries, Vietnam, stood out, for example. They've obviously had that advantage from being a low-cost manufacturer and there's been a lot of MRO activity going there. But of course, the one mentioned before on the larger end of the scale, of course, is China, seemingly a trade war between the US and China. So yeah, that'll definitely pop up a lot at Aero-Engines Asia-Pacific, no doubt.

Lindsay Bjerregaard:

Well, Lee Ann, James and Christine, thank you for your insights. That is a wrap for this MRO podcast. Don't miss the next episode by subscribing to the MRO podcast wherever you listen. And one last request, please consider leaving us a star rating or writing a review. Thanks for listening.