The OEMs Enmeshed in the Great Tariff Folly Mar/Apr 2025

The tariff policy has collided with economic reality, much as mainstream economists predicted it would. Stock markets slumped, the dollar weakened, US GDP forecasts were downgraded and, perhaps most importantly, yields on US government bonds jumped. All this was explained away as short-term pain which would lead to long-term gain as the global economy rebalanced in the US’s favour.

In the apparent absence of constitutional checks and balances, behind-the-scenes lobbying by leading US industrialists and financiers seem to have had an effect on the Administration’s thinking, at least resulting in from key exemptions from tariffs, as in electronic components for iPhones.

A recovery in share prices suggests that the market expects that the tariff policy will be modified. It might even be nullified if the Administration can be made to understand the complexities of the modern global economy; that simplistic populist solutions to deep-rooted problems like regional de-industrialisation, the fall-out from the introduction of new technology, the fentanyl scourge, Intellectual Property theft and the national security threat from foreign movies, will not work. The tariff strategy is likely to exacerbate these problems.

Aerospace is one of the sectors put most at risk from tariff policy — ironic, as the US industry has a strong trade surplus, about $136bn total export sales and a $113bn trade surplus in 2023 according to the Aerospace Industries Association. Kelly Ortberg, appointed as CEO of Boeing in the middle of last year, has been on quiet missions to Washington and perhaps Mar-a-Lago. At Boeing’s first quarter results presentation he commented: “We continue to work this situation proactively with the Administration and it’s clear that they understand the importance of the aerospace industry to the US economy on the role that Boeing plays”.

More interesting was his reply to the inevitable tariff question during the Q&A session:

“I don’t think a day goes by when we aren’t engaged with someone in the Administration including cabinet secretaries and up to POTUS. We have had the luxury of operating for decades since the 1979 Civil Aviation agreement on Large Aircraft in a tariff-free environment, so we’re spending a lot of time making sure the Administration understands the implications of either short term or long term’s tariffs on not just our company but the overall aviation industry in the US. I would just tell you that they understand. They know this is extremely important to our trade, to the trade balance. Aircraft are such a significant part of our trade surplus. And if we see markets closing that’s going to be a big challenge.”

He concluded by commenting on the uncertainty created by the tariff war: “I can’t predict where this is going … we do hear signs that indicate that [there are opportunities for negotiated settlements]. I just don’t know the timing and so again we’re going to take the actions we need to make sure if this takes a while we don’t get in a situation where it impacts our recovery”.

Real world supply and relocation complexities

Perhaps Mr Ortberg was able to plonk this picture on the POTUS’s desk, illustrating that the 787 Dreamliner Is not an all-American product; in fact, about one third of its components come from European or Japanese suppliers, with the value percentage in the total cost of the 787 being somewhat higher. This is the result of Boeing’s established strategy of sourcing components from the most efficient suppliers worldwide, not some nasty conspiracy on the part of foreign manufacturers.

Presumably US Customs will have to come up with an assessment of the foreign produced components in 787 and all other Boeing products in order to exempt them from taxes. Otherwise, the US tariffs will inflate the price of the 787 for both domestic and foreign purchasers.

Exempting these foreign components then undermines one of the stated aims of the tariff policy — to force foreign manufacturers to relocate production to the US. This relocation idea seems to be particularly economically naive, an attempt to regulate corporate decisions by an Administration that is supposed to be removing regulation on industry.

One of the many practical issues is timing. Establishing offshore production facilities is a long and complicated process, stretching beyond the US political horizons set by congressional or presidential elections. An awkward detail is that the FAA has indicated that it would take up to two years for any new component production facility set up in the US by a foreign entity to be certified.

Airbus’s assembly plant at Mobile Alabama Is the most important example of offshoring production to the US. This facility was originally proposed back in 2005 with the target of up to producing 50 A320 Family aircraft a year by 2015, but at present output is seven A320s a year (with a pre-Trump plan to double output). Plans to develop further A220 assembly at Mobile were also in place pre-Trump, but with the majority of the components being imported from Canada there is no clarity on the future direction for this operation as President Trump’s bewildering economic and political attacks on the neighbour threaten to completely undermine the free trade principles of the USMCA.

There are some obvious prerequisites for investing in an offshore country, such as an efficient, flexible construction sector and a relevantly skilled labour force, and the US has problems in both these areas, which will certainly not be solved by tariffs. Then there is an inherent contradiction in the tariff policy: for a foreign company to be persuaded too invest in the US, presumably a higher cost location, the US tariff barriers would have to be maintained, but the Administration seems to be offering an easing in tariffs as a reward for investing.

In short, investors need a stable and predictable regulatory regime, the opposite of that created by the tariff wars.

Chinese 5,000 year miscalculations

It has to be said that the US Administration appears to have miscalculated badly by launching its 145% tariffs against China, with the aim of punishing China for “hollowing out” US industry, on the assumption that because China exported over twice as much to the US as the US exported to China it would be forced to capitulate.

China shows no signs of doing so, the contrary in fact. In an interview with the BBC the highly articulate Victor Gao, from the Center for China and Globalization, a think-tank closely linked to the Beijing leadership, summarised China’s attitude with the bald statement: “We don’t care”. China, he observed, has a 5,000 year history under enlightened or repressive regimes but with all of its rulers being autocratic. President Xi, unlike President Trump, is not subject to democratic pressures when his people suffer.

The direct consequence of the US tariffs will be to reinforce Airbus’s advantage in this market, the single most important country market for new aircraft demand. As at the end of last year Airbus’s Chinese orderbook, which we estimated at $21bn, was more than double that of Boeing, $9bn. China is simply refusing to take the 45-50 Boeing aircraft due for delivery this year, and has returned aircraft from the completion centres in Zhoushan, leaving Boeing trying to place the aircraft in other markets like India, unfortunately another country subject to Trumpian tariff attacks.

In the aerospace sphere China has been trying to break into the commercial manufacturing market for over 20 years but certification of the C919 by EASA, let alone the FAA, is still some years off. COMAC currently reports a total of over 700 orders for the C919, about 230 from Chinese carriers, the rest “undisclosed”. The commercial aircraft industry in the PRC is a direct target for the US Administration — collateral damage will be felt by US manufacturers.

The C919 is sometimes described as a A320 clone but what the picture illustrates is that here is a major US involvement in this aircraft from companies such as Arconic, GE, Rockwell Collins, Honeywell. Safran, which in partnership with GE, manufactures the CFM LEAP engines for the C919, has said that its has been assured by the Chinese that no tariffs will be applied to its supplies for the aircraft, but it is unknown whether other American components will be taxed. In short, the tariff policy threatens the US aerospace industry as well as the Chinese.

An unintended consequence of the tariff war is that China will intensify its sales efforts and joint venture projects in Asia, Africa and Latin America, where it gained ground rapidly after the first wave of tariffs in the late 2010s curtailed business in the US. There may also be a little complacency about the C919, and future Chinese models, with Western observers underestimating the potential of the Chinese commercial aircraft manufacturing business. Note that the BYD (Build Your Dreams) electric vehicle corporation Is competing very effectively with Tesla especially in developing markets. Taking a longer term perspective: in the 1990s it seemed inconceivable that China would become a become a player in the commercial shipbuilding industry, dominated by Europe and Japan, but it brought in technology and in 2024 delivered over half the global newbuilding tonnage.

Michael O’Leary, CEO of Ryanair, perhaps Boeing’s most important customer, has stated that Ryanair would buy the C919 if it were about 10% below the price for which it could get an A320. A typically provocative statement, but one which might not seem so ludicrous in 5-10 years’ time.

The vicious circle

According to mainstream economists, the best response to the imposition of tariffs is not to retaliate. This seems to be the UK’s policy at present, instead inviting President Trump for a shooting weekend at Balmoral with King Charles (or something similar). For the other European countries, which are not fortunate enough to have an accessible monarch or grouse, the political pressure to match US tariffs will be irresistible. The EU has already strongly hinted at full-scale retaliation. This is the vicious circle of tariffs that David Ricardo warned about in the 19th century.

Guillaume Faury, CEO of Airbus has remained philosophical, accepting the inevitability of US and European tariffs in the short-term, while hoping to bring back at the first opportunity the 1980 Agreement on Trade in Civil Aircraft which eliminated import duties on all aircraft, engines and components. Airbus, at its first quarter results presentation, explicitly refused to factor tariff impacts into its 2025 financial outlook, claiming it was too early to make an assessment.

Faury also commented that “that there will be only losers in the aerospace industry, in particular in the US”. He added that Airbus was in talks with US airline customers as to how to mitigate the impact of tariffs, but indicated that Airbus would not be making concessions on the delivery prices, that it was up to US airlines to pay US import taxes on Airbuses.

The cost of the tariffs will somehow be split between the OEMs/suppliers and the airlines/lessors, and will eventually be passed on to shareholders and passengers, but it is the airlines that that are most directly exposed in the short term. Delta has bluntly stated that it will not accept its ten A320s and A350s due this year if it has to pay tariffs on imports from Europe. China is refusing delivery of up to 50 Boeings scheduled for delivery this year. Aengus Kelly, CEO of Dublin -based AerCap, the world’s largest operating lessor, was quoted in the Financial Times as warning that “if this tariff situation is to continue and the Europeans will be forced to put tariffs on Boeing aircraft... it will be far more challenging for Boeing to sell into Europe and China”.

Ryanair has said that it will delay MAX deliveries until 2026 if tariffs are imposed by the EU, and has even threatened to cancel its 184 unit order completely. This is MOL hyperbole to be sure, but could orders actually be cancelled because of tariffs? The 10%-plus price increases unexpectedly added to final sale prices because of tariffs might or might not be covered by the escalation clauses in the sale and purchase contracts, questions for corporate lawyers to argue over and earn large fees from.

Airlines are facing a particularly problematic situation when it comes to accepting new aircraft, one that the US Administration patently did not have a clue about. Deposits and PDPs are paid at regular intervals during an aircraft production process to the OEM; by the schedule delivery date about 80% of the price will have been paid, but these payments are calculated on the list price of the aircraft not the discounted price negotiated by the airline. So it is often the case that the airline will have paid more pre-delivery than the total cost of its aircraft, with the result that when the aircraft is delivered the airline also receives a financial credit. Sadly in the new world of tariffs instead of a cash-back the airline will be facing an unexpected invoice for, say, $14m for an A321NEO.

The best outcome would be for the President to declare that tariffs have been a HUMONGOUS SUCCESS — then abandon the policy . Unfortunately, the likelihood is that the US will retain minimum 10% barriers, maybe 20%. This may seem like a relief, but to the civil aircraft industry, that has operated tariff-free for most of the past 25 years, this in theory could equate $8-16bn in extra costs on European imports to the US and a further $8-16 bn on retaliatory tariffs imposed by the Europeans on US exports (based on the respective backlog tables, 10% or 20% tariff rates, using list, not actual, prices, and ignoring possible exemptions). For perspective, over the past 10 years Boeing’s cumulative net result was $(1.4)bn, while Airbus’s net profit totalled $27.5bn.

This $16-32bn represents a tax transfer from the two manufacturers (and/or airlines) to their respective governments: so instead of Boeing and Airbus and the airlines using these funds productively they will be absorbed in government spending. That is the meaning of tariffs.

	Total Aircraft	Value ($bn)
Lufthansa	101	10.3
Ryanair	184	8.6
AerCap	128	7.0
Avolon	113	5.4
Pegasus	100	4.7
British Airways	25	3.8
SMBC	81	3.8
SunExpress	73	3.4
IAG	50	2.3
Norwegian	50	2.3
Avia Solutions	40	1.9
Macquarie AirFinance	40	1.9
Cargolux	10	1.6
TUI Travel	34	1.6
Turkish	11	1.4
Air Europa	20	0.9
Timaero Ireland	17	0.8
Air France-KLM	4	0.5
Luxair	10	0.5
SkyUp	7	0.3
Enter Air	6	0.3
TAROM	5	0.2
CMA CGM	1	0.2
TOTAL	1,110	63.8

Note: value based on  estimated (not list) prices

	Total Aircraft	Value ($bn)
United	191	13.1
Delta	185	10.7
Air Lease Corp	180	9.0
Frontier	168	8.7
American	146	7.6
JetBlue	103	4.3
NAS Aviation Services	81	4.2
Spirit	53	2.6
Jackson Square	50	2.5
Aviation Capital	55	2.5
Breeze	56	1.8
Azorra	18	0.6
Total	1,286	67.6