Global geopolitics were profoundly disrupted three years ago by the near-total and instantaneous severance of relations between Western countries (Europe + North America + Japan) and Russia, as of April 2022.
To make matters worse, Donald Trump’s new trade war, characterized by very high tariffs, has been added.
These two events have global repercussions, not least for the aerospace industry. Their impact is both immediate and long-term. This article attempts to analyze these short- and long-term impacts for the airline industry.
1. The breakdown in collaboration between Russia and the West
Short-term consequences
The cessation of economic and diplomatic relations between Russia and the West has had immediate effects:
Rising energy and commodity prices: Europe, heavily dependent on Russian gas, saw gas and oil prices soar, leading to increased inflation and a major energy crisis.
Economic sanctions and collapse of trade: Russia’s exclusion from the SWIFT banking system and the introduction of trade sanctions have led to a sharp drop in imports and exports between Russia and the West. Aircraft equipment manufacturers can no longer supply spare parts or repairs, nor can they charge for them. Lessors have lost 5-10% of their managed fleets (which were operated by Russian airlines). Airworthiness certificates are no longer up to date, and Russia has somehow “re-invented” a whole certification procedure for aircraft and aeronautical parts in place of EASA and the FAA.
Reorganization of geopolitical alliances: Russia has turned to other economic partners such as China, India and certain African countries to compensate for the loss of the Western market.
Consequences for Western industries: many European and American companies have had to rethink their supply chains, particularly in the automotive, arms and agri-food sectors. Airlines to and from Russia were cut off (Serbia tried to maintain them for a few months, but was soon forced to give in). Airlines that used to fly over Russia are no longer able to do so, at least when they are Western airlines – an undeniable competitive advantage for non-embargoed airlines).
Long-term consequences
Regionalization of the world economy: the emergence of distinct and less interdependent economic blocs could slow down globalization and redraw trade balances, leading to blocs that no longer trade. Trade via third parties is a stop-gap measure that won’t be viable for long (e.g. Europeans could continue to buy Russian oil, but via India, with a significant increase in tariffs to pay intermediaries).
Sino-Russian rapprochement: China and Russia used to be neighbors, but not necessarily good buddies. The new situation will encourage the Russians and Chinese to step up their cooperation, with both countries keen to find partners and markets outside Europe and North America. It’s not out of the question for India to follow suit.
It’s more complicated for a country like Brazil, which is much further away physically from Russia and China, and would be hard-pressed to do without the USA (its closest export market) or Europe.
2. Donald Trump’s New Trade War
Short-term consequences
Donald Trump’s drastic increase in tariffs, particularly on Canadian, Chinese and European products, is causing immediate economic upheaval:
Falling exports vs. rising imports: Canadian, European and Chinese producers (and all the others who took this unilateral and brutal increase in American tariffs in the face) will see sales of certain products fall, or even collapse (depending on the price elasticity of the products on offer).
Conversely, American consumers will see prices rise on many products, notably electronics, cars and raw materials.
Trade Ripostes: In response to U.S. taxes, the European Union, China and other countries are obviously putting up their own tariff barriers, reducing U.S. exports. This silly little trade war has only just begun.
Uncertainty on financial markets: The instability caused by these tensions is leading to major fluctuations in stock market indices and a re-evaluation of multinationals’ strategies. Not all traders will complain about this instability, as some financial products are designed specifically for this purpose. The “classic” shareholders and CODIRs of major groups, on the other hand, will find it more distressing.
Impact on the manufacturing industry: Many American companies, dependent on imported parts, will see their production costs rise, reducing their competitiveness. Others will see competing products disappear or become more expensive, creating a business opportunity. The same applies to other markets, whether Canadian, European or Asian: some will feel the full impact of the new tariffs and simply disappear, while others will have a rare opportunity in their market. In short, the rules of the game have just changed.
Long-term consequences
We need to talk about the long-term consequences, even if we don’t know how long these new tariffs will remain high. Trump behaves like a businessman: he fires on all cylinders and knows how to be opportunistic. No one can say today whether he won’t come back to these new tariffs very quickly.
Let’s assume they remain unchanged and high for a long time.
Changing supply chains: Companies are seeking to diversify their sources of supply, encouraging a partial relocation of production. This is particularly true in the highly globalized aerospace sector.
Reduced U.S. economic leadership: If the trade war continues, it could encourage trading partners to favor other economic players, notably China and the European Union.
We can therefore imagine that Airbus, Embraer and Dassault Aviation will continue to gain market share in both civil and military markets. The “political” dimension of these aircraft purchases remains important, including for civil aircraft. This customs war is indeed a war; it is likely that countries “attacked” by these tariffs will react by favoring partners who treat them not fairly, but predictably. Choosing a fighter plane commits a country for at least thirty years, and it’s difficult to do so with so much uncertainty.
By way of example, the European countries that chose Lockheed Martin’s F35 now realize that they are bound hand and foot to the goodwill of the American military. It’s not too serious yet, but it’s very unpleasant.
Technological and industrial change: in the face of tariff barriers, some sectors are investing in innovation and automation to offset rising production costs.
Death of the WORLD TRADE ORGANIZATION: born of the GATT (General Agreement on Tariffs and Trade) agreements of 1993-1995, the WTO is set to disappear, perhaps to be replaced by other international structures. The WTO was supposed to study and manage any cross-border disputes that might arise. Moreover, signatory countries – including the USA – are not supposed to take unilateral customs measures. Vanitas vanitatum et omnia vanitas: the WTO no longer serves any useful purpose.
Conclusion
These two events are generating a profound transformation in global economic and diplomatic relations. There are immediate consequences, and it’s possible that there will be in the long term, even if it’s impossible to be certain.
In this increasingly fragmented world, companies cannot simply wait for the situation to improve. They must proactively redouble their efforts to diversify their supplies and markets, strengthen their international presence, diversify their international customers and identify new business prospects.
Business innovation, active prospecting and adaptation to new economic dynamics are becoming strategic imperatives to secure their future, no less. The ability to anticipate and react rapidly to geopolitical developments will undoubtedly be a determining factor in the success of companies in the years to come.