Richard Aboulafia: June 2017 Letter

Dear Fellow Le Bourget Melted Tarmac Connoisseurs,

Spexit. I didn’t invent this funny word; it currently gets 49,100 Google hits, and refers to a Spanish EU exit. It’s not a popular idea. Even in Catalonia, where I am now, where just under half the population is pro-independence, open borders and the EU are still hugely popular. This is because the idea of economic nationalism is discredited here. The last guy who promised to Make Spain Great Again died 40 years ago. Spain was stagnant under Franco; even when the economy was okay it was a sluggish, inbred society. The local aerospace industry reflected this stagnation. As the UK confronts Brexit, it might want to reflect upon Spain’s experience.

I first visited Spain thirtysomething years ago, and the country was still afflicted with the dismal echoes of Francoist autarky. There wasn’t much innovation, since out-of-box thinkers were routinely exiled, or shot. The military was just beginning to figure out that the enemy was located outside the country, not inside it. The country’s aerospace industry was focused on building aircraft for national requirements. It seldom worked with global partners, and seldom built anything exportable. CASA’s corporate history, a lovely two-volume cloth-bound set, shows little work of lasting value being done by the company before the 1980s.

After Franco began his valiant struggle to remain dead (per 1975 Saturday Night Live), Spain opened up. So did its aero industry. CASA partnered with other companies in other countries, took more risk-sharing partnerships, and ultimately was absorbed by Airbus. Aernnova emerged as a noteworthy structures firm. ITP emerged as a global engine partner company, to be acquired by Rolls-Royce. Spain’s A400M and Eurofighter assembly lines may be the last of their kind.

Today, Spain produces many important composite structures, systems, and turbine components, but almost all for global customers. This isn’t the same as producing planes under license or building small props for local use, but it is generally profitable. Much of the country’s economy has morphed along similar lines; SEAT, for example, was like CASA for cars, and like CASA it is now owned by a global company (Volkswagen). That’s why nobody takes Spexit seriously. It was already tried under Franco, and it was dumb. 

The UK is a different story. The Brexiteers promised to Make Britain Great Again. They won. And from an aerospace perspective, that’s intriguing, because unlike Spain, the UK’s aerospace industry has a truly glorious past. But it was seldom, if ever, a profitable past.

Worse, the UK Government shows no signs of funding or supporting a return to this past. The RAF’s F-35s are coming from a foreign line, with Pratt engines and no plans to restore UK fighter sovereignty. In fact, right after the Brexit vote, at Farnborough last year, the government announced big plans to buy AH-64Es and P-8s from Boeing, but with nothing for UK industry. The original Apache buy came with mandated local production by Westland (Leonardo today) and Rolls-Royce engines. This time, Boeing will rebuild the helicopters, and they will use GE engines. Similarly, the P-8 buy comes with no local content (other than what’s baselined on all P-8s). Britain’s long history of building maritime patrol aircraft – Shackletons and Nimrods in the post-War era – has conclusively ended.

Without a back-to-the-future plan, the UK aerospace industry will stay on its current path: as globalized as Spain’s, only much larger and more important (to the UK economy and to the world). All Airbus wings – over 1,200 per year – are produced in Britain, with their parts imported from all over the world. Some 90% of GKN’s business is outside the UK, with a similar percentage for Rolls-Royce and other UK firms. So, the future of UK industry depends on the terms of Brexit. 

Yet the road to Brexit is not starting well. This month’s election produced comically disastrous results for Prime Minister Theresa May, who somehow managed to make opposition leader Jeremy Corbyn look like a serious person, which he isn’t. A weakened May still insists that “Brexit means Brexit” but seems to have no idea about how to handle the upcoming negotiations with the EU. They have two years (from March) to come to an agreement, and the EU has every incentive to make this painful to the UK, as a cautionary lesson for other would-be EU exiters.

The default outcome of these negotiations is no deal, or a hard Brexit. The UK would need to negotiate its own trade agreements, quickly, and hope that the EU would be generous with them. Without new agreements, all those aero components coming in to the UK could be inspected and taxed. All those UK wings and engines going out of the UK could be inspected and taxed. Engineers and workers crossing borders could need new professional certifications, work visas, and be subject to income taxes.

That’s just the start of it. Pan-European technology development funds would dry up. Air access agreements would need re-negotiation. The age of pan-European programs will likely come to an end, since Germany would be unlikely to work on future European military aircraft without UK involvement. Notably, in May Germany requested its first classified F-35 briefing. This month, El País reported that Spain will likely follow them.

The rest of the world seems to be slowly backing away from closed borders. The Trump administration has reversed every single daft Make America Great Again anti-trade idea it ever proposed, particularly the ghastly Border Adjustment Tax (more here). France’s Emmanuel Macron campaigned and won in May on a globalization agenda. Germany’s Angela Merkel and Canada’s Justin Trudeau are proving able champions for the cause too. Only Theresa May’s Britain is still eagerly paddling towards the economic nationalism waterfall. 

Almost everyone in Spain knows that Spanish aerospace can’t go back to the old days. I’m not completely sure that everyone in the UK, particularly in government, has quite absorbed that lesson. It is highly unlikely that a hard Brexit will be an extinction-level event for UK aerospace. But it’s deeply unpleasant to watch them take that chance. 

June Aircraft Binder updates include theF-35, V-22, and 737/P-8 reports, and the Regional Aircraft overview. There’s a new Cirrus Vision Jet report too. Have a great month.

Yours, ‘Til A Brexited Westland Helicopters Creates Another 1980s-Type UK Political Crisis,

Richard Aboulafia