Richard Aboulafia: August 2018 Letter

Dear Fellow Global Crisis Junkies,

There’s this country. It’s an emerging market with fast economic growth and outsized aerospace industry aspirations. Unfortunately, the government is deeply incompetent, and uses a thin veneer of nationalism, religion, and conspiratorial thinking to disguise its stupidity. Inevitably, there’s a debt crisis and a currency plunge, both of which threaten regional shock waves, with possible global impact. As a tangential consequence, the country’s massive aerospace ambitions are imperiled.

Turkey today? Sure, but also Indonesia 21 years ago. The similarities (above) are striking. There’s much to learn from a comparison. First, two differences:

Difference 1: Turkey is a much bigger aero market (and a NATO partner, too). Indonesia’s military isn’t large and has never taken more than a handful of new or used planes. Turkey’s military, by contrast, is the second biggest in NATO, and flies around 300 fast combat aircraft. Turkey is far more important as an airliner market than Garuda and its cohorts were back in ‘97. Turkish carriers have 136 orders on backlog with Boeing, including 25 787s. Both countries, however, are terrific travel markets. I honeymooned in Bali, and Istanbul is one of my favorite cities in the world.

Difference 2: Indonesia ’97 didn’t involve a confrontation with the US; Turkey ‘18 does. Since Erdogan has staked his legitimacy on confronting Trump, it’s hard to see how he backs down. Trump heavily depends on support from the Christian right, and they’re aggrieved that one of their pastors has been thrown in jail, along with tens of thousands of other people who’ve annoyed Erdogan somehow. Trump’s probably not going to back down here, either.

This US-Turkey confrontation will impact our industry. Turkish Airlines vowed to halt advertising in US media. “We as Turkish Airlines are taking our place alongside our state and people,” said a spokes-stooge, managing to encapsulate everything wrong with a state-directed economy in a single tweet.

Meanwhile, Turkey’s military leadership knows it’s best to obey the supreme leader. When I last met with a group of senior Turkish officers, their median age was around 32. They had replaced people now in jail, or worse, and understandably didn’t want the same fate as their predecessors. That doesn’t augur well for US systems purchases. Like that Turkish Airlines guy, the people running Turkish businesses and the military now sound like hostages reading a carefully-prepared note as someone holds a gun to their heads. We didn’t see this in Jakarta ’97.

Yet there’s one Enormous Similarity between the two crises: both Indonesia 1997 and Turkey 2018 have started numerous aerospace programs, attracting interest from component and technology suppliers around the globe. With Indonesia, this primarily took the form of civil airliners, while Turkey has prioritized military platforms and rotorcraft. Vainglorious platform aspirations, sadly, are a close cousin of miserable governance.

What happens next? Predicting outcomes in international politics is harder than forecasting aircraft programs and markets. As always, a good base case is that somehow everyone muddles through: the Turkish economy stabilizes, with weaker growth and a weaker lira, but no collapse. There will be the usual face-saving compromises and gradual backdowns. Erdogan will blame the country’s problems on Gulenism, Zionism, and Martians. While this bad guy will stay in charge, Turkey won’t follow Iran or Venezuela down Pariah Parkway. Turkey will stay in NATO, and even if there’s no reconciliation with the US, things won’t get worse either.

If this is indeed what happens, here are three aero outcomes:

First, consider the Elephant in the Corner, Turkey’s F-35 role. The John McCain National Defense Authorization Act (NDAA), signed this month, puts further F-35 deliveries on hold (they’ve taken two, but these have remained in the US). In addition to the imprisoned pastor issue, Turkey has signed for Russia’s S-400 air defense system, which could yield valuable data on how to use a Russian system to track a stealth jet. This F-35 decision could go either way. But I would argue that it doesn’t matter much for the program. Turkey’s industrial role in the program can be replaced in reasonably short order, and the country was only going to take around 8 planes per year out of 150-160 total annual output.

Second, there’s the broader Turkish market. It will decline. The airlines and military will have less buying power due to slower economic growth, budget constraints, a weaker lira, and more political interference. Sikorsky’s T70 co-production deal will die, but Leonardo’s T129 is far enough along to survive (the Pakistan T129 sale may collapse due to US export license problems, though). A few jetliner orders will be deferred, and in the long run, Istanbul’s new overbuilt airport will look a bit like St. Louis Lambert after TWA died. Sad.

Third, and biggest: most of those new Turkish aircraft platforms will disappear. The impossibly foolish Turkish Regional Jet was reportedly killed last October. The TF-X Turkish fighter will remain a concept plane, as will the Hurjet T-38 fast jet trainer replacement and the T625 helicopter. The Hurkus turboprop trainer will die after a token production run. The problem with all of these is that they depend almost completely on imported components, which become a lot more expensive when the local currency reaches parity with food stamps.

All of this could be worse. Again, there are political and economic worst-case scenarios with Turkey that would be deeply horrible. And consider the Indonesian outcome. Indonesia today has an insignificant role in the world aerospace industry, a jarring contrast with the time they aspired to be one of the few (fewer than ten) countries in the world that actually built a jetliner (my September 2007 letter describes the Indonesian fiasco endgame).

Indonesia and Turkey provide a valuable lesson to aerospace equipment suppliers seeking new platforms opportunities: If something sounds too good to be true, it usually is. Emerging markets are a great thing. Emerging platform producers are usually a disaster.

Yours, ‘Til I Can Visit Istanbul Again (sigh),

Richard Aboulafia