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Dan Loney: Well, certainly there
are many questions being asked right now about the impact of
tariffs. And it really runs the
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gamut of different sectors out
there right now. Right now, we're going to talk about the
potential impact that tariffs
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might have on the airline
industry. And a pleasure to be joined by Wharton's Gad Allon.
Gad, great to talk to you again.
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How are you? - I'm good. How are
you? It's great to be here. Thank you. Look, obviously, the
question of tariffs, I think, is
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something that— and I would
guess you would agree with me that it's so multifaceted for so
many different companies and
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business sectors right now.
- Yeah, because over the last 25 years,
we made every possible product
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as cheap as possible. And that
meant to make it made all over the globe. And now we have to
start collecting these pieces
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again. For most firms, they
don't really know when they make things. They know where they
make things, but they don't know
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where their suppliers are making
them. In which case, I mean, we talk about wide and deep
implications.
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So when you talk about the airline
industry and maybe even the manufacturing side, where are
the potential areas of impact
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that tariffs could have an
influence on? So I think it starts really as
simple— if you look at what
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happened with a 787, which is
the Boeing plane, Boeing has a way to try to expedite the time
to make it and reduce its cost
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of making that, made it— it is one of
the biggest worldwide projects in terms of production, right?
So just to give you an idea,
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where there are components made
in Japan, because otherwise you cannot sell to ANA. There are
components made in Italy.
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Otherwise you cannot sell to the
Italian airlines, Anitalia. And so there are components made
everywhere. In the short term,
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what does that mean? In the short
term, it means that actually,
there are— continuously, you need
many of these components
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to maintain your
plane. Planes require maintenance continuously. If you
prefer to have doors not fly off
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the plane in the middle of the
flight, it helps to try to maintain the plane. And this
maintenance is going to
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increase, right? Because that
means that every component that is brought into the US now has
to be paid. There are some
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tariffs to be paid. So in the
short term, we talk about probably some five to 10%
increase for airlines to
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maintain these planes. In the
midterm, the entire plane is going to become more expensive,
right? Because being now, we're
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going to get into the fact that
there is going to be probably attempts to try to bring more of
that capacity to the US back,
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and that's going to make things
more expensive. That means that there is no capacity. So I
expect in the midterm, for the
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cost to go even higher. Long
term, I think it's hard to know, right? I think there's a whole
realignment now of how— what is
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viewed as an ally and what
countries will be able to sell to other countries. But no, I
think it— if the airlines will
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have— airlines run on very low
margins. And as such, it's not— they can absorb these costs. It
might be that Boeing will absorb
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some of these costs, but Boeing
is not in a great shape either, given what happens now. So you
don't really have too many
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places that can be absorbed. And
so the only ones going to absorb it are us as consumers.
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Wouldn't the expectation be, to
a degree, that the consumer would feel some of this, the traveler
would feel some of it, as we
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move forward, the longer that
the tariffs have an impact? Yes. I mean, the short term, I
think impact is low, right? It's
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primarily maintenance. Because
these planes are already in the air— most of the work is done by
people. So it's not like most of
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the cost is— is— is already
absorbed in what we have. So it's primarily some small— but
primarily maintenance. Midterm, I
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think that's where we see the
big impact. Because, I mean, I think the planes that are not
supplied yet, the planes that
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are being built now, you need to
have much, much deeper rehaul— overhaul of planes. Then again,
I think airlines— I mean, as the
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price of these planes are going
to go higher and the maintenance is going to be more expensive,
ticket price will have to absorb
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it. I mean, airlines are not in
the place where they can actually say, "Well, we're going
to absorb some of that as price—
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as ticket prices." So
ticket price is going to go up, we're going to see potentially
fewer planes flying,
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potentially, maybe cancellation
of lines that— as we get into supply chain disruptions and
higher cost, airlines might have
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to prioritize which routes are
more profitable and direct planes there. We might see older
planes in the air, right, and
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older planes mean they
potentially, you know— we have this long streak recently of— of
accidents and mishaps. We might
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see more of that. Airlines are
going to be— hopefully not, but will potentially delay a lot of
that. So we'll see, I think,
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even the impact. I think some
of it will be ticket prices, because of shortage— some of that
will be ticket prices because
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the— the expenses. Some that
will be just, like, fewer routes. Some that are going to be lower-
quality planes.
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You mentioned supply chain. When
you think about how the parts are delivered to the
manufacturers, or delivered in
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repairs being done by the
airlines themselves. Where are the areas of focus where supply
chain could be impacted because
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of tariffs? Almost everything. You know,
like they— I would say the most important ones are probably
the engine and the landing gear.
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Engine is done in different
places. But I mean, the landing gear, for example, is in store—
is out— is out— offshore, then
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brought in. Like, if you look at
the model of what Boeing did with the 787, they disassembled the fusilages.
Boeing is essentially
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just a large-scale aggregator.
They just, like, you know, Lego, they put everything together.
But each one of these fusilages,
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every different
component is made in a different country. And so each
one of these, right, there is a
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supplier in Israel that supplies
a component to a subcontractor, then supply to— to Boeing . There
is one in Italy. There is, like,
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literall in every single
country, there is one. And so like, these are suppliers that
are now going to be expected
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to pay these tariffs. And so
like, ultimately, it's an attempt to try to realign the supply
chain. We'll try to bring into
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place where we have lower tariffs,
potentially. And lower tariffs, however, means that there is
currently, at least, not enough
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capacity to provide things at
the rate we need them. How much does this challenge,
then, Boeing specifically, when
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you think about all that that
company has gone through over the last few years and trying to
get itself back to what I think
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we historically considered
Boeing to be, going back a few decades?
- Yeah, I don't
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think it's specifically going to
Boeing. I think it's a— this is going to hit Airbus. Airbus,
over the last few years, built
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more and more capacity in the
US, surprisingly, right? So they have in Mobile, Alabama, like,
a fairly big plant, primarily
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because this— to be able to sell
in the US to airlines, they needed to— to have
manufacturing here in the US.
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The south of the US became locus
manufacturing in many countries— compared to many countries. And
so the same way— it's actually
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quite interesting that if you
look at automotive, we see something similar to that, where
the US firms moved manufacturing
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to Mexico and Canada, but
actually it's the German firm that actually brought the
manufacturing to the US. So I
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think we'll see— Airbus is almost,
like, as exposed as Boeing, primarily because the plabook
is a similar playbook.
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You want to
sell to more airlines, you need to be as global as possible. When you think about the air
carriers themselves, are the
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lower-budget carriers impacted,
similar to what, say, the Americans and the Deltas would
be impacted? Or is there a
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different— different level of
impact? I would say the low-costs are
definitely impacted more. I
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mean, they've just fewer places
for them to absorb it, primarily in the US, where there
was already— they were squeezed
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quite a bit. Like if I look at
Europe, for example, Ryanair managed, overall, to do well. So
I'm sure that they have a— and
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they will never pride themselves
on the newest planes and never pride themselves on complex
flights. So I think the ones who are
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going to be exposed more are the
ones that actually maintain a higher level of safety or don't
have the balance sheet and the
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income statement to try to
absorb it. So low-cost airlines are going to be hit. Complex
airlines are going to be hit
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like that. Simpler airlines like
Ryanair, probably less so. Gad, great to talk to you today.
Thanks very much for your time.
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All the best.
- It was great to be here. Thank you, Gad Allon
of the Wharton School.