The Trump administration has shocked and unsettled the aerospace industry with its plans for five significant tariffs. Two target aluminum and steel, while three target the largest trading partners of the United States: Canada, Mexico and China. These recent tariffs imposed by the Trump administration are sending shockwaves through the aviation sector, particularly affecting aircraft manufacturing and leasing. The newly imposed 25 percent tariffs on steel and aluminum, along with additional duties on Canadian, Mexican, and Chinese imports, are leading to increased costs, supply chain disruptions, and strategic shifts within the industry.
Aluminum is the most popular material in aerospace. Steel is Aerospace’s second most popular material which is used all over aircraft. In 2018, President Trump’s tariffs on imported aluminum and steel increased the cost for U.S. companies to manufacture airframes and aircraft components. So, such tariffs will likely increase the costs of new aircraft deliveries in the United States and may impact Boeing, an American multinational corporation that designs, manufactures, and sells airplanes, rotorcraft, rockets, satellites, and missiles worldwide. The company also provides leasing and product support services.
From reports, the tariffs have increased the price of imported materials, leading to a potential $40 million hike in the cost of a Boeing 787 Dreamliner, according to Aengus Kelly, CEO of AerCap, the world’s largest aircraft leasing company. This increase could push airlines — many of which operate on narrow profit margins — to seek alternatives. This puts European rival Airbus in a prime position to capitalise on Boeing’s struggles. Kelly predicts that Airbus could dominate as much as 75 percent to 80 percent of the global aircraft market if the situation persists, leaving Boeing largely confined to the U.S. market. This has planning implications for airlines in Africa that rely on the Boeing products for their operations.
Meanwhile, the trade war is not one-sided. Canada, China, and the European Union have responded with retaliatory tariffs on U.S. products, further complicating the economic landscape. To circumvent tariffs, manufacturers might explore shifting production or assembly facilities to countries with more favourable trade conditions. Africa’s progress towards industrialisation has been slow despite abundant natural resources, a youthful workforce, and the potential to become a global manufacturing hub. Policy initiatives may be needed to attract the shift in production facilities to the continent.
From reports, it is expected that in aggregate, the five tariffs would add up to $5.3 billion in taxes, most of which would be borne by OEMs and suppliers, as their capacity to pass on costs to customers is low. On top of this are the indirect costs of complying with tariffs. Presently, many capital allocation and strategic decisions are reportedly frozen until some certainty is gained.
In the airline world, low fuel prices in recent years have already caused carriers to operate less fuel-efficient aircraft longer and defer new purchases. The tariffs add one more reason for that trend to continue. Vendors who can supply cost-effective means of continued operations of used aircraft may see a boon, however, and buyers may find it may be a better deal to purchase used aircraft or maintain existing aircraft. These are questions to consider while looking ahead.
Aircraft leasing companies, which facilitate fleet expansion for airlines, are also to be impacted. With higher aircraft prices, leasing firms may struggle to offer competitive rates. Aircraft leasing rates may rise as the costs of acquiring new aircraft increase. Airlines may respond by extending the lifespan of existing fleets instead of purchasing new planes.
Meanwhile, in the business aviation sector, some jet buyers are reportedly rushing to close deals before tariffs drive up costs. Others are reportedly inserting clauses in contracts to protect themselves from potential tariff-related price hikes. These are lessons for the aviation industry stakeholders on the African continent.
When tariffs are imposed, somebody in the marketplace has to absorb the increase. Manufacturers, retailers, and transporters will see the stress of the tariffs directly impact them in an almost chain-like reaction. As a result, manufacturers may be forced to establish or exacerbate other foreign and domestic relationships in an effort to maintain costs and expenses. With the increase in manufacturing costs, retailers will be forced to pass this cost along to consumers leading to a reduction in overall sales. Prolonged tariffs could contribute to reduced airline profitability, leading to increased ticket prices and potential industry slowdowns.
As demand then decreases, the aviation industry will be negatively impacted if such spreads to Africa. The long-term effects of the trade wars and tariffs on the aviation industry are still uncertain. However, it is likely that the industry will continue to face challenges, including increased costs, reduced demand, and disrupted supply chains. As the industry adapts to these changes, it is essential to monitor the situation and adjust strategies accordingly.
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