By: Carter Copeland
Cost will become an increasingly important aspect of the Aerospace OEM investment debate in the 2020s. For the most part, the margin expansion of the 2010s seen at Boeing and Airbus was about fixing money-losing programs, which had a huge impact on the companies’ earnings and FCF growth algorithms. Future growth and margin expansion will rely more on profit rate maximization, and cost is going to become a very important differentiator over the next 5-6 years.
Cost gets very little airtime in our investor discussions. Price is more debated and better understood. Aerospace pricing is inflationary with escalators contractually built into new aircraft sales and inflation-plus pricing power is a key characteristic of the commercial aerospace aftermarket. Hard-fought competitions between specific aircraft platforms drive investor interest in pricing dynamics and differentials. Interestingly, even then, the Street rarely explores whether price deviations are consistent with cost moves.