The Sky's The Limit: Washington Update and Farnborough Takeaways

Richard Aboulafia:
Oh my God. Have you seen the services budget bow wave? You layer up everything that they've got to pay for, especially F35A, KC46, GBSD, B21, T7. Something's got to give.

Roman Schweizer:
From DOD to Congress and from the White House to Wall Street, the Nat Sec Need to know podcast, an unrehearsed podcast presenting insightful discussion and forecasts of the major national security and defense issues of the day. We're leading off with our editors round table to discuss the top national security issues in Washington. Joining me is a murderer's row of experienced Washington editors and reporters, Tony Bertuca from Inside Defense, Aaron Mehta from Breaking Defense, and Robert Wall from Aviation Week. They've each covered Washington and the Pentagon for years and are as well-sourced as anyone. Thank you all for joining. Let's get after it. All right, first question is to Aaron Mehta. You've been on the road a bit at Farnborough. You've also had a lot of coverage about the NATO summit that we had here in Washington this month. Not going to ask you to tie those two together, but talk about some of your major findings. How was the NATO summit? Was it impactful? And then as we slid into Farnborough, did you have that sort of European spirit of goodwill and what was the vibe?

Aaron Mehta:
NATO, it was certainly hot and sweaty and a pain to get into being in downtown DC with security cordon. But it was really interesting and I think in some ways honest. This was supposed to be a celebration of NATO's 75th anniversary and 75 to go and everything ended up being about Trump, and what's going to happen if Trump wins? This came about a week after Joe Biden's disastrous debate with Trump when all of a sudden it seemed like the election was basically a foregone conclusion that Trump would win. And you saw a lot of delegations talking openly about, "Yes, we do need to spend more." And also making pilgrimage to the Heritage Foundation, trying to get interviews and meetings with people on the Trump team to basically run a rear guard of, "Oh God, we actually think Trump's going to win now. How are we going to manage this?"
Of course that was before President Biden dropped out of the race and obviously things have been somewhat upended electorally right now, but it was impossible to miss this sense of real pessimism when you talked to the Europeans at was supposed to be an event that was supposed to be a big celebration of NATO, real trepidation running throughout the whole thing. There were a couple of agreements that came out of that and interesting one about icebreakers with Finland, Canada and the US, some announcements about weapons for Ukraine. But really it was all about looking towards November and what's going to happen. And I do think some of that did bleed into Farnborough. While it wasn't as political an event just by its nature, you did have a lot of people at Farnborough trying to figure out, "Okay. What's going to happen if Trump wins? Will that impact investment in Europe? How serious are the Europeans about increasing their own defense spending?" It's a trend and a thread that carried through from NATO to Farnborough is these kind of questions and concerns about the transatlantic relationship going forward?

Roman Schweizer:
Well, I think everybody's going to be on pins and needles through November, whether you're American or carrying a different passport. Tony or Robert, anything to piggyback on kind of that just particularly on the NATO stuff? I want to get into a little more detail on Farnborough, but any kind of thoughts on that?

Robert Wall:
I thought very interesting. Also, kind of playing off of what Aaron also just said, how is Europe reacting to all this? And they did use the event to announce some European things including a new missile initiative. So Europe trying to do more together. I think there's definitely a theme here to that, that there's this feeling that they've been talking about this for decades. Obviously, it hasn't really gone anywhere in grand scale or not often very successfully when they have tried it. But I really think that there is a sense of urgency and it's not just because of what's going on in Ukraine. I think it is also in part about concerns about what may be going on in the US or what may happen in the US.
Ironically in a way though probably for investors, it could be for almost like a good thing for those worried about money going into Europe because I think it's just reinforcing the view among the politicians over here. We need to spend not just more money on defense, but we need to spend more money on sovereign defense. So that obviously would be a good thing for the defense industries over here.

Tony Bertuca:
Yeah. All I would say is Aaron is right about hearing that people were making those pilgrimages to the Heritage Foundation. You talk to defense insiders and people who used to be at the Pentagon and people who become lobbyists and people who become business development executives. That was very much the case a couple of weeks to a month ago. It was sort of, "Okay. Insiders are getting their Rolodexes together trying to find out, who is MAGA in exile that will be maybe returning to power? How do I reconnect with these people? How do I get on their speed dial, that type of thing?" And the momentum was sort of building in that direction I think. That seems to have come to a halt at least according to people I'm chatting with.

Roman Schweizer:
Interesting. Yeah, no, I think the Harris presumed nomination at least kind of reset the race certainly, and we will certainly close the gap on expectations.

Robert Wall:
Roman, funny you should mention that, but it reminds me of a Farnborough moment actually. On the eve before I was at an event and the news broke that President Biden was not going to see a second term. And it was very funny in a way. Every conversation anyone had just stopped and people were trying to figure out what it all means. The show hadn't started yet but it really, really did change the dynamics of the conversation.

Roman Schweizer:
I bet, for sure. I do just want to close out this sort of NATO summit discussion with one thought about how relieved I am that the government of Canada announced that they will get to 2% of GDP by 2032 to just really show that they're pulling their weight and won't be left behind with 23 of 32 countries now above the 2% standard. So I don't know, we will see what the next administration, depending on which flavor it is here has to say about that.

Tony Bertuca:
Yeah. They really kicked it in gear there.

Aaron Mehta:
Yeah. Canada really be kicking a whipping boy at NATO. I'm not entirely sure exactly why that is, but people were real knives out for Ottawa and they really got the brunt of the anger about people not spending enough, kind of all got just funneled to the north.

Roman Schweizer:
Yeah. No, I thought it was somewhat amazing. Well, let's change gears. I want to switch to Robert and really this is a kind of home turf story for those listening who don't know. Robert is based in London. We've got a new government, the Starmer government, and there is a defense review there which potentially has both spending, top line spending and programmatic implications. Can you talk a little bit about that? And obviously that was a bit of a shadow over Farnborough. But what do you think that new government is going to... How are they going to treat defense, and what does the defense review have in store?

Robert Wall:
Yeah, so it's interesting. To some extent, they telegraphed they were going to do a review. And then within a few days of getting into office, they kicked it off. Lord Robertson is basically leading it, the former NATO Secretary General. So it's not a huge surprise. It's maybe even a good sign for defense. They got on with it right away. It's not something they put on the back burner. What was interesting, again at the Global Air Space Chief's Conference, the minister for the armed forces technically was asked about GCAP, the British version of NGAD, the UK Italian Japanese future fighter program and whether that would be now in jeopardy. And he gave a very benign answer I thought, which is basically, "The review just kicked off. I'm not going to rule in or out any one program."
And that created a bit of a stir here because some people decided that meant that GCAP was not long for being. And I think over the course of the week of Farnborough, the narrative changed a bit. Starmer showed up very low key, which was actually interesting. Minute security detail and no incidents. Anyway, when you compare that, what usually happens in Washington. But anyway, he was there, he made an appearance, he didn't have to, kind of showing his commitment to aerospace and defense in general. And I think as people exited, especially the people on the GCAP program exited the show, they felt much better about it and really more of a sense that, "Okay, there's a review. Nothing's going to happen necessarily. It's not necessarily good or bad, but nothing's pre-judged going in.
If you think about what the Starmer government has said early on, there's actually a lot of things that work in GCAP's favor, which is one, they want to do more international and restore Britain as an international partner, in this case Italy and Japan, and they care about good jobs and engineering jobs and eventual production jobs and GCAP will probably fit the bill. Those will be good union jobs. On the other end, of course, it's an expensive program and they don't have much money and it's really difficult to figure out how they're going to pay for everything they need to do, not just in defense. But it was interesting. Almost perhaps just as interesting was that it didn't dominate. Yes, it was a subtext to Farnborough. But it didn't dominate it in a way you might've thought a couple of years ago it would. And maybe that's just a bit of a reflection also where the UK is now right now in the pecking order of what matters on defense.

Roman Schweizer:
Right. No, I do think the review is interesting and I mean obviously the Ministry of Defense has been very focused on naval modernization. I think perhaps then followed by Air Force and certainly well much like here in the US, the army tends to be last at the table. I will say as far as GCAP goes, I will continue to call it Tempest until someone of significance tells me not to. And then Robert, I think you're absolutely right. It is a tremendous opportunity for the industrial partners, BAE, Leonardo and Mitsubishi to develop an export program, develop a program, really a six gen program that could build several hundred aircraft over its lifetime. So it's probably something that I think as you mentioned, fits in that starer government sweet spot of what they would like to see.

Robert Wall:
Yeah. And you're right on Tempest. In part, people are slowly heading back there. But the other interesting point to perhaps make is one of the policies on national security they've been clear about is, "We want to restore the relationship with Europe strain post Brexit and specifically with Germany." And there's so many questions about the Franco German Spanish future combat program, FCAS or SCAF or whatever term you want to use. Now there's questions. Well, if that falls apart, will they bring the Germans somehow into Tempest? So I think lots to watch here with the coming months and years.

Roman Schweizer:
We'll just keep on the Farnborough theme right now. Aaron, and you had a piece on Hanwha, a South Korean defense company, about some of their initiatives. And I understand some other South Korean companies were perhaps pretty prominent. Eric, could you talk a little bit about what you saw and what you think they see as the opportunity?

Aaron Mehta:
Yeah. Hanwha brought a prototype engine model. And look, this is something where they're saying, "If we get an industrial partner, we think we can have it done in nine years and we think it's going to have this ability and this thrust that'll be comparable to the OG 404 engine that's going to be used in the K-21 now and eventually we'll make this thing for the K-21 and also maybe for drones and the technology could be used to power naval ships. To me, the engine itself, given how far away, this thing is less interesting than the I would say interest in getting a domestic engine, which we all know is kind of the holy grail for military aviation, for countries that are trying to come up in that world.
But it kind just fits into the broader thing of Hanhwa and South Korean defense industry broadly over the last two years has really just exploded. It's always been there. It's kind of a second or third tier exporter. But we saw really starting with a series of major exports to Poland of Howitzers and wheel track vehicles and the training aircraft, and then the one a giant contract for wheel vehicles, infantry riding vehicles down in Australia [inaudible 00:13:41] Rheinmetall. And ever since then, all of a sudden the South Koreans are really an export defense powerhouse and they're very open about the fact they're targeting US Army programs and they want to break into the US market. I think some of that's been helped by the fact that Korea, by the stint of its relationship with North Korea has always had a strong Howitzer and shell production capability. And in a post Ukraine world, that's a very popular thing. So that's helped them. Also, they've got a lot of government support for some of these companies to focus on exports. That's helped as well.
But I think they're going to see a fairly big presence going forward at any major defense show. They had a fairly big presence inside hall four at Farnborough. And talking with people from them, they expressed that they think it needs to be bigger. Talking to folks from Hanhwa, they said kind of a sense of, "Hey, we actually could have gone bigger. We don't have enough space for the meetings we're taking." I think you'll probably see them at AFA and I know for sure you're going to see a big presence at AUSA. And I think that's probably going to be the case for them going forward. I also just want to swing back to GCAP for one second just because this cracked me up. They unveiled GCAP Tempest, maybe it's FCAS, the nomenclature is insane. That's separate.
A new version of what they're saying the Tempest thing will look like, it's kind of more like a Son of Vulcan, big swept wings, significantly larger than it was at the previous Farnborough where they first unveiled it. But if you look closely at the model, you could actually see that the wings were literally being held on with duct tape that had been painted over. And I feel like that might be a good metaphor for how people were talking about the program this week because to what Robert said, everyone wanted to talk about the fact that, "Oh, well, does this mean it's not protected in the SDR, in the review?"
I do think, as Robert said, the government has done a good job of walking some of that back, but there's still definitely a lot of questions about GCAP's future I think just because of the price and also because the US Air Force is obviously having some second thoughts on NGAD and what that should look like. And while they are absolutely separate programs, the same threat architecture is what they're aimed at. And so if you have to think UK, Italian, Japanese planners are talking to their American counterparts, and if the Americans are saying, "Hey, this idea that we had isn't really going to work for the future," then you got to think that's going to influence the other programs as well.

Roman Schweizer:
Well. I think that's fair. But I do remain suspicious or dubious that NGAD is really on the ropes. I am still in the category of, I think it's more attributable to Air Force sticker shock from some proposals. Once Lockheed Boeing priced out exactly what the Air Force was asking for, I'm sure that probably made the budgeteers faint from shock. Look, we've got a fast and flowing conversation here. I do want to jump over to Tony just to talk a little bit about what we've got cooking in Washington this week because we've got certainly Senate appropriators are going to be marking up at the end of the week. We've got a hearing on the commission on the National Defense Strategy. So just any thoughts? And then of course, Congress is going to take next month off because they've obviously logged so many hours. So Tony, any thoughts on where we're headed in DC legislatively?

Tony Bertuca:
Yeah. The House of course having covered itself in glory has taken its break a week early, but the Senate is still in session. Senate appropriators are going to meet Thursday and they're going to mark among other appropriations bills, the defense appropriations bill according to a deal that Republicans and Democrats have worked out that should have 21 billion in what they're calling emergency funding for defense. They're arguing that it doesn't technically break the cap mandated by the Fiscal Responsibility Act. But yeah, it's 21 billion more than the cap allows. And there's I think 13.5 billion in non-defense that kind of helped free up that 21 billion. So we'll see details on that this week Thursday. But then, yeah, speaking of top line and top line adjustments, we've got a Senate Armed Services Committee hearing with the National Defense Strategy Commission. And they're saying that much like the last commission in 2018, defense spending has got to go up according to them, a bipartisan commission, an annual increase of three to 5% real growth every year.
So that's obviously not something that's been going on with the defense budget. And if you remember the late Jim Inhofe, Senator Inhofe used to wave around that NDS report all the time during hearings. And this next one that they've already unveiled and they're going to talk about on Thursday, it's the kind of thing he'd wave around again if he were still around. So we've got a lot of arguing about defense spending still to come and everybody knows it's really likely, like miracle otherwise, we're going to be on a CR when Congress actually does get back. And none of this spending levels for defense or non-defense, none of it's going to be figured out until after the election. But at least Thursday, certainly with the SAC, Senate Appropriations Committee, we get to see their opening sort of bid in the process. And they're in a little bit under what the Senate Armed Services Committee's bill would authorize. They wanted to authorize a 25 billion increase over the FRA cap, so SAC would be 21 billion.

Roman Schweizer:
Well, and I will turn it over to Aaron and Robert for their thoughts on this. And despite the rumors, I do not have a three to five real bumper sticker on my truck. But I do think that there is a continued momentum, both certainly GOP Defense Hawks, but in both parties for some sort of continued increase. Obviously, whether or not non-defense spending is tied one-to-one on that, we will see. And Tony certainly as you reference former Senator Inhofe, we now have Senator Roger Wicker who of course has wasted no time in taking up that mantle calling for 5% of GDP to be spent on defense and wanted a plus up of I think 50 or 55 million. So he was certainly going large early on that. So I will toss it to Aaron or Robert if you guys have any thoughts just on the general trajectory of defense spending or too any of the interplay here in Washington as we get into next year.

Aaron Mehta:
Yeah. Not to directly steal from Green Day, but wake me up when November ends. We'll see after we get through CR and probably CR into the next end of January. And we'll see what the Congress looks like and what they're willing to do at that point.

Robert Wall:
What I find interesting is for years increases in global defense spending have basically been the US spending more and not many people doing that much else. What's curious is really what's happening this year is for the rare occasion where it's really not the US. The US is relatively flat and actually the increase that's happening in global defense spending is largely driven by others. That's to some extent the Europeans just catching up with and trying to fill in needs. It's obviously what's happening in Asia. I'm not sure it amounts to much over the long term, but it is a curious anomaly.

Roman Schweizer:
Yeah, no, I think that's a fair observation. And I think the one thing that from an investor perspective or certainly folks that are thinking about the sector longer term, there's a bit of risk about what the US Congress or administration, whether it's Biden, Harris or Trump will do with Ukraine spending. But certainly it's notable that President Vladimir Zelinsky had a phone call with Donald Trump and we will see if that was a perfect call. But at least they're speaking and perhaps thinking long term about what a potential negotiated solution or ceasefire to that conflict might mean. But also I think longer term, what that might mean for supporting Ukraine and its building up its defenses and US company role in those kinds of things.
So all right, let's change gears. I think one of the things sort of in the pre-conversation that I'd like to dive into maybe a little bit is I understand there was a fair amount of talk at Farnborough about collaborative combat aircraft and certainly there's a strain of interest here in the US. So maybe Robert, if you want to lead off with that and then we'll cycle through the guys in terms of what we think is going on with CCAs.

Robert Wall:
Yeah. I think it was certainly in a way the hot topic. But I also think if Aaron and I talked to a dozen people or more, we probably got twice as many views. It seemed like everyone seems to agree both on the industry side and on the customer side, these are important. These are big. They potentially change the dynamics significantly either industrially or from a war fighting perspective. But they also all seem to not be able to agree what they should really be. And quite curious I thought was there was a bit of it on the industrial side, a fight breaking out after the US Air Force increment won awards on CCA, Anduril and General Atomics. A Northrop exec took the stage and kind of said, "Well, we really need to think more higher end," basically almost poo-pooing what these people were doing and obviously trying to drive the requirements somewhere else, which is maybe more that company's sweet spot.
But again, as I said, also talking to the customer, between this idea of expendable, attritable and exquisite. So something might not even plan to come back, something that comes back, but if it gets shot down or well, and then something that really is basically a high-end combat aircraft, just not with a pilot in it. I think that there's so much debate on where people should be, what's the financial sweet spot and what operationally will actually be able to do the job because some people, proponents of the high end say, "It doesn't matter how many low end drones you put out there. They all get shot down. It really doesn't really change the equation." But I think it's a fascinating debate and I think it's far from over. But I'd be curious to see how Aaron reads the tea leaves.

Aaron Mehta:
Yeah. I think that's a pretty good summary of it. Everyone has an idea of what these things should do, the mission sets they should be able to perform, how much they should cost and how they should be built. Nobody seems to be in agreement outside of themselves on any of those points. And the challenge here, some of it goes back to the original US Air Force messaging around it, which was these things will be attributable and kind of [inaudible 00:24:48] that we could throw at things." And then slowly over time it became, "Well, actually these things will be more expensive. Well, they can't actually be a attritable because they're basically small airplanes and they'll be a couple a hundred million dollars each and yada, yada, yada." And all of a sudden you're dealing with exquisite systems that are capable for a long range China mission, but which are no longer really a attritable, but they're still talking about mission sets as if they are attritable.
And there seems to be a real disconnect, certainly inside even just the US Air Force and officials when they talk about it. But then if you expand it out to all the other militaries in the world, everyone seems to have their own ideas. It's telling that when you walked around Farnborough, the CCAs that you saw on display certainly from the European side were not sheep systems. These are large systems that are high-end exquisite capabilities, basically a son of [inaudible 00:25:43].
And I think that that's being put out there is kind of the options that companies are marketing that tells you a lot about what they at least feel they're being told from the governments behind closed doors about what requirements are needed. Again, that doesn't match the public mission the way it's been described for the last couple of years by officials, again, mostly on the US Air Force side, but elsewhere as well. And how companies are going to be able to close that gap between what the idealized version of things are and what the reality is and how they make that profitable I think is going to be a pretty big question.
I think Robert's absolutely right to point out the comments from Northrop because Northrop has said openly over the last 18 months or so, "We're not going to compete for cheap systems. We're competing for high end exquisite capabilities." We saw obviously Anduril and General Atomics won the first tranche, but there's a second tranche. Nobody's really sure what the difference is going to be between those two tranches. Maybe it's something that's more high end, maybe they go more low end. We're kind of going to have to see how this shakes out. But it's just a lot of excitement about CCA. Everyone wants to be part of Loyal Wingman and have part of that business. Nobody really seems to have a good grasp on what it is.

Robert Wall:
Yeah, I totally agree. And especially with the thought. Also, everyone wants a part of the business. You talk to the engine makers and everyone there is throwing out ideas from engines from basically what are souped up cruise missile motors to something that's maybe a slightly derated advanced fighter engine. So their, again, appetite galore and uncertainty of what it is.

Tony Bertuca:
And Roman, you mentioned sticker shock, right? That's what's happening here. And it's playing out as they're trying to put together the five-year plan for FY 26 as you've got an 81% cost surge in Sentinel, as the F 35 is now projected to be more than $2 trillion over its lifespan. That's why they're kind of trying to hit the pause button inside the building to figure out how they want to commit to something over the next five years. It is sticker shot at a bad time.

Roman Schweizer:
No, that's for sure. The Air Force certainly wants more than it can afford. Aaron, I'm going to one up you on the Green Day quote and go with a Zoolander quote and just say, "CCAs are so hot right now." But I do want to point out one other thing that's not really bothered me, but I've kept in the back of my mind. In November of 2017, an MQ9 Reaper used an A9X Sidewinder missile to take down a target drone the first time I think ever. In September 20th, the Air Force released a statement saying an MQ9 had used an A9X to take down a target drone simulating a cruise missile. And folks may know that there's something called the MQ-20 that General Atomics builds that I think the Air Force had bought six or seven of them and stashed them at Wright-Patt and has been doing who knows what with them.
So I think CCAs are all well and good and it's a great public display of how innovative the Air Force is. But I would be really disappointed if there's not some really badass stuff going on in the classified world. So I'll just throw that out there, no need for anybody to piggyback on it. But look, these capabilities exist and they exist at a pretty good cost compared to frontline fifth gen, fourth gen fighter aircraft. I just hope we're doing something to field this capability a little quicker than most people think. All right, gentlemen, we are coming up on time. I wanted to switch into sort of a parting shot phase. If each of you could kind of give me your best shot, give us something either underappreciated, something on your calendar that looking forward to and something you think folks should be paying attention to. So I will throw that out there and we'll see who wants to take the bite first.

Robert Wall:
Well, maybe I'll jump in since we've been talking a lot about NG and GAD and GCAP. A comment from the Northrop earnings call that really struck me asked about the Navy's version of this FAXX, which has repeatedly had money taken out of it. So I thought it was interesting that Northrop CEO Kathy Warden kind of made the point, she gets the impression or she believes the program is still tracking and despite all these discussions and that she's looking for an award next year. So that's something I'm certainly keeping my eye out for.

Roman Schweizer:
Great, thank you. And bonus points if it is a Super Hornet upgrade, but we will just see. All right, let's see who's next on the podcast?

Robert Wall:
That'll be the Super Duper Hornet.

Roman Schweizer:
I like that. Go right out and trademark that. The Super Duper Hornet. I love it. All right. Tony, you're up.

Tony Bertuca:
Yeah. My parting shot is sort of last week, house oversight subcommittee had a hearing on how dysfunctional DOD's acquisition system is, especially with the large MDAP programs. Everybody took shots at the F-35, the LCS, the Ford class. Lawmakers were there just saying this drives them up the wall. But they didn't have anybody from DOD during the hearing to discuss this with, to sort of... They said they wanted accountability, but they weren't talking to anybody who they could hold accountable. They were in fact talking to outside experts. You had Brian Clark from Hudson there and McKenzie Eagle and at AEI, Moshe Schwartz from NDIA. A representative from POGO was also there. So they were there talking with experts saying, "What do you think we ought to do? What's the way out of this?" And one lawmaker at the end, Steven Lynch from Massachusetts said, "This is really great that we're having these hearings. But maybe we ought to try to actually do something about this and let's do something."
And there wasn't a sense of... I do think Congressman Rothman who chaired the subcommittee said, "Well, I sure hope the House Armed Services Committee is paying attention to what we're doing here because it's not oversight that writes the NDA. It's House Armed Services committee that's putting together the NDA." So that's sort of my parting shot just to say that that's a hearing that normally would've had a lot of visibility on it. But I think just because of the time of the year it happened and they didn't have anybody from DOD and it happened to be the same day Netanyahu was coming to town to speak, there just wasn't a lot of eyeballs on it. And people I talked to just sort of were like, "Oh yeah, I guess that happened. How did that go? And I think it's just sort of indicative of the intractability of some of the problems that the Pentagon faces with these MDAP programs with cost and schedule and not being able to deliver.

Roman Schweizer:
Yes. I understand it was a real Festivus airing of grievances. But as you mentioned, they've been tilting at this windmill for a long time, unfortunately. Aaron, all right, do you have something for us on the way out?

Aaron Mehta:
So a couple of weeks ago, the Defense Innovation Board put out a report with some recommendations, one of which was to recreate ATNL, the old acquisition office that was split up by John McCain led reforms in Congress in 2016. That's what gave us the under secretaries of acquisition and sustainment, and research and engineering. The DIB is calling for them to be reemerged to create one office. And it's basically back to the future for all of us. I know Tony covered this pretty closely at the time, as did I. It's kind of a whiplash moment because all the arguments they're making for why these two offices need to be merged into one office are the exact arguments that were made why that one office needed to be broken up into two.
The DIB has influence, it does not have any real power. So how much, if anything, will actually come out of this? I don't know. But it was just one of those things where I got a little cognitive dissonance and also just got a kick out of Frank image of Frank Kendall who of course was the last ATNL head, now the Air Force secretary just sitting in his office reading it and just chuckling to himself that he was right all along. So we'll keep an eye on that. Again, I don't know if anything will really come out of it. But it just really caught my attention. And I do think to what Tony was saying about the hearing. There is a sense out there right now of, "Hey, we still haven't got an acquisition right. Maybe we should do something different." Maybe that's something different is just going back to what we did before.

Roman Schweizer:
Yeah. That is the perfect full circle metaphor to pair with the House Oversight Committee on DOD failed programs. Look, the one thing I would say, and it will be interesting to see... Well, it'll be a lot of things. But if Donald Trump is elected as the next president, certainly who he brings with him into DOD and from an acquisition perspective, you can think back to his views on the F-35 early on in his tenure. Certainly the quite cut rate deals he was able to induce Dennis Muilenburg at Boeing to sign up for. Perhaps there might be some push towards some acquisition reform or changes. But we shall see. Gentlemen, we are up on time and certainly we could keep going. It was a fantastic discussion. I really appreciate your time, your insights, and thanks so much. Look forward to doing it again.
Now we're going to shift gears and go to our focus discussion on US and foreign defense aerospace programs. And for our feature conversation, I'm joined by my good friend Richard Aboulafia, who is a managing director at the aerodynamic advisory and an aviation luminary par excellence. In addition to his day job advising the top commercial and defense companies in the world, he also publishes a monthly letter at his eponymous website. His June letter published at the beginning of July was his evaluation of the current status of major US DOD aerospace programs. So now with a visit to Farnborough on his passport, I wanted to bring him in for a chat on us and foreign defense aerospace programs.
Richard, it's great to see you and thank you for joining us. I want to ask you to set the stage a little bit about the overall defense aerospace market before we get into the particulars. What's your view of the market right now? What's demand look like? What are the supply considerations? And how do you think we've sort of transitioned over the last several years?

Richard Aboulafia:
Yeah. First and foremost, I'm kind of the guy who doesn't have a job because I've spent 35 or so years as a market specialist. And the problem isn't really markets. Demand looks really solid. A couple of hiccups here and there, but for the most part, led by defense but also followed by commercial we've never seen demand this strong. The problem is all on the supply side, and that really was felt at the Farnborough Air Show. So it's all about how many you can build rather than what people want to buy. Bizarrely enough in Farnborough, people are focused on orders. I'm like, "It really doesn't matter. You can't have those planes anyway." So the broader environment is supply constrained, and that's especially true for sustainment, maintenance, repair, overhaul and whatever else. Both civil and military, we're in a very production limited environment.

Roman Schweizer:
And when you think about that, how much do you think is still sort of Covid recovery versus had Covid never happened, are we in just such a incredible demand environment or had production atrophied so much? I know a lot of the primes and subs talk about whether it's hiring or machinery or things. But where is that dynamic and what do you think it's going to take to get to a sort of full production capacity?

Richard Aboulafia:
When people focus on Covid, obviously that's the sort of big, "Oh my God, I can't believe that happened. There were factory closures, logistical snafus, and of course the laying off of lots of people who would've been very useful." That's all true. But what's I think just as important is that for the first time in almost since the dawn of my professional career, probably yours too, we've just got this extraordinary defense environment. We'd spent the past three decades watching defense either decline or flatten. And now it's just come roaring back limited again only by production. So that's an even bigger factor than Covid. But also you look at how Covid happened and how it impacted the workforce in the context of broader demographics, it couldn't have come at a worse time. You've got a bunch of poke folks who were basically about to retire, who were supposed to mentor the new generation, and instead they kind of retired early. Just, "Okay, I'm leaving, see you."
And then on top of that, for the first time ever certainly in my career, you had every other sector of the economy come back faster and stronger than aerospace. Normally we lead the way. Not this time. So we were kind of last in line to hire and didn't have the older gray beards to measure these new folks. This is a recipe for a talent catastrophe, which is what we've been experiencing, and it's going to take us years to recover. So yes, Covid, big factor. But it's really kind of the indirect effects of Covid coupled with an unprecedented defense upturn.

Roman Schweizer:
Right. And clearly, global defense spending, angst, worry, Russia, China, the whole gamut is really, I guess to date ourselves, hearkens back to the beginning of our careers when we were young fit and had full heads of hair and whatnot. I know there's a shift in digital design and engineering. What about the adoption of robotics or new manufacturing techniques? How long is that transition going to take and will it occur if at all?

Richard Aboulafia:
Yeah. If I've heard one thing after all these years. And so since we had full heads of non gray hair, it's that charismatic new technologies are often oversold. And certainly a lot of what we've got, whether it's additive or whether it's... Well, CAD/CAM was certainly useful, but you've got MBSE now and all kinds of digital design. We can't help but wonder if it's not been extremely oversold. Not to drill down too deeply into one particular program, but Boeing's T-7 Supersonic Trainer was positioned as a kind of, "This is what happens when we do MBESE and pure digital and all that." Guess what? Lots of delays, serious cost overruns. Sounds like every other program that we've seen in the past few decades that has been troubled. So I think there's a lot of potential. It could get better, there could be some exciting new technologies coming down the road. But it's just important not to overstate things.

Roman Schweizer:
Yeah, no, I think that's very true, and I think it also requires the companies to make the investments, to make that leap. And that's tough to do when you're worried about profitability and shareholders and free cash cashflow in some cases.

Richard Aboulafia:
That's absolutely right. I'd just quickly add that if you visit St. Louis, they've done remarkable things with digitization of the F-15, which of course is a [inaudible 00:41:33] drawing plane from the seventies, amazing aircraft. But all of this process of digitizing stuff has served to really gov up the works and slow things down and probably increase costs too.

Roman Schweizer:
Well, I would say we didn't rehearse this, we didn't script it, but that is a great transition to my next question because the other day I was pondering as I often due for no reason that the US still has almost all of its major fighter programs, with the exception of course of the F-22 in production. As you referenced, F-15. F-16 in South Carolina is getting up to rate. F-18 is still sort of teetering along, but still I guess what you would call sort of full rate two per month or whatever, it's at production. And then of course F-35 just got the clean bill of health. So they're all either at or moving to something like full rate production, at least for what they've got. What do you think about those rates? One, if you're worried about a global war, it's good to have all those aircraft in production. And as you mentioned, the demand. So do you think those rates can go higher? What are we going to be talking about in five years in terms of those aircraft?

Richard Aboulafia:
Yeah, right. Here again is a perfect example of the kind of production constraints that are getting in the way of my market forecast. If you could look at markets and just flip a switch and build aircraft, you'd have F-35 rates at 230, 240, 250 a year easily for the next few years. The people who've joined the F-35 Club from Canada to Finland to Switzerland to Germany kind of want their planes now. And instead, well, they're not getting them and even the Air Force is having a hard time getting them. So even if you discount TR3 Block 4 and those delays and allow for the resumption, we'll be super extra lucky sometime in a year from now to get to the stated goal of 156, which we have yet to achieve. So there's a great example. F-16, yeah, that should be four per month and probably should stay there for a few years. But they're having a hard time. They'll get there.
F-15 looks like Israel's coming true, probably a few other customers too or repeat customers. That looks like it's going to be two or three per month for some time. FA-18 is the only troubled US program. It's late to end in 2027. It looks like that's for real. No one really knows what the Navy's going to do, your old pals in the Navy. A few years ago, there was the strike fighter shortage and no one really knows what the answer to that is, especially with FAXX further pushed out. In Europe, Eurofighter's making a nice recovery, nice comeback. Rafale, they just again... push a button, you do three or four per month and they're having a hard time building 20 a year and creeping still around. So the only thing that's really a troubled area that's not increasing or trying to increase is the FAE team.

Roman Schweizer:
Well, as you know, I do tend to dabble in conspiracy theories. Or let's put it this way, I'm an aficionado. I do enjoy a good one. And this is my personal opinion, not represented by the Defense Department, DOD or DON or anything else. But I would hedge, I would suspect that the Navy is going to wind up throwing its hands up on FAXX and buying more F-18s. And the one thing I do note, I don't know if you caught it, I suspect you may have, but the Navy recently debuted, I believe it's the AIM-174, which is a Raytheon SM6 missile underslung a Super Hornet, which hearkens back to the good old fashioned days of the AIM-154, the Phoenix missile, which was used to keep bear and backfire bombers at bay. I'm just stunned, I'm actually surprised. It's perhaps the one thing that's positively happened that surprised me. Have you had any thoughts on that?

Richard Aboulafia:
Yeah. And wow, this is our golden opportunity to geek out a little both on conspiracies and tech. But I remember it was an F 14 with the AIM-154 that held the record for years in terms of beyond visual range target destruction. I think I want to say 130, 140 miles if memory serves. Boy, that makes a lot of sense what you're saying. So it might be more than a conspiracy theory. It might also just be a very educated hypothesis. If you looked at penetrating counter air for the Navy mission and you were to say, "Wow, it's a hornet's nest in that A2AD environment. Why don't we just rely war on standoff munitions like this new Raytheon missile fired from existing platforms?" That might be the best way to protect carrier battle groups and project naval power. That makes total sense to me.

Roman Schweizer:
And it's a twin engine aircraft, not a single engine aircraft like the beloved... Well, let's put it this way. Maybe the extremely capable, but perhaps not beloved F-35C, which is still unfortunately one of those issues that perhaps the Navy will never get over.

Richard Aboulafia:
Yeah, it's interesting. The F-35Cs that have been delivered, the majority have got greens, not the blue water folks. It's pretty clear they still have, as you imply, a strong resistance to the F-35.

Roman Schweizer:
Well, let's change gears. Let's get to a six gen fighter. The good folks, the fine folks at BAE part of the GCAP program, the teammates, Leonardo, Mitsubishi, Heavy, rolled out a new concept model as some imagery for its new fighter, its six gen fighter. I'm still going to call it Tempest. I don't know if I'm allowed to do that, but I guess I will. What are your thoughts on where GCAP's at and what was the vibe?

Richard Aboulafia:
Since that thing was unveiled, I've been a big fan of the concept, especially the alliance between Britain and Japan, two people who have actually fairly costly harmonized air defense requirements. Now, yeah, I went into the BAE chalet over at Farnborough and I saw the new redesign. And I was like, "My God, that thing is like the size of some very impressive monster movie monster or something, just like that thing is huge." I think the British boffins out there, you scratch beneath a bread at an air show and you're going to find an anorak who hangs around at the edge of airfields and loves his aircraft. They refer to it as a mini vulgate, and taking you back to the wonderful bat winged bomber that the Brits used in the sixties and seventies and even in the earlier part of the eighties. So it's huge.
However, hanging over it was the Keir Starmer government, and of course their new strategic review that's going to be underway. And this is a very big budget item. And even though they've got buy-in from the Japanese and the Italians, and who knows, perhaps, the big debate whether they'll allow the Saudis in, it's vulnerable. It's at a very vulnerable stage of its program life.

Roman Schweizer:
Now, I know that you are, let's see, dubious, suspicious at best about European collaborative programs. But I think that's probably more Franco German programs. But as you kind of reference it, this is a great opportunity for BAE. The Japanese really need this, right? Being spurned on from F-22 and maybe part of AUKUS or not part of AUKUS kind of getting not the favorable treatment from the US that they would like. Aside from the politics, it really is a pretty good industrial team to deliver a fifth gen plus or really truly six gen aircraft that could be exportable and certainly not like NGAD.

Richard Aboulafia:
Yeah, very strong agreement. And of course, BAE is still very much a strong fighter prime. Mitsubishi, aspiring, somewhat capable. The F2 was sort of fighter prime adjacent. And then you've got the engine question. Rolls Royce, of course, is arguably Europe's only truly strong combat engine producer. I apologize for the hate mail I'm going to get from Safran, but it's largely true. IHI working with Rolls Royce, work here as the devil in the details. Can this be apportioned out on the basis of cost contribution? What happens when people with money but no experience or industrial capability, read Saudi Arabia, want to join the Italians? What percent will they demand for in Meccanica, Avio? Whoever else will this be in our free aircraft? Will us mezzanine contractors be free to join in the fund if your Collins or GE or whoever?
These are all enormous questions. And again, you've got that budgetary review too, but there's so much potential, there's so much talent from the companies involved. The requirements are really strong. Both the Japanese air self defense forces and the RAF, frankly, they need range and they need time to climb, and they need speed. In other words, not an F-35, which of course is making this a bigger aircraft resulting in the very large creature I saw represented at Farnborough.

Roman Schweizer:
Yeah, no, it's truly a twin engine heavyweight in a world where air superiority seems to matter a hell of a lot these days.

Richard Aboulafia:
That's right.

Roman Schweizer:
So I guess then sort of switching gears slightly, but we've heard this back and forth about NGAD here in the US's six gen development program. I remain of the camp that I think this is some public negotiating after some sticker shock on the proposal costs from Lockheed and Boeing. I also think there's a little bit of a difference. I think we saw the new head of ACC talk about a down select by the end of the year. And Secretary Kendall talk about the role of CCAs are unmanned. There tends to be differences of opinions between the appointed civilian leadership of departments versus the four stars who come up through the ranks, and particularly the fighter jocks who want a manned aircraft. So I'm just wondering, what are you hearing about NGAD? Obviously classified, obviously the companies are probably not talking it up. But what's your outlook for that program as we get into potentially down select, election season, et cetera?

Richard Aboulafia:
Yeah. First of all, I think I'm with you. This will happen eventually in the form of accrued penetrating counter aircraft. I just can't believe the services culture and orientation would change so drastically as to not make this a priority. Now, there's two issues. One is a contradiction, and the other is just a bummer. The bummer is, oh my God, have you seen the services budget bow wave? You layer up everything that they've got to pay for, especially F-35A, KC-46, GBSD, B-21, T-7. Something's got to give. There's just no way to grow the top line to allow for all of that, and then include our friend NGAD in there. So even if they didn't have big choices to make in terms of design, in terms of technological capabilities and performance features, it would still have to slip to the right anyway. It just would, especially with the GBSD overruns we're talking about.
Part of me, okay, I'm an aircraft guy. I wouldn't mind seeing GBSD kind of be the one that takes the hit. The problem is that it's a real estate program for gerrymandered red states. You're not going to make it go away. Now, the contradiction here though is that Secretary Kendall has implied this is very expensive, perhaps too expensive. Other people have said it's got range, but not enough range. It should be like Tempest and even bigger. Okay. Those are two very different directions to go. Less expensive, more capable, bigger, longer range. You can't have both. So there's that problem.

Roman Schweizer:
Right, no, and perhaps it's an Air force in the midst of struggling to define requirements, which is always a challenge in and of itself or a frustration. And I will say, look, one of the other things just to sort of, not to change gears, but I think what's lost in the war in Russia, Ukraine debate or the cottage industry of lessons learned is that if one side was able to establish air dominance, it would be over. If the Ukrainians could do it over the Russians or the Russians. So I really think for the Air Force to think about having a twin engine dominate the skies fighter is very important. And perhaps the idea of sliding NGAD a little bit, I noticed that one of the Air Force Generals came out and suggested that upgrading the, what is it? 30 Block 20 F-22s, that the Air Force would like to retire and actually keeping those? That gets you 30 very capable aircraft in short order. If you're worried about a Taiwan scenario in three years, having 30 extra F-22s sure does make a hell of a lot of difference.

Richard Aboulafia:
Yeah, it does. Obviously there's been a lot of disparagement about the upgrade capabilities of those early model F-22s with their basic computers and whatever, those were really rudimentary. But just having them as air vehicles, absolutely right. Even if they're only used for training, I think it would probably help the broader deplorable force of F 22s. So yeah, I completely agree.

Roman Schweizer:
Well, listen, one thing I did want to commend our listeners to is, for those who don't know, and that should probably be no one, but you do publish your monthly letter at your eponymous website. And your June version, which you published at the end of June or beginning of July, you kind of ran through all of the sort of major US fighter or US defense aviation programs. Anything we left out, any parting shots on perhaps CCAs or flora or things? I will say on CCAs, I hope it's a shell game. I hope this is bait and switch, that what we're seeing publicly from the Air Force is simply a slight of hand to confuse us from what is really going on in the classified realm, that there's 500 of these things flying somewhere over the South China Sea. But we'll see. Any closing thoughts?

Richard Aboulafia:
Well, yeah, and you're exactly right. CCA is a huge complication to all of this. It's going to be a big enabler, I think, whether it's 2030 or 2040, whenever it happens, whenever AI and super connectivity and whatever other technological improvements unfold. But what's interesting about the airshow was that people were really talking in terms of the one big building block, which is engines. There was an agreement between GE and Kratos.
And GE is clearly looking to an entire family of low thrust turbo fans, and people are also looking at one notch up because frankly, if you have big deployability concerns about CCAs, you've got to make it bigger, the range that you get with a bigger platform. And they can't all operate at Guam, right? In which case you have to start thinking about, Hey, do we have a really good combat engine in the 8,000 pound [inaudible 00:58:04] class? And people who are looking at that too. So yeah, I expect we're going to see a lot more production experimentation, maybe not the kind of mass production that some people would like because we don't know the optimal size of a CCA. But at least they're getting underway in terms of those building blocks, particularly gen engines.

Roman Schweizer:
That's a fascinating point. I should not say things before it's a fully formed thought in my head, but I will go out on the limb. And really there is almost a renaissance in propulsion in terms of talking about hypersonics and scram jet, solid rocket motors demand and lower cost production models. And then as you mentioned, in terms of jet propulsion. So it's really across the entirety of things that fly, right? Obviously I bow to your eminence on this, but is that a correct thought?

Richard Aboulafia:
Always say stuff before they're fully formed because they're often correct. Right? I agree completely. There is a remarkable upturn in appreciation and research and whatever else for what's needed. And the problem is that nobody really knows the right answer. For hypersonics, for example, do you have rotating detonation? Do you have scram jets? Do you have something completely new? Are we just going to maybe throttle back on the concept of not going or boost glide vehicles, but instead going on cruise hypersonics? I think there's a lot going on in the black world I can only guess at. But it is interesting to see this renewed appreciation for the propulsion side of the business and probably a lot more money for it because you don't design a turbine for an aircraft. You design aircraft around the turbines that you got around the propulsion that you're developing. That's the key first step.

Roman Schweizer:
Yeah. Yeah. No, and certainly you've got NGAP. You've got the F-135 Power Program, or I forget the acronym. So it's really kind of across multiple platforms, weight classes, performance ranges, weapons. Yeah. It's kind of an interesting thesis. Well, I know we could keep going on this and really get into some of the nerdy aspects and some of these programmatics, but I think we will call it at that. Richard, I can't thank you enough for doing this. I really appreciate it. It's always great to catch up with you, and I look forward to doing it again. So thank you so much.

Richard Aboulafia:
Yeah, it's my pleasure, Roman. Thanks very much and absolutely. Happy to join. Anytime.

Roman Schweizer:
All right, everybody, thank you so much for joining us for this edition of the Nat Sec Need to Know Podcast. We'll talk to you soon.

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