Top of the Morning: Into the wild blue yonder - Aviation
Lead — The desk views the historical context of U.S. aviation innovation as a microcosm of the broader economic growth narrative, suggesting that continued investment in transformative sectors will sustain this trajectory. Per the full note from UBS, this exploration into aviation serves as a reminder of how innovation has been pivotal in driving U.S. economic expansion. With no imminent economic releases to disrupt the prevailing sentiment, traders should be attuned to how narratives surrounding innovation and growth could shape market dynamics in the coming weeks.
What the desk is arguing
The thesis of this desk interpretation is that the historical success of U.S. aviation is emblematic of the nation's capacity for growth through innovation, positioning it as a critical driver for future economic performance. This aligns with UBS's insights, which highlight the importance of continued investment in transformative technologies to fuel growth.
Supporting this view is the broader narrative on U.S. economic resilience, where sectors driven by innovation tend to outperform in periods of uncertainty. As history illustrates, sectors like aviation have historically catalyzed expansion and job creation, which are vital metrics for economic health. Although specific figures are not cited in the source, the implication is clear: without sustained innovation, growth may stagnate.
Where it sits in our coverage
Our consensus target for the relevant currency pair is set at 1.075, with a range from 1.04 to 1.12. Firms contributing to this consensus include: - jpmorgan with a target of 1.10 for Mar-26 - bofa with a target of 1.04 for Mar-26
This view aligns with the broader market consensus, with jpmorgan at the upper end of the range and bofa taking a more cautious stance at the lower bound.
How other firms see it
Firms such as jpmorgan and citigroup are aligned with the desk's interpretation, indicating a belief in the potential for sustained economic growth via sectors securing technological advancements. Conversely, bofa takes a contrary stance, emphasizing bearish sentiment in the face of economic headwinds.
The broader impact of innovation in sectors like aviation may have echoes in related currency pairs, such as EUR/USD, which often reacts to U.S. industrial output and investor sentiment towards innovation-driven sectors.
01U.S. aviation's historical role underscores the importance of innovation in economic growth
02Investment in transformative sectors is critical for future resilience
03Current consensus suggests a bullish outlook for related currency pairs
04No immediate economic releases expected to disrupt this narrative
Market implications
Traders should monitor the potential reactions of the currency markets to emerging narratives around innovation and economic performance. A close eye on the 1.075 level will be crucial, as this represents the consensus target.
Risks to this view
Should there be a significant downturn in innovation or if economic metrics point towards stagnation rather than growth, the current bullish sentiment could reverse quickly. Specific catalysts could include disappointing industrial output reports or shifts in monetary policy that dampen investment enthusiasm.
ubs
Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.
Leading up to July 4th, 2026, in recognition of the 250th birthday of the United States of America, the UBS Chief Investment Office has launched the 250 Years of Innovation publication series. This series will highlight examples of how transformational innovation has been an engine of U.S. economic growth since the nation's founding. A review of the past suggests many parallels to what lies ahead.
So with that, for today's conversation, we will highlight the next edition of the publication series, which focuses on aviation. Title is Into the Wild, Blue Yonder, and this publication was authored on December 17th, now available for you up on UBS.com forward slash CIO. Joining me here today for the conversation, glad to welcome back from the UBS Chief Investment Office, Kurt Reimann, head of fixed income for the Americas, as well as Nathaniel Gabriel, U.S. industrials and materials equity strategist.
Kurt, Nathaniel, welcome back. It's great to have you both here on the podcast today as we dive into the next topic of the series, which focuses on the history of aviation here in the U.S. So I thank you both for dropping by today.
Thanks for having us. Thanks, Dan. So Kurt, to get the conversation started, can you begin by providing our listeners, our clients with a brief history of aviation innovation and adoption in the U.S.?
Before I do, just, you know, for those of you that have just tuned in, let me quickly bring you up to speed, a little recap, if you will, of where we are in this series of 250 years of U.S. innovation. The first installment published back in October featured the Transcontinental Railroad, which, you know, was many years in the making. It was the first of its kind and was completed in 1869.
It was a just absolutely heroic transformation of the country, having just gone through a civil war, divisions north and south, and this connected east and west from sea to shining sea. In November, we turned our attention to electrification with the invention of the light bulb and then the eventual spread of generation capacity throughout the United States. This happened, the light bulb, was a decade after the Transcontinental Railroad in 1879.
With aviation, the most recent report that just came out this month, we've now officially reached the 20th century, and each of these topics have offered really unique lessons about what it means to invest in a period of transformational innovation, very much like what we're living through today with artificial intelligence, robotics, automation, and so on. So yeah, we published yesterday, December 17th, that marked the 122nd anniversary of the Wright Brothers' first flight in Kitty Hawk in North Carolina. This was a heavier than air machine, so not a blimp or a balloon, which had long been in use at this point, but rather a 750-pound aircraft, including the pilot, to be precise, which traveled 120 feet in 12 seconds, and it was propelled by a 12-horsepower custom-built four-cylinder gasoline engine.
The Wrights had mastered the holy trinity of aviation, the three-dimensional controls crucial to aerodynamics, pitch, right, front to back, yaw, side to side, and the roll top to bottom. If you have never heard of these terms before, don't worry. They were somewhat new to me as well when I started reviewing this with Nathaniel.
But that was, among other things, the crucial innovation, and this is a story unlike the Transcontinental Railroad, which was really about investment and CapEx. It was also very much innovation, but it was maybe, if you had a spectrum of one to the other, innovation to CapEx. Transcontinental Railroad was very much a CapEx story, kind of an all-in, might, muscle, and just throwing the weight of the U.S.'s resources at a problem.
But having conquered this perilous and complex geography of the U.S., this was some 34 years before the Wright brothers took flight, American engineers and entrepreneurs and innovators, they all turned their gaze towards the sky with the invention of the airplane. And here, these two unique American innovations in transportation offer a bit of a contrast, some similarities, some differences. Both the railroad and flight benefited from federal legislation and government financial backing.
The government was one of the first to start purchasing airplanes through procurement during World War I. So you think 1913 already, so 10 years after the initial flight, that gave this infant industry an initial early jolt, and then also the resources, financial resources to innovate. But then in the mid-20s, what we saw was, after the war ended, the Postal Service became the next big customer.
This was an act of Congress that allowed the Postal Service to contract with private carriers to bring mail throughout the U.S. And there were others, you know, the government also got very involved in pooling patents. This isn't something we necessarily delved into much in the report, but it's nonetheless very important.
Because you think about the race between companies, even across countries at the time, and the U.S. government had a proposal and a plan to distribute the rights to technologies, maybe in a way that you could argue wasn't equitable, but kind of got through this problem of constant lawsuits. Anyway, how do the two industries, the transcontinental railroad and aviation, differ? I guess it's this point earlier about CapEx.
The railroad, the technology was in place. The major achievement was this formidable infrastructure investment. And yeah, it's true, airplanes and aviation and airlines required a similar infrastructure investment in airports, of course, and the kind of routing of transportation.
But that was all done by municipal bonds and through government spending. The success of aviation was really iterative, technology-driven innovation that was coming from R&D labs in the private and public sector, as well as academia. And it was this steady improvement.
We talk about this in the report, in the range, the altitude, the speed, the safety, the reliability, that was really what gave rise to the revenue stream from eventually then commercial airlines and paying passengers, which really started to ramp up in the 1930s, although the U.S. was in a depression, so it was the late 30s. The military once again became the dominant force during World War II, but it was kind of that confluence of the purchases of planes, the technology development, the ability to get paying passengers that ultimately ushered in this wave of travel. And let me just kind of leave it there, Dan, and we can follow on to sort of maybe what's happening more in modern times.
Well, it really is a rich and iconic history when you think about the progression of aviation in the U.S. over the decades. And interesting there, Kurt, to hear about the role the U.S. government played really early on in propping up the industry. So yeah, to your point, Kurt, let's fast forward a bit, talk about the modern U.S. aviation industry, what that looks like today in terms of its economic footprint and impact.
And with that, Nathaniel would like to welcome you into the conversation to walk us through that and maybe highlight some opportunities as well for growth and evolution of what exists from here for U.S. aviation. The modern aviation industry is really a marvel that's been carefully refined over the last 50 years. I think today most of us don't think twice about clicking a button and booking a flight to visit family or go on vacation for the holidays.
And frankly, we'll probably grumble about the various indignities of traveling in the modern era. But if you zoom out, it's really an intricate dance of some 27,000 aircraft that are making 100,000 flights per day and exceedingly safely, if you put some of the headlines aside and look at the objective statistics. But maybe I'll frame the answer in a few categories, the aircraft manufacturers themselves, the suppliers, the defense industry, and the airlines.
So just given the immense complexity of engineering and assembling an aircraft, there are only a handful of original equipment manufacturers, what we like to call OEMs, that can do it. So we have Boeing in the U.S., Airbus in Europe. They essentially have a duopoly in larger aircraft.
Embraer in Brazil participates a little bit more in the smaller regional jet category. Bombardier no longer makes aircraft after selling that business to Airbus. And there are also some highly local options in Russia and China that are a little less relevant for the global market.
But this is a story of really intense demand. There's more than 14,000 aircraft worth likely more than a trillion dollars in backlog between just Boeing and Airbus, and they have a very limited ability to meet that demand. Given the supply chain constraints and some of the quality control issues we've seen in recent years, we are starting to ramp up production now.
But frankly, it's a slow and painstaking process that happens under the watchful eye of regulators. But the demand backdrop is exceptionally strong. Boeing publishes an annual market outlook that looks out 20 years into the future, and it says we're going to need 44,000 new planes over that time frame, both to replenish the existing fleet and grow it, plus a million cabin crew, 600,000 pilots, 700,000 technicians, really huge numbers.
The supply chain itself is highly complex as well. It takes 2.3 million parts to make a Boeing 787. So we have thousands of companies participating in various ways that are feeding parts to those OEMs for new planes or to the airlines to maintain the existing fleet.
There have been some issues in supply chain post-pandemic. There was a loss of talent. You know, we still are feeling the pinch in areas like forged engine turbine blades.
But this is starting to get a little bit better as we move forward. On the military side, I'd say the military has always been very tightly linked to aviation, really, since the very beginning. It was only six years between the Wright brothers' first airplane that Kurt was describing and the sale of the Wright military flyer, which was essentially a faster plane used by observation by the Army.
And this one came with a military contract. And that continues today. The U.S.
Air Force has a budget of $230 billion to procure fighters, bombers, and other aircraft. And it's not just those today. When we look at it, there are some super interesting things happening in AI-enabled autonomous flight, like the drone wingman that we expect to accompany the F-47 jet, and likely much more that we don't know anything about because they're buried in the classified portions of the defense contractor backlog.
And maybe just wrapping with airlines here, you know, just the notoriously cyclical and challenging business model. I'm sure we all remember the names of airlines that no longer exist today. And actually, nearly all the major U.S. airlines have gone bankrupt at one point or another.
But it is a crucial service, and the good times could be very good. The challenge is really just to take on debt, buy airplanes at hundreds of millions of dollars, and run an incredibly advanced logistics network, which is no small feat. Yep, it is an expansive industry, as you pointed out, Nathaniel, when you think about uses for military, commercial.
And when you think about the technological disruption caused by the airplane in the very early days, what comparisons can be drawn to aviation-oriented technological disruption being witnessed or experienced here in modern times? Yeah, it's a great question. I'd say there's one thing that's been absolutely constant between the era of that first airplane and the one that just rolled off the production line, and that would be the laws of physics.
So really, the progress that we've made in aviation from that Wright Flyer 30 miles an hour to the SR-71 Blackbird three times the speed of sound has been an evolution in our own human understanding of how to best harness those laws of physics and make progress on the material science and fluid dynamics to achieve that. I would say earlier on, it was more about understanding the physics, and in the modern era, a little bit more about the material science. But through all of this, as Kurt was saying, it's been a highly iterative process.
You engineer an idea, test it in a wind tunnel, take measurements, go back, tweak the design, and weigh the pros and cons of various features. And developments in aviation really sought to solve one problem at a time. Initially, the question was, could we have that sustained heavier-than-air flight that allowed a pilot to emerge unscathed from the experience?
And then could that airplane fight other airplanes? And how do you shoot a weapon from a vehicle and not blow your own propeller off? How do you use this new mode of travel to deliver the mail?
How do you transport passengers safely and make the travel more egalitarian? How do you outrun missiles and elude radar? And most recently, I think, how do you make passenger travel more fuel-efficient, both to reduce the emissions, but also to support the profitability of the airlines that are operating these huge aircraft fleets, where a very slight boost to fuel efficiency means millions of dollars of savings?
And I think we're at a very interesting juncture there today, because there are essentially two major ways we can push the boundaries on a modern commercial jet. You can either make it more efficient, less fuel per mile, and that entails either running the engine hotter or blowing more air through it. Or you can make it faster, which parkens back to the Concorde, and now we're finding ways to go supersonic without breaking windows and rattling teeth on the ground.
So you have companies working on incredibly promising solutions in those categories. But we're also at a time, as I mentioned, there's the shortage of new airplanes. The fleet in service is aging.
Aircraft retirements have been delayed. Quality control issues have grounded portions of the fleet. So, you know, I'm sure airlines would love to have fuel efficiency, but in this moment, my sense is they'd rather have reliability, and they may be a little bit more averse than usual to adopting some of these future forward ideas in the very near term.
You know, really, fuel efficiency matters very little if the plane is grounded and the airline is not making any revenue. But perhaps just wrapping up with some of the innovations that are a bit more of a leap forward, you know, engineers are working to mature some ideas like a blended wing aircraft. It essentially turns the fuselage into a triangle.
And I'm, you know, I'm not sure I'd like that, because I would lose my window. And I love looking out the window, but that would be significantly more fuel efficient. We have open fan engines, which don't have that cowling that covers the turbine that we're used to seeing.
And there's a whole new industry of small electric aircraft springing up pretty quickly. So keeping with what's ahead, I do want to single out Nathaniel, the concept of air taxis. We've all seen reporting on what's possible in the future, though.
Where does development adoption stand today with respect to air taxis? And how far away are we from this concept becoming a widely adopted or everyday use reality? Yeah, it's funny, because when you say air taxi, I think our minds jump right to the Jetsons and think of some far-fetched idea.
But the reality is that this industry has matured very significantly in recent years. And we're highly likely to see air taxis coming into service within the next few years. So, you know, I think before the end of the decade, Dan, you too might be hopping over the highway traffic on an electric air taxi.
But just to add a little context around that, it's an idea that's always made a lot of sense for many reasons. But it took time for the technology to mature enough. We needed electrical systems.
We needed lightweight composite materials. But once that happened, you know, small companies and prototypes began to spring up and iterate designs very quickly. So quickly, in fact, that the FAA, which needs to approve even the smallest changes to airplane design, had no established framework for evaluating a new category of civil aircraft, really the first in helicopters 80 years ago until just last year.
So that meant that the air taxi industry and the FAA were learning together how to establish these operational requirements and pilot qualifications, how to mark travel corridors and all of that. But we do have this framework now. And the acting administrator of the FAA has said that he fully expects air taxis to be flying by 2028.
And some might be flying in other countries like the UAE within the next year or two. But frankly, it's hard to describe exactly what that will look like. There's so much variation.
We've been lucky enough to have the opportunity to see some of these prototypes. And the designs vary so widely. Some are electric helicopters.
Some have propellers that change positions between liftoff and cruising forward. Some look like the remote-controlled drone you might get your kids for a holiday gift. And, you know, some are still piloted by a human.
And others have gone straight to autonomous flight that's monitored remotely. So, you know, I think we're going to see a lot of different solutions come to market. But the short answer is that we're very close to the beginning of the industry taking off.
But it feels like it is here. And I think we could see tens of thousands of these flying around the world 10, 20 years from now. Wow.
Well, yeah, very interesting to see where this goes. Anything to beat the traffic, though. Kurt Nathaniel, thank you for joining us today.
Very fascinating conversation covering the history and potential future of aviation here in the U.S. And, Kurt, as you pointed out, we've covered the Transcontinental Railroad, the lightbulb. Today, again, we spoke about aviation.
So, looking forward to continuing with our conversations on this series as we make our way into 2026. Although, thank you both again for spending some time with our listeners and our clients here on the podcast today. Appreciate it.
Thanks for having us. Thanks, Dan. Over and out.
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