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The spirit of innovation is deeply ingrained in America, and Google is helping Americans innovate in ways both big and small. The Air Force Research Laboratory is partnering with Google Cloud, using AI to accelerate defense research for air, space and cyberspace forces. This is a new era of American innovation. Find out more at G CO AmericanInnovation.
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Hey listeners, it's April 29th. I'm Spencer Jacob for the Wall Street Journal, and this is what's news and earning our look at the broad themes that stood out in the latest earnings season. We're four months into 2025, and it's a changed world. The United States, which has for decades been at the center of international trade and capital flows and also the bulwark of security for the world's democracies, is pulling back sharply from both roles. Tariffs hurt most manufacturing businesses, of course, but some defense companies operate in a world where that affects them less as Western democracies up spending for their own defense. How would that balance play out? First quarter earnings season for defense contractors gave us a mixed picture on how this all will play out for those companies. Sharon Turlep covers the business for the Journal and is here to help us understand. Sharon during their first quarter earnings calls, defense company executives gave different accounts of how tariffs could affect them. Dorothy Brummond said that additional costs are built into their contracts and so they weren't very concerned. General Dynamics said that they wouldn't answer questions about tariffs because of all the uncertainty. And then GE Aerospace and Boeing were both more specific, but they also have larger commercial footprints. Boeing, for example, said that about 80% of its commercial suppliers and about 10% of those for defense are outside the US and could be affected by tariffs. Can you just give us some picture of how much you think they'll be hit? And is anyone really totally insulated in this world?
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I would say nobody's totally insulated. The nature of supply chains today, our parts go back and forth. There's nobody in this industry that is reliant entirely on the United States. That said, unlike most complicated global supply chains, the supply chain for building defense products, jets, missiles, all that type of thing is much more protected and US Based than say, cars or home appliances.
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And if I look at this business, I look at defense and aerospace, commercial aviation, those are two rare industries where the US Actually has a manufactured good surplus with other countries. There are not a lot of businesses where you can say that about we have a very large goods trade deficit with the rest of the world. They're understandably cautious. The executives this Company's talking about whether or not that's in danger because nonstop tariff headlines and the fact that we've antagonized some of our closest trading partners and allies. But have you heard anything? Are they concerned that they're burning bridges and that customers may basically not trust the US or not want to deal as much with them as they have in the past?
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Absolutely. And we're hearing that privately, but also publicly. Boeing CEO Kelly Ortberg talked about there's the cost that we could incur by the parts that we have to import, but then there's the cost of having markets shut off to us because of trade wars. And like everything in this industry, that's complicated as well. The big news last week was China. Some Chinese airlines started literally flying planes, sending Boeing jets back to the United States rather than paying tariffs, which was painful for Boeing financially in the short term. At the same time, the reality is China relies on US Parts makers and Boeing for jets, engine parts for a lot of things. And so they quietly lifted some of their tariffs on US Aerospace parts.
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Listening to some of the calls and reading the transcripts of the calls, they're talking about the next generation of a lot of these fighter aircrafts and missiles and air defense systems and things like that. These projects, they classically do run into cost overruns. Given all the cost cutting we have in Washington, are some of those projects in danger? I know the F35, for example, had massive cost overruns. And in order to just to make one of these things viable, you have to have foreign partners, you have to have a certain number of purchases of them abroad. At least for some of them, there.
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Is cost cutting, as you've said, and particularly in the dod, they're coming down on these contracts. And these companies that are overspending and over budget, they're trying to tighten that up. At the same time as there's cuts throughout the entire government, President Trump has recommended a $1 trillion defense budget. So that would be a 12% increase from the prior year. So it's one sector of the government that while there's perhaps an expectation of efficiencies, there's also an expectation that there's more spending. As much as Europe would like to be more self reliant, the conflict there, one European industrial company CEO told us peacetime in Europe is over and everybody's building for it. And that's going to require some purchases from US Companies.
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It seems like it's, in some sense it's a golden age. If you're in the defense Business, right.
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You saw with earnings at a time that's hard for a lot of big industrial companies. Boeing, for example, it's still burning cash, but almost half as much as it had been a year ago. So $2.3 billion in cash burn much better than expectations. GE and RTX put estimates on how much they would lose from tariffs. For GE, it was about $500 million. RTX, it was around $850 million. Lockheed and Northrop, both forecasts that didn't thrill investors. So you saw that in their stock price. So it is very much kind of a mixed bag out there.
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And these companies, many of them, have two legs to stand on. They have commercial side as well as the military side. Boeing has had its share of problems in the last few years related to the commercial side of its business. The military and the space side were the relative strengths. Is that diversification good for those companies?
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Right now you'll hear executives say, this is why we do this, because a lot of times just the nature of air travel is in times of economic and geopolitical uncertainty, people are maybe less likely to travel. But that's also when defense spending goes up. So certainly a case can be made that that's good. The question is, can they execute well on the defense side? So Boeing, they have a strong defense business in terms of demand, but they've really struggled with massive losses because they've really struggled to execute these contracts and have been losing a lot of money in this quarter. It was actually the first time in a while they didn't take a big charge in defense, and they seemed to, to have started to turn things around.
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Is the nature of that business different? You had Northrop Grumman specifically saying, look, these contracts have, if there are additional costs that we didn't anticipate, those are built into them. You hear about the $900 hammers and things like that that the Pentagon buys. Is it still that kind of gravy train or are they under stricter scrutiny in terms of being able to say, our suppliers are charging us more for this material and now you're paying for it?
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And it depends, and I think this is where you're seeing the variation. There's different types of defense contracts. One thing that Boeing will say is that they've typically struck contracts in which if there's cost overruns, they carry the load of that. So for Boeing, they've been taking a ton of extra costs and they've said, look, we're not going to do these contracts anymore. We're going to do contracts where the government's going to have to help if costs change and we'll be guaranteed more of a profit. So it really depends on where the contracts were in terms of how they'll be affected by this change going forward. The language out of the DOD is that they're not going to tolerate these overrun behind schedule projects. The trick is when you're dealing with a program as important as the F35 or if you think of battleships and these huge things, they can't just cut it off and go get it somewhere else.
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B
Sharon, thanks so much. That was fascinating. Great insight into how this business works.
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Well, thanks for having me.
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And that was what's News in Earnings. Today's show was produced by Charlie Duffield and Anthony Banzi with supervising producer Michael Cosmitez. Later today we'll have the PM edition of what's NEWS out for you as usual. And we'll be back later this earnings season diving into another industry. Until then, I'm Spencer Jacob. Have a great day.