TWST: From a market perspective, it seems the aerospace and defense group has tracked alongside the S&P. Why is that, given the uncertainties in both segments at this point?
Mr. Leake: When you say both segments, I assume you are talking about new build, O.E., and aftermarket, A.M. On the O.E. side, I have a very high degree of confidence that the production rate increases planned by Boeing (BA) and Airbus (EAD.PA) will go forward. On the aftermarket side, I see some near-term risk that schedule reductions by the world's airlines could have a negative impact on aftermarket demand, but certainly nothing close to what we saw in the 2008-2009 downturn. The airlines simply do not have as much surplus capacity, and we think they are at the end of their rope on deferred maintenance. So on the O.E. side, while we might come up with several potentially margin-dilutive reasons why Boeing and Airbus need to increase rates by 40% - raise cash to offset 787, flush out the legacy backlog to make room for the 737 Max or have excess supply to combat impending Chinese threats - we are hard pressed to come up with reasons why Boeing and Airbus would suddenly reverse course. To do so could be devastating to the smaller suppliers who are already on the razor's edge due to the 787 delays. Thus, we are favoring those suppliers that are most levered to the O.E. segment like BE Aerospace (BEAV) or Spirit AeroSystems (SPR).
TWST: Let's start with the O.E. side because that's the positive news. Boeing finally has gotten a 787 airliner delivered. Is that the start of a better pattern for them?
