Strategic Rotation: Navigating Aerospace Challenges and Unlocking Industrial Opportunities

In the second quarter of 2025, the aerospace sector faced a reckoning. Passenger plane orders, once a barometer of global economic confidence, plummeted as airlines canceled or deferred commitments, exposing vulnerabilities in the industry's supply chains and delivery timelines. Boeing and Airbus, the twin pillars of commercial aviation, now grapple with backlogs stretching over a decade, a stark contrast to the optimism of pre-pandemic years. For investors, this decline underscores a critical question: How should capital be reallocated in a world where aerospace's overexposure to macroeconomic and regulatory risks is laid bare?

Aerospace Overexposure: A Tale of Two Giants

The data is unambiguous. Boeing's Q2 2025 results revealed a net order book of 163 aircraft, but this was marred by 29 cancellations in March alone, including 27 737 MAX units. The company's backlog now represents 11.6 years of production at current rates, with an average EBIT loss of $17 million per aircraft. Similarly, Airbus recorded 203 firm orders in June, but 75 A320neo cancellations signaled a shift in customer sentiment. Tariffs, supply chain bottlenecks, and delivery delays have eroded trust, forcing airlines to reevaluate long-term commitments.

The financial toll is evident: Boeing's derived EBIT loss in Q1 2025 hit $2.222 billion, while Airbus's margins, though healthier, reflect a planned reduction in deliveries. These challenges are not cyclical but structural—rooted in geopolitical tensions, regulatory hurdles, and the high cost of maintaining a global supply chain. For investors, the message is clear: aerospace's traditional growth drivers are no longer reliable in a fragmented, high-tariff world.

Contrasting with Non-Transport Durable Goods

While aerospace reels, non-transport durable goods sectors—such as industrial machinery and equipment—face a different but equally daunting landscape. These industries, which include manufacturers of heavy machinery, appliances, and infrastructure tools, are inherently cyclical. They thrive in periods of robust capital expenditure but are vulnerable to macroeconomic headwinds like inflation, trade wars, and shifting consumer demand.

For example, machinery producers have seen demand flatten as global manufacturing growth slows. Labor shortages and supply chain disruptions further strain operations. Yet, these sectors are not without merit. Unlike aerospace, their business models are less dependent on long-term contracts and more agile in adapting to near-term shifts. However, their resilience is conditional: without a broader economic rebound, their potential remains muted.

Underappreciated Subsectors: The New Frontiers of Industrial Resilience

In this environment, certain industrial subsectors stand out for their stability and growth potential. These are not the headline-grabbing giants of aerospace but the innovators leveraging technology to redefine their industries:

1. Advanced Air Mobility (AAM): Electric vertical takeoff and landing (eVTOL) aircraft are poised to disrupt urban transportation. With 93% of asset managers overseeing over $1.787 trillion in assets expressing interest in eVTOL, the sector is attracting both capital and regulatory attention. The Federal Aviation Administration's recent guidance on certification and operations has accelerated progress, with companies like Archer Aviation and Joby Aviation eyeing 2025 launches.

2. Unmanned Systems: Drones are no longer niche. The military drone market, valued at $20.21 billion in 2024, is expanding rapidly, while commercial applications—from agriculture to logistics—are gaining traction. The U.S. Department of Defense's $61.2 billion air power budget underscores the strategic importance of unmanned systems. Meanwhile, the FAA's approval of beyond visual line of sight (BVLOS) flights in Dallas signals a regulatory green light for commercial operators.

3. Positioning, Navigation, and Timing (PNT): As GPS vulnerabilities become more apparent, demand for resilient PNT solutions is surging. Iridium Communications (IRDM), for instance, is capitalizing on this trend with its satellite-based PNT services. The global PNT market, projected to grow at a 29.5% CAGR through 2033, is a critical enabler for autonomous systems, defense, and smart infrastructure.

Strategic Sector Rotation: Where to Allocate Capital

For investors seeking to mitigate risk in a slowing demand environment, the answer lies in sector rotation. Aerospace, despite its long-term potential, remains overexposed to macroeconomic and regulatory risks. Conversely, underappreciated subsectors like AAM, unmanned systems, and PNT offer a compelling combination of technological innovation and stable demand.

Consider the following strategies:
- AAM: Invest in companies with strong regulatory partnerships and scalable production capabilities. The sector's success hinges on achieving automotive-scale production while maintaining aerospace-quality standards.
- Unmanned Systems: Target firms with diversified applications (military and commercial) and robust R&D pipelines. The DoD's focus on hypersonic and solid rocket motor technologies also presents opportunities in adjacent markets.
- PNT: Prioritize companies with proprietary satellite infrastructure and growing defense contracts. Iridium's recent partnerships and infrastructure investments position it as a key player in this space.

Conclusion

The decline in passenger plane orders is a wake-up call for the aerospace sector. While the industry's challenges are profound, they also create an opening for investors to pivot toward more resilient subsectors. Advanced Air Mobility, unmanned systems, and PNT technologies are not just surviving—they are thriving in a world where adaptability and innovation are paramount. By reallocating capital to these underappreciated areas, investors can navigate the uncertainties of a slowing demand environment and position themselves for long-term growth.

The future of industrial investment lies not in the past but in the next generation of technologies redefining mobility, security, and connectivity. The time to act is now.