Catching Lightning in a Bottle: Aircraft, Arctic, and the TSX

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With regime change, political & economic upheaval and military modernization on the anvil, It is imperative that Canada uses this potentially generational opportunity to “invest in itself” and promote local industries. Having lost the CSeries program to Europe as well as the Avro Arrow in the 60s, local investment would provide a fillip to the TSX and local manufacturing companies. I also briefly touch upon how and why, Canada needs to take the lead in policing the Arctic to ensure security & stability in the region

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Avro Arrow & Bombardier CSeries – Lest We Forget

That the Avro Arrow was a precursor to the failings of Bombardier in its ability to keep hold of the Bombardier CSeries program, which is now under the wing of Airbus (as the A220 regional jet), is interesting to behold. Many forget that since the WWII – the Canadian Navy and the Air Force were supposedly the third and fourth largest allied forces (the RCN and RCAF respectively). In addition to providing the war effort with Camp X (of which David Ogilvy also is supposedly an alum of), and its military, Canada also did its bit by proving to be a good manufacturing hub and a cornerstone in the military-industrial effort so as to produce aircraft, tanks and other equipment to help aid the war effort.

The Avro Arrow, an early cold war era interceptor, never saw the light of day given that the Diefenbaker administration prioritized choosing an American air defense system to help aid NORAD efforts, as opposed to mass producing the Arrow – a technological marvel and a high-speed interceptor to foil the efforts of Soviet long range bombers.

That the Arrow was an engineering marvel and Avro housed some of the best engineering talent, is no surprise given that Bombardier aircraft are also known for their engineering and ease of flying. What was unfortunate was losing top talent to NASA and the shutting down of the Avro company, instead of using the Arrow programme as a staging ground to launch & grow a Canadian military-industrial base for aerospace. Bombardier, under pressure from the US administration, and Brazil (think Embraer lobbying group) similarly lost hold of the (now) A220 programme – which has spawned a formidable regional jet and whom Embraer group was weary of.

Today, we find ourselves at similar crossroads, what with talk of NORAD, re-arming by means of the F-35 5th generation fighter, as well as combating trade tariffs from the Trump administration.

Familiarity vs Future

A program cost of near-about C$40B for eighty eight (88) jets involving MRO, avionics and missile packages for the aircraft is close to 10% of the total market cap of the TSX stock market index. Whilst proponents for the F35 program argue about it being a 5th gen fighter jet (coupled with the age of the CF-18), which will help defend the borders and also NORAD efforts one must keep in mind the bountiful benefits which would accrue from pursuing a stake in the Gripen program.

To begin, it is my opinion that Canada pursuing a mixed fleet – which would have both the F35 and the J39 Gripen, would be the optimal solution to the current conundrum. That the F35 has stealth capabilities and is 0.5 generation(s) higher than the Gripen doesn’t mean much when looking at the bigger picture. In any case, current technological trends dictate that the avionics and missile package is becoming a larger piece of the “generation” pie which goes into making an aircraft, which effectively means that the F35 only enjoys advantages of the airframe RCS and its stealth-bay to boot (since software and avionic advantages can be arbitraged away by SAAB).

If investing in only the F35 program, Canada will be tethered to the American military-industrial complex for the complete lifecycle of the fighter jet program. Additionally, one mustn’t ignore that the jet has had its own issues related with the disposal of oxygen as well as avionics issues with the F35. As a close partner of America, one must also keep in mind that the software heavy aircraft of today, could be “jailbroken” by adversary nation-states in order to find vulnerabilities and weaknesses in its system which they can exploit. Hacking America would also mean hacking Canada.

Relatively speaking, engaging in a mixed fleet program would allow Canada to not only uphold it end of the NORAD bargain and appeasing the American policy-makers, it would also allow the nation to build ties with the Swedes. That SAAB and Sweden will set up a local industrial base for manufacturing and other purposes will only provide a boost to the local industries. Assuming that Canada will also manufacture the jets for Ukraine, it would also mean that the country will be able to aid Ukrainian defense without funneling monies directly into the nation (something which the policy-makers will have noticed, especially as it is my belief that Ukraine is likely to receive security guarantees without being admitted into NATO).

Furthermore, it would also allow the RCAF to finally become a force which is trained and operationalized in the art of deploying mixed fleet fighters thereby leading to an organic evolution of airborne tactics and doctrine. That the Americans will also be able to test various NORAD strategies and tactics with Canada’s mixed fleet of J39 & F35s – (which would likely be rechristened as the CF39 and CF35 respectively) as compared to a single jet fleet will also add to the appeal (with adversaries also having to plan on facing a mixed fleet RCAF).

Policing the Arctic

Engaging with the Swedes, would also allow Canada to take the lead in policing the Arctic and becoming a reliable and strong ally of the Americans by canvassing the Scandinavian nations (some of whom have just joined the NATO recently) together and running operations and training exercises. That the Northwestern passage and the surrounding region is becoming increasingly attractive to various nations owing to the geopolitical implications view the potential abundance of natural resources (not to mention oil and gas), as well as shipping lanes being opened up post-global warming or rather as global warming progresses, should provide a wake-up call to the western Arctic nations. Russia and China already stealing a march in the region by placing research vessels along with their surface combatants, icebreakers and submarines is not a surprise.

Although President Trump’s rapaciousness for the jugular has ensured that Greenland “being up for grabs” is a part of the conversation, one mustn’t discount two things. Firstly, that Russia and China docking ships in the region can’t be stopped as long as they are navigating for peaceful and research purposes. Second, that the Scandinavian nations were until very recently a part of the “Non-Aligned” states, and with Norway, Finland etc. sharing land borders with Russia, mean that they share historical lineages & social customs with the country (and erstwhile USSR) – which is to say that as long as any nation (including Russia & China) docks its ships, sets up businesses or runs any other programs in Greenland, which also benefit the local populace, it is unlikely to face pushback from the local government or even Denmark.

Whilst ignoring the headline-worthy comments about taking over the nation, the importance of NATO forces gaining a foothold in the region is paramount. That Canada, a nation with the worlds largest coastline and over 160,000km of Arctic coast has only a dozen capital warships, six Arctic Patrol Vessels, and two submarines apiece on either side of the coast is appalling. Although, I believe that more can be done about the NSS & Canada’s ship-building program, re-shoring via Hanwha and building out an Arctic capable submarine, whilst dovetailing deals to use Canadian steel via Algoma, with the help of the Koreans is a logical first step.

Building out the local manufacturing industry via bringing in the Swedes for the Gripen jet also makes similar sense. Keeping in mind that most of the Scandinavian countries are either already operating or have committed to operating the F35, having both – the Gripen and the Lightning in Canada’s arsenal will help jointmanship when it comes to aerial and sea-based recon, SAR, as well as any operational taskings for NATO, NORAD or the Arctic nations. A capability which Canada should look to develop as it positions itself in an emerging “New World Order”, and as it looks to lessen its reliance on America.

Investing Locally – A Fillip to Bay Street

Combining the market cap of Firan Group, Magna, Linamar and Calian group (FTG CN, MG CN, LNR CN, CGY CN) we stand at close to C$35B. If we throw in Heroux, CAE as well as Bombardiers market cap adjusted for its recent growth (assuming a C$12B market cap), the total capitalization of these companies stands at C$60B. Whilst not encompassing every SMB involved in the military industrial complex along with some heavy-hitters in Canada, it can be seen that the total program cost of the fighter jet program coming in at C$40B is almost equal to the total value of all of the above mentioned companies.

Adjusted for cost over-runs and as well only looking at the possibility of 58 fighter jets from SAAB (with a sign-on deal for 16 follow on F35/components already signed), bringing home the fighter jet deal through the Swedes will also help Canada to kickstart its own defense aerospace industry along with other tertiary aspects (ask Bombardier, CAE etc. for manufacturing and training) what through transfer of technology among others. That Melanie Joly, from Montreal (which boasts of Bombardier and CAE), argues for extracting more benefits from the fighter program for the local industries, could imply that active discussions within Ottawa are still ongoing. Bringing home the manufacturing will also allow Canadian policymakers to get deals done with other friendly nations through the military industrial complex, given that the aforementioned companies all have subsidiaries which manufacture critical components in nations around the world as a part of their global supply chain.

Canadian companies which are publicly listed (TSX) in comparison with American ones, have always posted a lower amount of returns for investors (8% annualized vs 10% annualized over the last 25 years for the TSX and the S&P500 indices respectively). A deal to bring home the manufacturing of the fighter jets through the Gripen fighter jet, and thereafter the manufacturing focus for Ukraine bound jets, would mean an injection of a lump-some of capital into the markets, some of which will also trickle down to Venture Cap and laterally to Private Equity.

That the Creative Destruction Lab, an incubator for startups which has buy-in from Canadian universities, has recently started the “Defense Stream” is a positive development, to a country which also boasts the likes of Kraken Robotics (PNG CN) among other companies on the eastern seaboard.

Conclusion

For markets which are intrinsically linked to their American counterparts, providing a fillip to the Canadian markets by bringing home the fighter jet program will have many secondary and tertiary benefits which will be hard to comprehend as we stand today. With Ottawa also signaling the importance of The Arctic, it will be interesting to see whether Canada uses this opportunity to de-couple from the USA its stock market, and therefore its military industries.

One mustn’t forget that it was the “Bonnie’s” CBG, with its complement of Tracker aircraft and surface combatants, (HMCS Bonaventure and her Carrier Battle Group), which helped the Americans to police and keep the adversary at bay on the eastern seaboard during the 1962 Cuban Missile Crisis. It was following this deployment of the CANFLTLANT that the Diefenbaker administration decided to “unify & size-down” the CAF and prioritize American missile systems for NORAD – which entailed shutting down the Avro company.

For Canada to be a strong and reliable ally, it is imperative that not only should the country be able to ensure inter-operability of a high degree with the Americans, it must also stand by itself as a military-industrial force which has a high-degree of “cohesiveness” with the other NATO Arctic nations. Onshoring and building out local industries via the Gripen program as a start, would allow the country to have the best of both the worlds.