Workforce attrition in the aerospace industry, largely due to the pandemic, is the root cause of some major quality-control issues, explains Fidelity Portfolio Manager Clayton Pfannenstiel, who believes a favorable shift in labor tenure and productivity will set a smoother course ahead for some of the industry’s major players.
“I believe the industry is poised to move beyond its labor-related quality challenges as a workforce revitalization builds and the recent influx of green, inexperienced workers on factory floors abates,” contends Pfannenstiel, who manages Fidelity® Select Defense and Aerospace Portfolio (FSDAX). “As a result, some companies could see a smooth climb towards long-term growth.”
In helming the narrowly focused equity strategy, Pfannenstiel favors companies with a strong business model, balanced capital allocation, and high recurring free cash flow, and that trade at a reasonable valuation.
Recalling the impact of COVID on aerospace businesses, Pfannenstiel notes that historically it was normal for firms to hire back eight of 10 workers laid off during periods of economic slowing. These days, however, companies are lucky if they’re able to bring back two of 10. “That’s a huge difference,” he says, adding that labor tenure and productivity have each declined, perhaps along with adherence to some important safety measures.
But a decidedly favorable shift has taken flight, according to Pfannenstiel, who highlights that the head count at aircraft manufacturer Boeing in 2023 was 171,000, notably exceeding 161,100 in 2019 and considerably higher than the pandemic trough of 141,000.
The silver lining, in his view, is that quality control and productivity should improve as these new hires gain valuable hands-on experience. “In fact, we are already witnessing a workforce revitalization and a better attrition rate as the impact of the pandemic on aerospace labor continues to fade,” he points out.
Moreover, the industry's renewed focus on safety should drive improved cash flow, Pfannenstiel contends. That said, he acknowledges that short-term declines in labor productivity likely will extend the cycle for aftermarket firms – including GE Aerospace, the former jet-engine business of General Electric that became a standalone company in early April – as older-model engines stay in the air longer, requiring more overhauls.
GE Aerospace (GE) and Boeing (BA) were the fund’s two largest holdings as of May 31, together representing about 27% of assets.
“Looking ahead, I remain optimistic about the long-term prospects for players in this space, given my expectation for a continuing recovery in air traffic and ebbing labor-driven challenges,” Pfannenstiel concludes.
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Clayton Pfannenstiel is a portfolio manager and research analyst in the Equity division at Fidelity Investments.
In this role, Mr. Pfannenstiel co-manages the Fidelity Select Aerospace and Defense Fund and covers the aerospace and defense industries.
Prior to assuming his current position in 2021, Mr. Pfannenstiel was a research analyst in Fidelity’s High Income and Alternatives division covering the airline, aerospace & defense, ground transports, maritime shipping, and packaging industries.
Before joining Fidelity in 2018, Mr. Pfannenstiel was a summer intern at Artisan Partners covering transports. He also served as a research associate at both Sirios Capital Management covering capital goods and Credit Suisse covering payment processors and IT services. Prior to that he worked at Bank of America/Merrill Lynch as a junior research analyst covering payment processors and IT Services. He has been in the financial industry since 2009.
Mr. Pfannenstiel earned his bachelor of arts degree in economics and Asian studies from the University of North Carolina – Chapel Hill and his master of business administration from the Massachusetts Institute of Technology – Sloan School of Management. He is also a CFA® charterholder.