2013 Commercial Aerospace Industry Perspective
by Dr. Erich Fischer, Jono Anderson, and Raman Ram
Originally published by Booz & Company: December 13, 2012
The commercial aircraft markets are poised for growth—and primed for the next generation of fuel-efficient, digitally enabled aircraft.
The civil aerospace sector is poised for growth, with many programs transitioning from years of sometimes troubled development into production, and the commercial installed base expected to double over the next two decades. As economies around the world become more global and the standard of living improves in developing regions, the demand for air travel will continue to grow. Wide- and narrow-body aircraft deliveries will drive most of the growth, with regional jet demand lagging.
Driven by the introduction of new products (such as Airbus’s A320neo and A350, and Boeing’s 737 MAX and 787), the backlog of orders for large commercial fixed-wing aircraft stands at an impressive 8,000 and growing. At the same time, entrants from Brazil, China, Japan, and Russia are beginning to claim a small portion of share, and perhaps in subsequent years will alter industry competitive dynamics.
The depressed market for business jets is starting to recover as corporate profits and financial markets have improved (at least for now). New product development is on the rise (such as Cessna’s Citation Latitude and Longitude aircraft), and some expect the market to grow at 5 percent annually over the next few years.
The global commercial helicopter market is recovering sooner than expected from the economic slump. Led by energy sector and search-and-rescue applications, commercial orders at AgustaWestland, Bell Helicopter, Eurocopter, and Sikorsky are increasing even as these manufacturers face pressure in their military business.
Given this positive outlook, 2013 should prove to be an interesting year. Now that many programs are exiting the development phase, much of civil aerospace will split its attention between increasing production rates and positioning to maximize value for the future.
We offer below a summary of our thoughts for success over the course of the next year—both the challenges to address and prescriptions to undertake.
With the A350 close to certification and production rates increasing on the 787, 777, 737, and A320—good news for the sector—the supply chain needs to deliver. However, not all suppliers are equipped to support these rates, either operationally or financially. Due to increased outsourcing and the complexity of subsystems and assemblies, the existing tooling, infrastructure, and capabilities will be pushed to the limit across the upstream supply chain. Weak links in the major subsystem suppliers and upstream supply chain will have to be identified. And some suppliers will require strategic investments—such as automation—to meet increased production rates.
It simply costs too much to develop and produce a new commercial airplane today. The price tag for recent large commercial wide-body aircraft development is more than US$19 billion. Although this has been a significant barrier to entry, it has also made new development programs nearly a bet-the-company move, even for the likes of Boeing and Airbus.
Moreover, OEMs don’t appear to obtain prices for new products that fully reflect the incremental value they’ve developed and delivered relative to prior-generation products. At the same time, when putting together the business case for these new designs, they sometimes underestimate development costs and program risks, with the result that business cases carry more aggregated risk than OEMs may desire. And because price is usually established early in a program, margins subsequently suffer.
As a result, risk-adjusted returns are perhaps not what they should be, and the ability to reinvest a portion of the proceeds for new development is becoming more challenging. With other airframers entering the market (at least for smaller aircraft), the pressure to introduce new aircraft more frequently may rise, along with the pressure to shrink development cost.
Making matters more complicated, the distribution of value as measured by economic profit has gradually shifted away from airframers. OEMs’ supply strategy decisions in the past have led to increased outsourcing of content and intellectual property for critical components and subsystems. At the same time, major suppliers have consolidated to create highly concentrated markets (such as Precision Castparts for forgings and TransDigm for pumps, valves, and ignition systems). This has enabled some supplier segments to capture significantly more value than others, and will likely pose challenges for some to sustain future development efforts.
Fuel efficiency has become one of the most important competitive differentiators over the past years, and this trend will continue. With sustained high fuel prices, the quest to continuously lower the total cost of ownership will drive demand for more efficient aircraft. Given that the newer generation of models is expected to feature considerably lower operating costs, operators may retire some of their current fleet early.
This will effectively reduce the life cycle of the existing generation of aircraft. Those companies relying on long service tails—for example, maintenance, repair, and overhaul (MRO) activities and spare parts—may find their financial situation under pressure by the shrinking service life of current-generation aircraft. The drive for more efficient aircraft will also increase demand for modularization of design given that it will enable efficiency upgrades.
At the same time that the iPhone and Android devices are making headlines elsewhere, the technological revolution in aerospace and aviation is much quieter and out of sight—the sensors that are embedded in the aircraft, its subsystems, and associated infrastructure (such as NextGen, Connected Airport, and other advanced systems). However, airframers and OEMs sometimes lack a full view of how the sensors they embed into designs—along with the data they produce and the connectivity they provide—can be utilized by operators to create value and improve the customer experience.
Over the next decade, digital aircraft and the explosion of related information—from real-time weather to flight operations, asset tracking, health monitoring, ticket prices, and even airport taxi availability—will have perhaps the greatest potential to improve both airliner operations and customer experience. This is a real opportunity for airframers and OEMs to embrace digitization as a potential source of differentiation.
How to respond to these challenges? We present below five prescriptions that, though not exhaustive, are good places to start in 2013 to position your company to capitalize on the sector’s current momentum.
In many portions of the sector over the past few years, management has been understandably focused on resolving development challenges. Going forward, increased production rates will require fundamentally shifting the culture and organizational behavior away from development and toward execution across the supply chain. As an example, airframers and suppliers will want to consider the means for making production processes more variable with respect to demand levels, and thus converting fixed costs to variable costs—via strategies such as automation, geographic arbitrage, or evolving partnership models.