How rapid growth and change are reshaping aviation: The global aerospace summit 2014
The global aviation and aerospace industries are experiencing rapid growth. However, to take full advantage of growth opportunities in the future, the industry needs to take a more cooperative approach than in the past. Airlines, aerospace original equipment manufacturers and suppliers, all need to work together along the entire value chain and across geographies.
How rapid growth and change are reshaping aviation The global aerospace summit 2014
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About the authors
Beirut Fadi Majdalani Partner +961-1-985-655 fadi.majdalani @strategyand.pwc.com Camil Tahan Senior Associate +961-1-985-655 camil.tahan @strategyand.pwc.com Dubai Alessandro Borgogna Partner +971-4-390-0260 alessandro.borgogna @strategyand.pwc.com Leonardo Monti Principal +971-4-390-0260 leonardo.monti @strategyand.pwc.com
Munich Hans-Jörg Kutschera Partner +49-89-545-250 hans-joerg.kutschera @strategyand.pwc.com Washington D.C. Raman Ramanathan Principal +1-703-847-1900 raman.ram @strategyand.pwc.com
Alessandro Borgogna is a partner at Strategy& in Dubai and a senior member of the firm’s aerospace and aviation practice. He focuses on governance, strategy development, operational improvements, infrastructure planning, and public– private partnerships in the aerospace and transportation industries. Fadi Majdalani is a partner at Strategy& in Beirut and the leader of the firm’s engineered products and services practice in the Middle East. He focuses on largescale strategy-based transformation. His projects have included strategy-based transformation programs for regional airlines, national postal operators, and railway operators, all of which were preparing for deregulation. Leonardo Monti is a principal at Strategy& based in Dubai and a member of the engineered products and services practice in the Middle East. He focuses on strategy, organization, and operations in the aerospace and defense, industrial, and transportation sectors. Camil Tahan is a senior associate at Strategy& based in Beirut and a member of the engineered products and services practice in the Middle East. He focuses on strategy, organization, and operational improvement in the aviation and different transportation industries.
Mayssa Haddad and Neemat Hasbini also contributed to this report.
The Global Aerospace Summit was held in Abu Dhabi in April 2014. It was hosted by Mubadala Development Company, a wholly owned investment company of the government of Abu Dhabi. Over one thousand executives from around the globe assembled to discuss the future of the industry and define the many challenges and opportunities that lie ahead. Globally, passenger traffic will double in the next fifteen years, but that growth will not be evenly distributed. As developing economies mature and continue to benefit from their large working-age populations, the industry’s center is shifting from West to East; supply chains are being stretched and stressed. At the same time, the military’s role in aviation development is changing. Budget cuts in the U.S. and slow economic growth in Europe mean that domestic defense companies in developed markets are losing their traditional partners. They must look elsewhere to form new partnerships, particularly in the emerging markets. Indeed, the theme of partnering and collaboration ran strongly throughout the two-day summit. Original equipment manufacturers (OEMs), suppliers, academia, regulators, and rival aerospace organizations will all need to work together to address the many complex challenges the industry faces. With this in mind, various panels during the summit discussed the key challenges and solutions for: airlines and aviation; aerospace OEMs and suppliers; air traffic management and air transport support services; and space.
The challenge of growth
There is broad agreement that the industry is in the midst of rapid growth and change. Excitement and optimism among the attendees during the two-day gathering were palpable, as was a determination and urgency to tackle the many challenges this growth and change presents. As observed over the past 30 years, air transport doubles every 15 years or so — a trend that is expected to continue. To put that growth into perspective, in 2030 the industry will transport 6.6 billion passengers compared to 3.3 billion in 2014. According to Boeing, the industry will need 35,000 new (of which 14,000 will replace aircraft that will have to be retired) worth about US$5 trillion over the next 20 years (see Exhibit 1, page 5).1 Despite capacity variations by region, the overall industry does not have excess capacity. OEMs and air traffic management (ATM) must increase capacity to meet this demand, and the whole aerospace value chain must evolve rapidly to release bottlenecks. This evolution must occur among regulators, financiers, ground infrastructure, training, and personal digital connectivity to facilitate the industry’s safe, sustainable growth. Adding to the complexity of these growth demands is that the industry is passing through some fundamental changes. According to one panelist, in 1990, 70 percent of all flight traffic (measured in total revenue passenger kilometers), was in North America and Europe; by 2013, Boeing estimated that figure had shrunk to 40 percent as the industry’s center of gravity has shifted from West to East. The panelist also reported that global passenger traffic grew 5 percent from 2008 to 2013, but traffic between the Middle East and Europe grew 33.8 percent, and between the Middle East and Asia it grew 41 percent. Besides this West to East shift, the other key change is the military’s role in aviation development. For decades, Western militaries spent heavily on programs with domestic defense companies. However, with budget cuts in the U.S. and slow economic growth in Europe, these traditional partners are losing their funding and are being forced to look elsewhere for partnerships. At the same time, many Middle East and Asian countries are increasing their focus on aviation and increasing their military spending, and this is a clear opportunity for Western defense companies. Harmonizing the changing dynamics in mature and emerging markets is testing the industry’s adaptability.
Despite capacity variations by region, the overall industry does not have excess capacity.
HE Saif Mohammed Al Suwaidi, General Civil Aviation Authority of the United Arab Emirates
Exhibit 1 The Asia-Pacific region will lead to a doubling in the number of passenger aircraft globally
Increase in Number of Aircraft by Region
+103% 41,240 1,500 3,790 2,850 8,010 690 1,130 1,280 1,140 20,310 8,810 4,390 6,590 5,090 2012 2032 14,750 Asia Pacific
Source: Boeing, “Current Market Outlook 2013 –2032,” Boeing Commercial Airplanes, 2013
Africa CIS Latin America Middle East Europe
Interestingly, according to panelists at the summit, the prescription for meeting the growth and change challenges is broadly the same — aggressive, open-minded collaboration. This includes collaboration: • between the industry and government to shape regulations, share technology, and open up new markets • among governments to regulate airspace capacity better to eliminate inefficiencies that reduce capacity • between the industry and academia to better train talent and meet the talent shortage • among aviation and other industries to identify and push forward new technologies and innovations • among traditional aviation industry rivals to gain scale and shoulder the risk of technology development Indeed, the message that summed up the tenor of the gathering in Abu Dhabi was that no one company, no matter how large or established, can tackle all the growth and change challenges on its own. The 21st century aerospace industry will be built on partnerships. Marion Blakey, the president and CEO of the Aerospace Industries Association of America, captured the spirit of the gathering when remarking: “As aerospace and defense development budgets tighten around the globe, many companies are seeking out partners where they can help reduce cost, reduce cycle time, and drive innovation together.... As aerospace businesses blossom and the capabilities that go with them blossom around the world, partnerships and collaboration are spreading at an unprecedented rate worldwide.”2
Airlines and aviation
Given the industry’s competitive dynamics, driving top-line and bottomline growth is extremely challenging and requires that airlines work both organic and inorganic growth levers. The airline industry is highly capital intensive. Planes, buildings, equipment, technology and service innovation, not to mention fuel costs, squeeze margins. Today, despite growing revenue and profits, the average profit margin for the airline industry hovers at about 2.5 percent on a global basis (see Exhibit 2).
Exhibit 2 Airline industry margins remain slim and below their 2010 peak
Global Commercial Airlines Revenue and Profitability
800 600 Billion US$ 465 400 200 0 570 476 564 618 679 5 4 3 2 1 0 -1 -2 -3 -4 -5
% of revenue
Revenue US$ billion Operating margin (% of revenue) Profit margin (% of revenue)
Source: IATA, Strategy& analysis
Although improving margins is a priority, doing so while simultaneously making the capital investments necessary to expand and evolve operations is a tall order. It is also difficult to improve margins when the entire value chain is under stress and subject to bottlenecks on the ground and in flight. For instance, panelists noted, airlines could be 10 to 15 percent more efficient if improved air traffic management procedures were implemented.
Tony Tyler, IATA
Outsourcing options To cope with expansion demands, most airlines are focusing on a lean strategy approach to improve their cost effectiveness, better utilize their scarce resources (e.g., flight crews), and focus on their core business. By outsourcing risky or non-core activities, airlines can focus their attention on areas where they can create a true competitive advantage and generate top-line growth. Outsourced activities could be in the realm of designing innovative marketing (e.g., evolving frequent flier miles into lifestyle programs), developing Big Data capabilities to better analyze and share data to improve customer service, or upgrading their revenue management capabilities and technologies. Freeing resources through outsourcing can also generate bottom-line growth in addition to conventional direct measures such as on-board weight optimization to improve fuel efficiency.
James Hogan, Etihad Airways
For instance, many airlines are increasingly outsourcing some of their overhaul needs to highly specialized maintenance, repair, and overhaul (MRO) players. Panelists at the conference noted that MRO outsourcing reduces inventory risk, complexity, and cost. In addition, because MRO companies are specialists, they bring the efficiency and scale that most airlines lack. MRO firms have enormous amounts of data on when and where parts fail historically. They can therefore manage inventory and move it preemptively around the globe; for example, to cope with seasonal spikes that traditionally trouble airline in-house inventories. Organic growth Passenger growth, particularly in the Middle East and Asia, is creating tremendous organic growth opportunities. For example, Etihad Airways is just 10 years old, but according to James Hogan, Etihad’s CEO, it is already a $7.4 billion corporation ($1 billion of that is the cargo business) with more than 100 aircraft and more than 100 destinations. Yet it is still not a major player in the region, which means that there is room for more growth. Mr. Hogan, said the airline has embarked on a different sort of organic growth strategy through codeshares with other carriers, investment in other carriers, and partnership with Abu Dhabi Airports Corporation to ensure that the hub is competitive with other regions. These efforts will drive organic growth because of more connectivity through Abu Dhabi, he said. The prospects for organic freight growth are less promising. A cargo airline panelist noted that from 2007 to 2013 air freight grew just 1
percent, and the outlook is not robust. The panelist said: “I don’t think any freight operator makes any money today,” though he added that the market may have finally turned at the end of 2013. Speakers reiterated their high expectations of the e-freight project (a paperless air cargo process), which they said promises broad benefits throughout the supply chain with better customer service, shorter transit times, and more efficient processes. The Gulf region is uniquely placed to benefit. Dubai has mandated an e-airway bill, which will make the region a leader in e-freight adoption. Concurrently, several panelists singled out business aviation as an area of promising business synergies. One described it as the third leg of the stool along with commercial airlines and freight traffic. What makes business aviation so attractive is that it tends to serve a different set of customers, yet its infrastructure and ATM needs are very similar. Moreover, when companies have a presence in all three they have a stronger industry voice with which to express their views about government regulation, improved infrastructure, and improved air traffic control. A coalition of industry participants can argue for these changes as part of a more holistic economic development platform. That said, business aviation faces specific challenges that demand attention and collaborative solutions. For example, private jets have limited access to busy airports. One proposed solution is to make better use of older commercial airports and reduce business aviation’s need to access busy hubs. Brazil has identified and is prioritizing 270 regional airports for targeted infrastructure development and improved air traffic control.3 The surge in business flights is also leading to increased air traffic congestion. Airlines need to work with governments and aviation authorities on this issue. What are also needed are regulations specific to business aviation, that will encourage its development and not unnecessarily curtail the growth of business aviation companies. For example, regulations must take into account that business aviation flies to airports where commercial airlines cannot. Inorganic growth Despite the promise of lean strategies, outsourcing, and technology advances, very few airlines have managed to improve efficiency, scale, capacity, and connectivity through organic growth alone. One exception is Emirates, which aside from its partnership with Qantas has expanded organically to become the largest airline in the world by number of international scheduled passenger-kilometers flown in 2013. On the other hand, it was said that there are still 1,700 airlines in the world today, and panelists said that consolidation is necessary and inevitable for many to survive.
There are two traditional inorganic growth models, and a third one is emerging from the Middle East. The first is the traditional merger of airlines, such as American Airlines and U.S. Airways; Southwest Airlines and AirTran Airlines; and KLM and Air France. Mergers allow the creation of new, unique players with much larger operations that benefit from economies of scale and from efficiencies through fixed costs management. (However, regulators usually allow these mergers to occur only within the same economic regions. For instance, U.S. regulators restrict European airlines to 20 percent voting rights in a U.S. airline.) The second is the traditional alliance, such as Oneworld, Star Alliance, and Skyteam. This model allows airlines to improve their top line and to expand connectivity without having to bear the costs of deploying the necessary assets. However, this model does not create cost and operational synergies. The third model is emerging and is being pioneered by Etihad. The airline, founded in 2003, continues to expand through equity partnerships (such as airberlin, Air Seychelles, Aer Lingus, and Virgin Australia). These equity alliances enable Etihad to capture both revenue and cost synergies. More recently, Etihad has also started to explore the opportunities of franchising in order to further leverage the efficiency of its processes and the power of its brand.
Tony Douglas, Abu Dhabi Airports
Aerospace OEMs and suppliers
As the industry continues on its rapid growth path, OEMs must manage several fundamental challenges. Chief among these, and setting the context for the rest, is the globalization of demand as the industry’s center of gravity shifts from West to East and many developing countries invest heavily to catch up with developed nations. This globalized demand puts intense pressure on supply chains, which now stretch across the globe, creating numerous potential weak links. On top of these challenges is the need for relentless innovation to improve efficiency, safety, and competitiveness. Finally, there is an acute shortage of talent as many employees in the West near retirement and emerging markets scramble to put appropriate training and academic programs in place to meet the diverse employment needs of the industry.
Homaid Al Shemmari, Mubadala
Globalized demand Just 20 years ago most aerospace development occurred within a country’s borders. Three major trends have changed that. The first has been the globalization of economies and transnational movement of people, goods, and ideas. The second trend is the decline of military spending in Western countries, which for decades has been instrumental in funding research and new technologies and absorbing development risk. The third trend is the shifting of civilian and military spending to emerging markets.
Marillyn A. Hewson, Lockheed Martin Corporation
Some Gulf Cooperation Council (GCC)4 countries, such as the United Arab Emirates (UAE) and Qatar, are investing heavily in the industry to diversify their economies and become hubs connecting East and West. Together these two countries negotiated the purchase of about 250 aircraft from Boeing in 2013. Meanwhile, Boeing estimates that China will need $780 billion in new aircraft, some 5,580 new airplanes, from 2012 to 2032 to accommodate growth.5 In response to all these trends, partnerships and collaborations are spreading fast around the globe, which has the added benefit of advancing innovation, interoperability, and common standards. No company, no matter how big and established, can go it alone. “If you pick the right partnerships, everyone can grow profitably,” said one panelist. At the conference, an Airbus representative said that it has 350 partnerships around the world and that innovation comes from every part of the globe.
Jean Botti, EADS
A prime example of these new partnerships mentioned at the summit is Sikorsky’s collaboration with the Turkish government on the Blackhawk helicopter program. As part of the deal, one-third of the contract goes to Sikorsky and two-thirds goes to Turkish companies. According to Sikorsky, great partners have a shared vision and goals, and they need a certain cultural fit given that the relationship could last for decades. It is also important that both sides believe they are learning something from each other, and one side is not simply delivering technology and know-how at a cut-rate price. Supply chain pressure Meeting this global demand, particularly the stepped-up demand in the emerging markets, is putting tremendous pressure on supply chain performance. For starters, OEMs must rethink and realign their operations and supply chains to gain better proximity to buyers. This will require relocating manufacturing, MRO operations, and training services, including the right leaders and talent, in a way that does not cannibalize existing operations or reduce quality. As part of this realignment to serve customers better and more efficiently, OEMs need to increase production speed — without decreasing efficiency and quality. For example, in 2013, CFM International, a joint venture between GE Aviation of the U.S. and Safran of France, logged orders for a total of 2,723 engines, including 1,330 CFM56 engines — of which Leading Edge Aviation Propulsion (LEAP) engines (including spares) accounted for 1,393 of the total and the remaining 1,330 were CFM56
engines (for commercial and military customers, and spares).6 That is a rapid production acceleration for the LEAP engines, which were introduced in 2008 and which promise double-digit improvements in fuel efficiency, emissions, and noise. This kind of aggressive ramp-up is risky for suppliers because any sudden demand drop can cause significant financial damage (see Exhibit 3).
Exhibit 3 The newest generation engines have ramp-up rates three times faster than legacy engines
Comparison of Engine Delivery Evolution (Totals, Compound Annual Growth Rate)
CFM 56-5 and 56-7 series
+62% 1,568 1,698 1,832
+21% 242 244
Source: Airline Monitor, Strategy& analysis
Further consolidation in the industry to improve supply chain performance is likely among tier 2 players. Panelists said the field is simply too crowded. For the most part, panelists concurred that regulatory pressure will prevent tier 1 suppliers from further consolidation in the U.S. and Europe. Among these major suppliers, collaborations and partnerships are more likely. Panelists suggested that organizations will increasingly need to shift from traditional supply chains to highly integrated supply networks in which multiple tiers of companies are working off the same shared view of total demand and total available supply with common processes and metrics. For example, one panelist stated that the ratio of Airbus’ supply chain in non-European countries has increased from 20 percent to 30 percent in five years. Meanwhile, it was said that GE already has 50 percent of its aerospace manufacturing facilities outside of the U.S., which shows the dramatic shift in production to outside home countries and into the emerging markets. As noted, this more global, more rapid approach to production creates supply chain risks that must be managed. This is particularly important now that so much design and manufacturing has migrated from OEMs to suppliers in the form of risk-sharing partnerships. To help avoid, or at least lessen, the effect of sudden shocks along the value chain, OEMs and suppliers need to establish true risk-sharing partnerships that significantly widen their sharing of critical information, from strategic plans down to the assembly footprints. Plus, to fully understand risk, OEMs need a deeper view into the supply chain, beyond tier 1 suppliers. A recent report said that only about a quarter of aerospace and defense organizations had the ability to go beyond their tier 1 suppliers. Relentless innovation The pace of technology innovation is relentless — from hypersonic flight design, to intelligent carbon and nano materials, to manufacturing automation for monolithic parts, to Big Data technologies that analyze aircraft and engine performance. It is also a more expensive, uncertain undertaking than ever now that many Western governments are reducing their spending, particularly on defense. Nonetheless, with or without government support, innovation around advanced and intelligent aircraft materials is critical. Lightweight composites hold the promise of improving how aviation deals with many of its most significant challenges. In the foreseeable future the focus will continue to be on reductions in weight and noise; an increase in fuel efficiency, aiming at lower operational costs; and a decrease in CO2 emissions. Composites may also cut production times and costs thanks to smart manufacturing and automation. Meanwhile, innovations around hypersonic titanium and nickel superalloys will be critical for thermal-fatigue resistance in hypersonic flight.
Hans-Jörg Kutschera, Strategy&
Another item on the innovation agenda is biofuels. These hold great promise in terms of lowering CO2 emissions, reducing airlines’ dependency on fossil fuels, and paving the way for improved engine designs. However, participants’ optimism and excitement about biofuels was somewhat diminished from that observed in 2012. This is due, in part, to the many challenges still to overcome, including the cost of making and transporting biofuels and the degree to which biofuels still compete with the food chain, which is particularly undesirable in an era of rising food costs. Another reason for the lost momentum behind biofuels is the shale gas trend in the U.S., which offers the prospect of energy independence without large-scale deployment of renewables. Given the scope of innovation challenges, even the largest OEMs cannot innovate fast enough on their own. They are increasingly teaming up with academia, and are also looking across industries to improve innovation and knowledge sharing. The automotive industry, with its ability to prototype and test new high-performing technologies much faster and at less cost, is proving an ideal partner. For instance, Boeing has had very positive results from its collaboration with Lotus F1. Elsewhere, OEMs are forming R&D partnerships with energy producers and refiners to create economically viable biofuels that do not deplete food resources.
James Simpson, Boeing Defense, Space & Security
As the industry searches for new innovation models, panelists said, long-ingrained cultural habits must change. For good reason safety is the industry’s chief concern. However, this can unwittingly foster a culture that broadly discourages experimentation. There is a growing realization among companies that they must encourage people to experiment, allow them to fail, and then learn from those failures in pursuit of the next big breakthrough — all of which can be done without affecting safety (e.g., the faster modeling and virtual testing made possible by the trial and error approach of the automobile racing industry). Shortage of talent As the industry grows in coming decades, one of the greatest challenges will be finding enough qualified workers. It has been estimated that over the next 20 years the industry will need 498,000 additional pilots. The talent pipeline is already under stress. In 2013, Airbus hired 16,500 workers, according to a speaker from Airbus. A panelist from Boeing said that the company expects to hire 10,000 in 2014 (see Exhibit 4, page 19). The industry needs to do a better job finding, developing, and then engaging and retaining talent. Corporate leaders in particular must be more deeply involved in the process. It is also important to bear in mind that many new workers will come from the emerging markets, which have a younger workforce than Western countries. In terms of finding talent, panelists said the industry should work with educators and students to create a sense of excitement around the industry (as early as secondary school), explain the kind of skills
needed, and develop appropriate courses jointly. The industry should also make more use of social media to reach potential candidates, establish and advertise internships, and speed up the recruitment process. One OEM, after losing some top candidates by not making job offers quickly enough, centralized its recruitment efforts and lowered the time to make a job offer from about 90 days to 30 days. Once companies have hired talent, they must nurture their employees with career development and other engaging activities, and provide high-potential stars with many career options. Panelists said today’s training and engagement is generally subpar. They made several suggestions for improvement: make better use of technology for on-thejob training, create virtual labs, put junior people on special projects of particular interest, and establish leadership centers for the most promising young talent. Boeing, for instance, has established its accelerated development programs to provide its interns with a unique experience aimed at retaining the most promising talent.
Exhibit 4 Doubling the size of the fleet by 2032 will drive demand for half a million pilots
Current and Forecast Number of Pilots Needed - 000’ Pilots
647 19 31 76 353 114
Large Wide-body Regional Jets Medium Wide-body Small Wide-body
294 35 30 45 170 145 145
Pilots in 2012
Additional Pilots (Replacements)
New Pilots Needed
Pilots in 2032
Note: Totals do not sum due to rounding. Source: Boeing, “Current Market Outlook 2013 –2032,” Boeing Commercial Airplanes, 2013; Strategy& analysis
Air traffic management and air transport support services
Panelists during the conference repeatedly cited uncoordinated air traffic management as one of the main threats to growth. Congestion is a real and growing problem in Europe, in the U.S., and particularly in areas — such as the Middle East — that are seeing dramatic growth in air traffic. Left unchecked, this congestion could unravel efficient hub operations. The capacity on the ground does not matter if it is not matched with capacity for the planes in the air. Panelists identified today’s key challenges as largely due to fragmented and uncoordinated jurisdictions and regulations.
Pascale Sourisse, Thales Group
Too many FIRs According to panelists, the existence of multiple flight information regions (FIRs) often leads to congestion and inefficient routes. According to one European industry executive, scores of FIRs in Europe increase total flight time by 11 percent. In the GCC there are now six FIRs today, compared to just one FIR (Bahrain) some 30 years ago.
Each region has its own reasons for keeping multiple FIRs. In Europe, it is a long-standing unwillingness to cede jurisdiction on critical national assets — like airspace — to others. The same holds true for the Middle East, with political unrest adding to the complexity. Still, the only way to overcome these political issues is through political initiatives. The CEO of NATS (a public–private partnership providing air traffic and airport services in the U.K.) noted that the more you can demonstrate savings, the more enthusiastic people become, and the more pressure there is for others to join the effort to further improve savings. For example, he said, the arrival management process starts 500 miles away from the U.K. in collaboration with the French and Irish air navigation service providers. The Irish, he noted, have been controlling some U.K. airspace and the U.K. has been controlling some Irish airspace. That gives the air navigation service providers the ability to close centers at night, reduce operating costs, and be more flexible. That collaboration has led to more efficient flight routes, which in turn, he said, has saved 70,000 metric tons of fuel. Flexible use of airspace Another contributor to air traffic management inefficiency is segregated military airspace. This can create very tight, indirect corridors for commercial aircraft. Military airspace takes up a significant portion of the world’s airspace, with countries in the Gulf at the high end with 40 to 60 percent allocated to the military.7 As they did at the 2012 summit, panelists said repeatedly that there is no reason for militaries to cede their airspace outright to commercial aviation, a point that should be made clearly in dialogue with military authorities. The idea is to promote commercial and military interoperability to share airspace when possible. These are not easy negotiations but they are worth pursuing. For example, the General Civil Aviation Authority (GCAA) of the UAE has been working with the military for several years to improve air traffic management efficiency through an aerospace committee, which consists of regulators, service providers, airports, airlines, and the military authority. Recently, the GCAA decided to expand the sphere of collaboration to include other regional players. It spearheaded the creation of the “Middle East ATM Enhancement Program,” which is a regional consolidated program to harmonize all the various initiatives and ensure the safety and efficiency of ATM operations.
Too many agencies Standards promoted by aviation-specialist authorities and countries’ civil authorities can be at odds and need to be harmonized. An oftrepeated example at the summit was environmental standards. The EU Emission Trading System is more stringent than environmental regulations in other regions. This has caused friction and disagreement in the global aviation community, to the point that the EU’s system is now on hold pending the release of a global International Civil Aviation Organization (ICAO) standard. Given the global nature of air travel and the multiple jurisdictions crossed during flights, one global set of environmental standards would be ideal. The general consensus among the panelists was that common standards facilitate the integration of common technologies, improving capacity and efficiency; hence they are the duty of all industry players across the value chain. Safety in the skies Besides the issue of fragmentation, the other leading challenge facing the air transport value chain is safety. Of particular concern is the training of ATM providers because accidents are usually the result of either human fatigue or human error. Panelists suggested the industry should commit to more proactive learning management systems as opposed to reactive education. They also noted the need to encourage the reporting of unsafe practices or conditions in ways that filter up to regulators. Another promising possibility for reducing human error would be through the introduction of unmanned flights. Although feasible, panelists acknowledged that passengers might resist this idea, which means the first unmanned flights are mostly likely to appear in freight. A more acceptable option to the general public might be to keep a pilot in the cockpit but relocate the co-pilot to a remote ground station. On the issue of safety, panelists promoted the importance of technical interoperability standards and said that very simple steps could have dramatically improved the search efforts for Malaysian Airlines Flight 370, which disappeared in March 2014. The inability to locate the plane shows the limitations of traditional tracking technologies (radio communication, radar, transponder, and automatic dependent surveillance-broadcast, known as ADS-B) in remote areas. In response, panelists said, the industry should make more use of alternative, satellitebased aircraft tracking, which offers real-time, highly reliable tracking capabilities. A speaker from Inmarsat pointed out that for only $7 to $10 per five-hour flight all the necessary aircraft position data could be activated in transponders across most of the active commercial fleet.
Kelly Ortberg, Rockwell Collins
The demand for total mobility and seamless personal connectivity (in the home, office, car, or airplane) is driving growth across most space applications (communication, tracking, TV, Internet, weather, etc.). However, the industry faces three serious challenges that are slowing the pace of space commercialization: lowering the costs of launches and flight, nurturing talent over the long term, and accelerating the pace of innovation. Managing costs and talent The first challenge is the high cost of launches. Currently it costs about $34,000 to send 1 kilogram of payload into orbit according to Strategy&. Panelists said this number needs to come down into the hundreds of dollars. One of the most promising ways to drive down costs is to develop reusable space products, such as propulsion systems and orbital vehicles. Also, improved technology standardization across the industry could improve manufacturing and reduce weight and costs. The second challenge is the scarcity of talent given the very long learning curve for employees to fully develop, generally 10 years or more. There is no substitute for experience. However, the industry can do a better job coordinating with universities and other organizations to identify and educate earlier and build a pipeline of talent. For instance, Tawazun, a strategic investment firm created in 2007 by the Tawazun Economic Council, focuses on the long-term development of Abu Dhabi’s industrial manufacturing and technology capabilities, and has established the Tawazun Training Centre to develop technical and engineering talent covering different disciplines and specializations. Tawazun partnered with the Abu Dhabi Tawteen Council, international and local universities, and vocational colleges to develop an array of programs to recruit, train, and employ male and female UAE nationals.
Accelerating innovation The third challenge is the slow pace of innovation, which is partly due to the industry’s aversion to risk and slow prototyping, and partly due to the conservative regulatory process. Panelists estimated that the industry will have suborbital capabilities in 12 to 15 years, but the regulatory issues will take another 12 to 15 years to resolve. Private companies cannot bear these high costs and risks alone, especially considering the decades it might take to recoup an investment. As with so many other challenges in the aerospace industry, the solution is collaboration through partnerships. In this case, partnerships with universities and other industries to increase the pace of experimentation; with governments to lessen financial risks and encourage innovation; and with regulators to reduce regulatory barriers and establish standards that make commercial launches more financially viable.
Panelists at the conference agreed that the aviation industry is experiencing a period of rapid growth and change that will last two decades or more. The opportunities are vast, but so too are the challenges. Given the global, interconnected nature of the industry, any bottleneck can have far-reaching consequences. Responses to the industry’s many challenges will require collaboration upstream and downstream of the value chain, with governments, regulators, the military, academia — even with other industries. For those companies that are risk averse and conservative by nature, this will not always come easily. They will have to respond nimbly to the industry’s many challenges, increase the pace of innovation, and forge new partnerships — sometimes with rivals. Still attendees at the summit clearly understood, and embraced, the magnitude of the task and the opportunities ahead.
Boeing, “Current Market Outlook 2013 –2032,” Boeing Commercial Airplanes, 2013 (http://www.boeing.com/assets/pdf/commercial/cmo/pdf/ Boeing_Current_Market_Outlook_2013.pdf).
All quotes in this report were made at the Global Aerospace Summit 2014.
Presidência da República, “Governo anuncia programa de investimento em aeroportos,” Portal do Planalto, December 20, 2012 (http://www2. planalto.gov.br/acompanhe-o-planalto/releases/governo-anunciaprograma-de-investimento-em-aeroportos).
The Gulf Cooperation Council consists of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
Boeing, “Current Market Outlook 2014–2033: China,” Boeing Commercial Airplanes, 2014 (http://www.boeing.com/boeing/commercial/cmo/china. page).
Safran-Snecma, “CFM sees record orders, production levels in 2013,” February 10, 2014 (http://snecma.com/cfm-sees-record-orders-production. html?lang=en).
“IATA calls for global standards in Gulf aviation,” Air Cargo World, April 8, 2014 (http://www.aircargoworld.com/Air-Cargo-World-News/2014/04/iatacalls-global-standards-gulf-aviation/6423#sthash.hme4B26W.dpuf).
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