Aerospace & Defense sector facing digital crisis says BCG

07 June 2018

A ‘looming digital crisis’ in the Aerospace & Defense sector has been identified by the Boston Consulting Group. A detailed study from the Big Three strategy consulting firm found that senior A&D executives are worried that their heavy investment in digital has been wasted.

After interviewing hundreds of leading executives in the thriving Aerospace & Defense (A&D) sector, the Boston Consulting Group (BCG) concluded that, despite its size, the industry is digitally immature. This is especially true when A&D is compared to similar industries – automotive and manufacturing – which have fully embraced digital transformation.

In its report ‘Is the Digital Revolution in Aerospace and Defense in Crisis?’ the strategy consulting firm may have given away its conclusion in the title. But the fears expressed by A&D leaders in BCG’s second annual global survey of digital transformation in the sector are very real.

“The survey results point to a looming digital crisis,” says Greg Mallory, a BCG senior partner and a coauthor of the report. “Executives have invested a lot in digital and now want to see returns for that money. Yet, in terms of digital adoption, the industry is still immature compared with automotive and industrial manufacturers.”

The problem is not a lack of ambition, or appreciation for the immense commercial benefits digital adoption presents to companies operating in any industry. More than half of the 200-plus executives polled by BCG said their organization planned to increase spending on digital technology in 2018. Nearly one in four said that spending would exceed $100 million this year alone, a huge sum by any stretch of the imagination.

Nine Digital Technologies Reshaping A&D

Nor is ignorance the problem. The highest investment priorities were 3D printing capability, Big Data, analytics, cloud storage, and simulation-based design. A full 96% of respondents said they planned to digitize their core internal operations to improve efficiency, R&D capability, time-to-market for new products, and customer understanding.

Yet respondents seemed disheartened by the relative lack of value their organizations’ had derived from such momentous spending on digital tools. In 2017 the executives cited ‘cultural concerns’ as the most common digital challenge. Fast forward one year and billions of dollars and ‘demonstrating value from digital investments’ is now challenge No. 1.

Although it is natural to become more concerned about returns as investment soars to unprecedented heights, there is a clear problem in the A&D sector which is not paralleled in the automotive or manufacturing industries. BCG analysts believe that A&D executives are missing a crucial piece of the puzzle – investment in digital enablers. 

A&D is strong on vision but lacks on enablers

Enablers offered as relevant examples include talent, leadership, agile at scale, data strategy, and digital ecosystems. Report co-author Lacy Ketzner argues that: “Companies should complement their direct investments in digital applications with simultaneous supporting investments in digital enablers.”

This, she believes, is a third approach to unlocking value, which is more effective than simply doubling down on investment, or even pulling out altogether. Mallory agrees and suggests that what BCG’s survey indicates is that smart and targeted digital investments are the way forward for stressed A&D executives.

A&D clearly has a long way ahead to catch up on its sister sectors automotive and manufacturing. The AutoTech business, the land of autonomous cars and advanced infotainment systems, is accelerating at full speed. Meanwhile, US factories are shedding their outdated image and are now pioneering the use of robotics and advanced AI technology to gain a competitive edge over global rivals.


Global commercial airplane fleet to see sharp rise as demand booms

16 April 2019

Low fuel prices saw commercial airlines enjoy a year of relatively solid returns in 2017, but rising fuel prices, prolonged use of older aircraft, and higher labor costs again saw airline profits fall in 2018. For the coming year, flight travel demand is projected to increase and many fleets are set to be modernized. There are, however, looming concerns surrounding the industry’s long-term environmental sustainability.

Globally, commercial airline prospects remain strong. Demographic shifts in developing economies are set to create considerable additional demand, particularly in Africa, Latin America, and Asia. Europe and the US are also set to see growth in demand, with tourism continuing to flourish. Approximately $900 billion was spent on commercial aviation in 2019, representing nearly 1% of global GDP.

To meet growing demand, airlines are strengthening their fleets – with a corresponding increase in the demand for maintenance. While demand is projected to grow, sustainability concerns stem from the considerable emissions generated from commercial aircraft, both in terms of greenhouse gases and aerosols. The industry is therefore grappling with how to offset its environmental impact, including changes in technology such as battery-powered short-haul craft, carbon credit programs, and different fuel mixes.

20-year RPK and GDP annual growth projections

New analysis from Oliver Wyman (“Global Fleet & MRO Market Forecast Commentary 2019-2029”) explores major trends in the industry as part of a wider report into the maintenance segment.

The industry is projected to see significant growth in the total aircraft fleet, with an additional 11,600 added in the coming decade. The commercial fleet is expected to total more than 27,492 by 2029.

The top driver of fleet growth is a projected increase in Revenue Passenger Kilometers (RPK), an airline industry metric that shows the number of kilometers traveled by paying passengers. Asia is expected to have strong RPK growth, at 5.7% annually over the coming 20 years. Africa and Latin America, however, are set to lead, with average growth of 6% and 5.9%. Europe and North America will see significantly slower average annual growth – although on far larger initial numbers – at 3.8% and 3.1%.

The firm notes that RPK growth is not set to follow respective long-term economic growth trends. It is instead largely due to demographic shifts, with a larger middle class opting for flight travel.

Passenger and cargo traffic

The firm notes that various factors have boosted revenue for the industry over 2018. The number of available seat kilometers (essentially passenger carrying capacity) has increased, as has RPK. These increases reflect market liberalization, service quality improvements, route additions, increased competition, and lower fares.

Global airlines financial performance

Industry economics

While demand growth is strong, the industry faces a number of challenges. A recent lull in fuel prices saw the industry able to claw back some of its lost profits – with the industry having spent years streamlining their operations to mitigate costs in the area. Yet the good times for low-cost fuel are not indefinite, with recent spikes adding additional expense. Delays in delivery of next-generation aircraft saw companies continuing to use older, less fuel-efficient stock, which added to costs in 2018.

The industry also faces additional costs from labor, which represents around a third of total costs. In the US, however, demand for workers is set to outstrip supply over the coming five years, with a similar long-term trend. The growth in the industry has seen the labor pool increase by around 3.1% in 2018 to 2.8 million people. The report notes, however, that demand for trained personnel is likely to outstrip supply in the coming decades as baby boomers begin to retire, placing upward pressure on wages and driving up costs.

Global passenger load factors relative to invested capital

Net profitability

The analysis revealed that profitability was down 14.3% in 2018 on 2017, at $32.3 billion and $37.7 billion, respectively. The decline in profitability is partly the result of higher costs, though that was partly offset by consolidation in major markets. Overall, net margins fell to 5.7% in North America in 2018 from 7.9% the year previous. Oliver Wyman projects net profit to increase in 2019 on 2018, although it will remain below 2017’s levels.