By Jay Carmel, Chris Higgins & Matt Miklavic; with contributions from Mike Brant, Ian Ferguson & Logan Slone
Ahead of the 2019 Paris Airshow, Avascent’s Aerospace group examine the key themes on both the civil and defense side of market that will be at the center of discussions at Le Bourget next week. Listen to the team discuss these themes further on podcast here.
Whither the Middle of the Market?
At the start of 2019 Boeing appeared poised to arrive at the Paris airshow with an authority to offer for its next generation midsize aircraft (NMA) followed by a formal launch next year. But the MAX groundings will likely push NMA timing to the right. If NMA is launched, suppliers will face a new procurement, production, and aftermarket model from Boeing, which will require them to rethink how to create value and optimize their economics on an aircraft program. The size of the market that NMA would address also remains hotly debated. Using a broad definition of the middle of the market, Avascent envisions demand for about 4,500 aircraft over the next two decades. Look for Airbus to possibly launch its A321XLR at the airshow, as it attempts to chip away at Boeing’s ability to address the lower end of these 4,500 aircraft.
We’re Going Vertical!
Significant production rate growth goals, coupled with emerging technology disruptions such as additive manufacturing, automation, and digitization, have inspired Airbus and Boeing to look at new ways of improving efficiency and delivery quality. Vertical integration is back in the spotlight after decades of increased outsourcing, but OEMs are also evaluating other options, including increasingly automated, data-driven production lines. Boeing will likely use the Air Show to further highlight its various initiatives to control more of the supply chain (e.g., Cabin and APU JVs with Adient and Safran, respectively). While insourcing is also a key topic within Airbus, it appears more focused in the near-term on its new Digital Design Manufacturing & Services initiative (DDMS) that will tie in design, production, and support concepts into new platform planning. Despite these differing focus areas, they reflect Boeing and Airbus’s growing interest in aftermarket service and should drive the rest of the supply base to rethink their relationship with airframers and their aftermarket strategies.
I’m Coming Out, I Want the World to Know
This airshow will be a coming out party for the newly christened “Super Tier 1s”: United Technologies (or soon to become Raytheon Technologies) and Safran. United Technologies’ acquisition of Rockwell Collins (covered in Avascent’s October 2017 white paper, “Power Play”) and Safran’s acquisition of Zodiac have created a New Duopoly of aerospace giants, right at the feet of Boeing and Airbus. The June 9 announcement of UTC’s merger with Raytheon underscores this dynamic in dramatic fashion, as the proposed Raytheon Technologies Corp. would become the second largest A&D firm behind Boeing. Within the civil aerospace domain alone, legacy UTC and Safran both enjoy tremendous diversification across avionics, propulsion, interiors, structures, mechanical and power systems — forcing other Tier 1s to consider their own scale and interaction with one of these new “super suppliers.” Smaller Tier 2 and Tier 3 companies must keenly evaluate their own differentiation, and the potential necessity to climb the value chain.
The historically stagnant regional aircraft market is back in the spotlight, with a flurry of investment activity that left Bombardier’s CSeries program under Airbus ownership and an 80% stake of Embraer’s E-Jet family in Boeing’s hands. The remaining OEMs must now decide whether they can reinvigorate demand and credibly compete or cede the market to the Airbus/Boeing duopoly. Mitsubishi (MITAC) appears ready to announce plans to “drastically” redesign its MRJ70 to better fit the US scope clause, and its fortunes could improve further if Bombardier soon announces the divestiture of its CRJ program (much like it’s Q400). But with a highly uncertain delivery timeline and Mitsubishi’s focus on the MRJ90, will the MRJ70 lose ground to other emerging competitors seeking to challenge “Boeing Brasil — Commercial’s” dominant position, or will the former Embraer continue its dominance by maintaining its E-Jet line?
A critical factor influencing regional aircraft OEMs’ long-term investment plans is the emergence of hybrid-electric propulsion capabilities. Battery performance is still decades away from enabling large, fully-electric commercial aircraft, but it has improved enough to generate notable OEM and Tier 1 interest in hybrid designs that can deliver useful range with lower operating costs and fewer emissions — factors that could unlock new air travel demand in many underserved markets. Despite the surge of interest, the most meaningful testing ground for large-scale hybrid and fully-electric is beginning in smaller aircraft, a segment already generating interest from local airlines and flight schools. Keep an eye out for first-looks at new aircraft like the Eviation Alice (with magniX motors) and VoltAero’s Cassio.
Even as countries roll out plans for 6th generation fighters, ongoing demand for near-term fleet modernization offers opportunities for many major companies at this year’s Air Show. Amid tension between F-15X and F-35 in the US, a wave of international acquisitions will pit 4.5th and 5th generation aircraft against each other. Driven by near-term competitions in Canada, India, and several European countries, Avascent forecasts more than 350 unawarded fighter deliveries over the coming decade. Competition from both sides of the Atlantic will be fierce as Boeing and Lockheed Martin fight to grow market share and extend the F-35 umbrella, respectively, while Dassault, Saab, and the Eurofighter consortium look to extend orderbooks and bridge production lines until the next generation of programs.
Put on Your Trainers, Let’s Chase Some Opportunities
Fresh off their T-X trainer win in the US, Boeing and Saab have already begun to eye international sales opportunities. Boeing has publicly stated market projections for over 2,600 trainer and light attack aircraft, anchoring the T-X business case in a multi-decadal global sales strategy that combines platform sale, lifecycle, and training revenues. Avascent sees a sizable opportunity as well, forecasting $12.8 billion of unawarded spending on trainer aircraft through 2028 and more than $5 billion of unawarded close air support aircraft programs over the same time period. But the T-X team will face competition from multiple competitors in both the light attack and trainer space, including BAE, Leonardo, KAI, Textron, and Embraer. The Paris airshow will provide an opportunity for the T-X team to further market its solution internationally, mirroring its efforts at the recent Avalon airshow in Australia.
A New Transport Program: A Heavy Lift?
Although next-gen fighter jets and stealth aircraft turn heads, large aging fleets of transport aircraft underpin the expeditionary reach of both the US and its NATO allies. The US mobility fleet is constituted by a mix of C-5, C-17, and C-130 aircraft designed between 30-60 years ago, begging the question of when the US will move away from continued upgrades of legacy platforms and launch a clean sheet program. As defense budgets — and industry R&D dollars — become stretched across a host of programs, the degree to which industry will be willing to invest in new range, lift, and stealth capabilities desired by customers is unclear. As with T-X, international partnerships could drive program efficiencies. To this point, both Boeing (via its JV with Embraer on the KC-390) and Lockheed (through its Airbus tanker MoU) have already demonstrated an appetite for cooperation within the support aircraft market, the extent to which remains to be seen.
ABOUT THE AUTHORS
Jay Carmel leads the firm’s civil aerospace practice. Mr. Carmel delivers strategic guidance to suppliers and investors active in multiple aviation end-markets. In addition to traditional aircraft systems, Mr. Carmel has expertise in aircraft autonomy, connectivity, and electrification For more information, contact: email@example.com.
Chris Higgins is a Principal at Avascent with over 17 years of industry, equity research, and consulting experience in the aerospace and defense sector. For more information, contact: firstname.lastname@example.org.
Matt Miklavic is a Consultant at Avascent where he supports a range of engagements, providing competitive intelligence, due diligence, and strategy development support to clients in both domestic and international markets. For more information, contact email@example.com.
Avascent is the leading strategy and management consulting firm with more than 30 years’ experience supporting corporate leaders, investors and government stakeholders in the aerospace, defence, security, and public services markets. Working with corporate leaders and financial investors, Avascent delivers sophisticated, fact-based solutions in the areas of strategic growth, value capture, and mergers and acquisition support. With deep sector expertise, analytically rigorous consulting methodologies, and a uniquely flexible service model, Avascent provides clients with the insights and advice they need to succeed in dynamic customer environments.