A version of this article appears in the August 25 issue of Aviation Week & Space Technology.
It is a striking feature of the aerospace & defense (A&D) industry that, by and large, it is still dominated by the same companies as 30 years ago, while in so many other industries historical players have long been challenged, and sometimes defeated: General Motors, Digital Equipment, Xerox, Motorola, Texas Instruments and Eastman Kodak are a few of the Fortune 500 companies of the 1990s that faced major challenges during the last two decades.
Yet, in A&D, apart from some reshuffling and rebranding, the top players are still the same:, Lockheed (plus Martin), Northrop (with Grumman), , , British Aerospace (now ), Thomson-CSF (now ), (now ), Aerospatiale and DASA (now Group). Out of the world’s top 50 A&D players—putting aside straight spinoffs such as Alliant Techsystems, Spirit AeroSystems, Exelis, Huntington Ingalls or Leidos—only two companies were founded within the last three decades: B/E Aerospace (1987) in commercial aerospace; and (1997) in the defense sector (although L-3 was the result of spinoffs from , its business model was so innovative that it could have been considered a new company).
There are two primary reasons for such stability: the relative youth of the commercial aerospace sector and the conservative behavior of customers, particularly in defense.
In a relatively young and immature sector such as commercial aerospace—the market really took off only in the 1980s—customers have logically placed a premium on product reliability as the primary dimension of performance, over other elements such as convenience or price. This has favored companies that control the design and final integration of their products: primarily Airbus and Boeing, as well as their major suppliers, which themselves created “closed systems” around key aircraft subsystems such as engines, avionics, power systems and control systems. All these dependencies have made it nearly impossible for new players to break in with innovations, at least in the “design and integration” markets dominated by incumbent players.
The only areas where new players like B/E Aerospace have prospered have been cabin equipment and consumables (as well as some MRO services), sectors where convenience such as price and the ability to customize have overtaken reliability as the key performance dimensions for airlines. In such a context, opportunities are created for new players to come in with different value propositions, for example as “aggregators” (one-stop shops) or brokers of products and services contributing specific functions or filling gaps in the industry value chain.
However, until visionary and deep-pocketed players of the same breed as Elon Musk, Jeff Bezos or Google develop new concepts for air transport or aircraft design and manufacturing—such as Space X, Toyota in its time and possibly Google tomorrow—it will be very difficult to challenge the industry leadership, including aircraft OEMs and their major suppliers.
Meanwhile, in defense, military customers’ propensity to engage in ambitious and large programs in closed architectures has protected long-established players by placing a premium on product reliability and technological complexity, and therefore on design and integration skills. Over time, this has created a kind of comfort zone for both customers and large established players, and has become a barrier to entry for new players with different value propositions.
It took the creation of L-3 Communications in 1997 to show that another value proposition was possible, namely one that consisted in creating a “Sears catalog” of the defense sector (as co-founder Frank Lanza once put it), positioning the new company as a horizontal aggregator of products and services. This represented a complete break with the traditional “vertical integrator” model of the top defense primes. However, military customers are even more conservative than commercial airlines so the L-3 story remains an exception. In fact over the last few years, L-3 has changed its model back to a more traditional one—probably encouraged to do so by the U.S.’s behavior.
While conservatism has brought us air travel safety and—for most of us—homeland security, the A&D industry as we know it in North America and Western Europe is living dangerously off antiquated assets, cozy relationships and outdated practices. Its long-term prosperity will only be ensured if more diverse players—including non-A&D specialists and small and medium enterprises—are allowed to compete on a level playing field, and if customers are willing to drastically change the way they procure their products and services. Undergoing this required evolution, if not revolution, in customer behavior is not the least of the A&D industry challenges.
Antoine Gelain is the A&D practice leader at Candesic. He is based in London.