Opinion: Stay Tuned For The Era Of Aerospace Reorganization

The aerospace and defense industrial base structure is somewhat analogous to a symphony orchestra. If the conductor is an OEM or prime integrator, then sections of companies are directed across supply chain tiers to produce and support platforms as diverse as airliners, submarines and space launch vehicles.

Today’s symphony has lost its rhythm and harmony, however. Airline and government end customers are dealing with delays, cost overruns and quality issues. Businesses and workers—key members of the ensemble—are revisiting their existing relationships and priorities to try to address a range of challenges.

The post-COVID-19 pandemic environment is not the first period of change for the industry. The 1990s, for example, was the “Era of Contraction” in aerospace and defense, driven by a rapid decline of defense budgets that triggered major industrial base consolidation.

In contrast, the “Era of Expansion” in the 2000s and 2010s created a challenging act to follow. Commercial aerospace build rates grew in a so-called super-cycle. The Pentagon awarded dozens of industry-defining programs. Globalization created new customers and low-cost suppliers. Workforces facilitated increased production rates while controlling or reducing production costs. The investment market, driven by low interest rates, further fueled growth.

Before 2020, with these expansionary forces in abundance, larger players conducted horizontal mergers and acquisitions, new players entered, and complex supply chain agreements across tiers emerged. As the dust has settled following the pandemic, conditions have changed, and now three major pressures are driving a new “Era of Reorganization.”

The first pressure is the capability gap left by the exodus of experienced engineering and technical talent. The substitution of virtuosi with relative novices has created major reliability issues that are testing long-held supplier relationships.

Escalating costs are a second pressure, driven by inflation, supply disruptions and uncertain demand signals. This is especially difficult when the market demands costly additional capacity and generational platform investments.

For example, while the U.S. defense budget has grown in nominal terms and demand signals are high, the procurement account, at $175 billion in 2024, is no higher in real terms than in 2019. While research and development (R&D) spending has grown in real terms, there is an expectation that vendors, whether traditional players or Silicon Valley entrants, should absorb a greater proportion of next-generation investments across “exquisite” and low-cost “proliferated” platforms.

In commercial aerospace, the latest wave of collective bargaining agreements reflects how wages need to catch up to several years of broader inflation. Combined with production rates that are far from a recovery level, this creates a severe cash flow squeeze. Investment of $30 billion or more needed for a next-generation, clean-sheet airliner demanded by the market will likely require fresh capital and partnerships.

The third compounding pressure is that in a world of increased uncertainty and higher interest rates, capital allocators are more discerning. External funding is more challenging to raise. Internal R&D funds have become scarcer due to both diminished buying power and higher return hurdles. This is becoming an added forcing function for reviews of alternatives for funding business plans and core or noncore designations.

To respond to the squeeze of these three pressures, the ensemble will be compelled to reorganize via new partnerships, supply relationships, and mergers and acquisitions.

Supply must be secured while reducing cost through reevaluation of buy-versus-build decisions and the use of alternative sources. Announced vertical integration moves such as Boeing’s acquisition of Spirit AeroSystems and Lockheed Martin’s of Terran Orbital may be signs of what is ahead. New entrants such as SpaceX and Anduril Industries have made increased vertical integration part of their DNA. The sector has hundreds of businesses, creating possible vertical moves or accelerated consolidation between suppliers as work packages are progressively realigned and funding gaps demand attention.

Two decades of “horizontal” mergers and acquisitions have left a range of large, diversified aerospace and defense conglomerates with sprawling product portfolios and mosaics of differing levels of positioning and performance. L3Harris Technologies, RTX and Safran are examples of prolific divestors, with about 30 divestitures among them since 2020. Other large companies are earlier in their evaluations of divestiture, partnership and licensing alternatives.

While we are confident the figurative symphony orchestra will adjust to a new sheet of music, the industry will materially change in the next decade. Early strategic planning and foresight will provide the best playbook for this new Era of Reorganization. Those who are not ready to adapt might find themselves without a seat in the ensemble.

Teo Ozsan is a senior partner and Jay Carmel is a principal at Renaissance Strategic Advisors, a global aerospace and defense advisory specializing in strategy and mergers and acquisitions.