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Industry executives are focused on M&A, talent, supply-chain issues, and growth
If there is a single word to describe the current state of the aerospace, defense, and airlines industry, it would be “disruption.” From supply chain to talent wars, digitization to production ramp ups, every trend points to higher stakes, a faster pace, fresh technology, and a tug-of-war between the big primes and new incumbents battling over their piece of a multi-trillion-dollar pie.
AlixPartners took a detailed look at the impact disruption has on C-Suites over the last five years and assessed a broad global business landscape. While executives across multiple industries share many concerns, the fifth annual AlixPartners Disruption Index (ADI) found A&D leaders are particularly on edge regarding upcoming elections, geopolitical tensions, supply chains, talent wars, and digitization.
This comprehensive survey polled 300 A&D executives (or 10% of the ADI total) with representation in North America (29%), Europe (30%), and Asia (41%). Other industries studied include automotive, consumer products, energy, financial services, healthcare, technology, retail, and telecom.
A&D executives struggle to regain footing amid industry disruptions
Across the board, fewer leaders said their companies are being ‘highly disrupted’ compared to prior years’ results. Perceptions of near-term volatility and uncertainty have also cooled. However, many of these executives are on their heels, more likely to react to disruption and less likely to drive it, as they continue to recover from a volatile post-pandemic period.
A&D executives look at disruption through a global lens. Historically, A&D supply chains have been highly globalized, and exports are among some of the most regulated globally. With interest rates elevated, political leadership in flux, the constant threat of economic volatility and continued supply chain disruption, A&D leaders must be bold in defining their paths forward.
The ADI highlighted that 70% of A&D executives are concerned about the upcoming U.S. election, compared to 52% of respondents in the overall survey, a key signal for the political sensitivity of A&D companies’ strategies. A similar spike is seen with concern around geopolitical tensions, where 67% of A&D executives express concern, compared to 54% of respondents in aggregate.
A&D leaders expressed significantly more concern than their peers in two key areas: the fear of losing their job due to disruption and the level of personal and professional support needed for success. Additionally, over one-third (39%) anticipated a significant change in their business model within the next year. Even though A&D is a long cycle industry, respondents across commercial aviation and airports, commercial aircraft, defense aircraft, engine OEMs, MRO, and defense systems were aligned in their responses (±3% from 39%). The major outliers were leaders from the space systems segment, where only 25% forecasted significant changes in their business model over the next year.
Which drivers of disruption spiked for A&D executives?
For A&D companies operating in a capital-intensive, highly regulated industry with long lead times, high interest rates, and significant exposure to macroeconomic conditions, disruptive forces pose serious challenges. Leading the concerns for A&D executives are skill shortages, the need to grow, and supply chain disruptions.
Below, we take a deeper dive into some key categories of disruption:
Workforce
Talent challenges are more severe in A&D than in other industries, with 54% (vs. 38% on average) of executives worrying their companies will need to downsize the workforce in the wake of industry-wide disruption. At the same time, 57% (vs. 40% on average) are concerned about the talent strategy, fearing it is not sufficient to attract or retain underrepresented groups. These talent shortages are exacerbated by significant gaps in both specialized engineering fields, such as software engineering, and in trade professions. In trade professions especially, employees can face hazardous conditions for low pay, while they could earn highly comparable wages in other fields.
Growth expectations
Generally, although A&D executives feel less disrupted than those in other industries, they are comparatively less optimistic about growth as they continue to face major hurdles on the supply side, both in commercial aerospace and in defense. While airlines’ passenger numbers have recovered past pre-COVID-19 levels, regional recovery has been unbalanced. Furthermore, airlines continue to face new aircraft delivery delays and increased operational costs. Players in Engine MRO and in the broader aftermarket, meanwhile, see continued growth prospects, driven by a duality of continued demand for shop visits for new-generation aircraft and stronger pricing power for legacy aircraft and engines.
Executives in the defense sector report feeling less disrupted despite higher exposure to geopolitics and technology-induced changes. Furthermore, in the aftermath of the renewed aggression in Ukraine, defense players in Europe and the U.S. continue to face major hurdles in ramping production for both high-end systems and ammunition. This is surprising given the strong performance of new software-driven aerospace entrants and the Department of Defense's endorsement of new procurement pathways, like Replicator, which aim to prioritize the introduction of new platforms into modern air fleets.
Importantly, M&A is regarded as the top lever for growth across A&D sectors. Nearly 70% of executives expect their company will actively pursue a deal within the next year (compared to 52% in other industries); 59% expect the company to divest business units or other assets over the next 12 months. The categories reporting the highest likelihood of near-term M&A are airports (86%) and airlines/commercial aviation (73%).
Supply chain
Supply-chain disruptions remain a significant challenge for the entire A&D industry. Despite promising production increases in commercial aerospace programs, OEMs and suppliers are struggling to re-synchronize. Four years after the start of the COVID-19 crisis, this is especially evident in cash conversion cycle trends, which are currently straining operations for most A&D suppliers. Additionally, many A&D companies find forecasting based on real-time data challenging, with 56% identifying it as a crucial priority—second only to telecom leaders in the survey and well above the overall average. Ongoing issues with data quality, forecasting, and re-synchronization between OEMs and suppliers hinder the ability to anticipate potential supply-chain problems and develop coordinated solutions.
Addressing disruption head-on
In today’s environment, the A&D sector is dealing with unprecedented events that need to be addressed. It is critical for industry executives to evaluate how they can position themselves to be successful and create opportunities through disruption rather than simply responding to it.
One key initiative that every player in A&D should consider is how to optimize their supply chain visibility. True supply chain visibility requires the implementation of a dynamic monitoring system that tracks live supplier performance, embeds governance, and supports decision-making at both the front-line and functional levels. This approach provides the visibility needed to prevent and detect supply chain risks and enables swift reaction and recovery when issues arise.
Furthermore, A&D leaders should continue conducting thorough portfolio reviews, and searching for M&A opportunities with a focus on chances to optimize underperforming assets. By focusing on growth, performance improvement, and cash generation, leaders can drive substantial improvements in their overall portfolio.
In a sector with unique challenges and global considerations, deep subject matter expertise combined with practical and effective solutions is crucial to counter disruption. Navigating sustainable growth demands a comprehensive understanding of industry turbulence, from supply-chain challenges to vertical integration and leading-edge innovations. The aerospace and defense industry must become more agile. To capitalize on forthcoming disruptions, strong leadership and thoughtful vision are essential today.
For a deeper discussion around the challenges and solutions in this area, contact:
Eric Bernardini
Executive Partner & Managing Director, Aerospace, Defense, and Airlines
[email protected]
Stefan Ohl
Global Co-Lead, Aerospace, Defense, and Airlines
[email protected]
David Wireman
Global Co-Lead, Aerospace, Defense, and Airlines
Contact the authors:
Ben Brooks
Partner
[email protected]
Rodion Kaplounov
Vice President
[email protected]
