Rethinking Aerospace Business Models for a Sustainable Future

The playbook for clean-sheet single-aisle aircraft is overdue for an update. The rapid pace of technological innovation and the increasing pressure to reduce emissions indicate that the next generation of aircraft may not enjoy the 30+ year lifespan of their predecessors. This shift will result in higher upfront R&D costs and a shortened aftermarket life in an industry where MRO drives the margin for many segments. Consequently, many business models must be fundamentally rethought to keep key players motivated to ramp up and innovate, or even remain in the industry.

Aerostructures Overhaul Requires Delicate Balancing Act

The segment most in need of a comprehensive business model overhaul is aerostructures. The recent Spirit AeroSystems deal highlights the financial untenability of the current model for even the largest Tier-1 aerostructures suppliers and Risk and Revenue Sharing Partners. As companies look to divest aerostructures units, buyers are nearly impossible to find.

The future looks even more challenging, especially for Tier-2 and Tier-3 suppliers. Boeing and Airbus already have extensive fabrication footprints, and a new thermoplastic fuselage or wings could revolutionize the sector, potentially lowering outsourcing and simplifying the supply chain. With less metal on the aircraft, there won’t be room for all the players in the long tail of machining and sheet metal suppliers.

Potential consequences of this disruption need to be carefully managed. These companies are the backbone of the current supply chain; ensuring their survival and willingness to invest further during the transition is critical for maintaining continuity and securing ramp-up. An accelerated consolidation centered on the best-performing and most technologically advanced players – potentially backed by private capital – could be the ideal outcome.

Systems Suppliers: the Super-Tier1 dilemma

Having undergone significant consolidation, systems suppliers are currently the healthiest segment in the supply chain. A small number of highly integrated suppliers dominate the market, offering complete subsystems and driving advancements in electrification, cockpit connectivity, and single-pilot operations. These Super Tier-1 players enjoy double-digit billion-dollar revenues and a disproportionate share of the profit pool, largely thanks to high-margin aftermarket. Their large balance sheets enable sustained R&D investment and the ability to weather production transition valleys.

OEMs could accept this status quo by adopting a winner-takes-all strategy for the next generation of major systems. This approach could mitigate the risks associated with coordinating and integrating multiple vendors but would limit competition to a handful of Super Tier-1s at best.

Alternatively, OEMs could scramble this equation by taking the lead on system integration, allowing them to maintain more control over the aftermarket and broader supply base, potentially through dual sourcing. While appealing, this approach would likely increase risks and require larger upfront investments from OEMs, making it applicable to only a limited subset of systems.

Unclogging the Cabin Bottleneck

Cabin interiors are increasingly becoming a key differentiator for airlines, significantly shaping the customer experience. Further innovation is inevitable, and the next single-aisle aircraft may resemble a smaller widebody, featuring two-class layouts and larger galleys.

However, cabin supplier performance is a stubborn bottleneck in production ramp-ups. Increasing interior complexity, combined with higher production rates, could spell disaster.

One potential solution is to allow airlines to customize customer-visible parts while keeping the core of the cabin standardized. This could be achieved with a combination of pre-approved suppliers and cost-competitive Buyer-Furnished Equipment (BFE). For example, BFE could include satellite communications, dual head-up displays, and in-flight entertainment.

Striking the right balance between customization and standardization will also shape the supply chain. Outside of giants like RTX and 赛峰集团(SAFRAN) , the market is highly fragmented. Many small players offer high craftsmanship but lack industrial maturity.

Engine OEMs at a Crossroads

Engine OEMs are at the forefront of innovation but face significant challenges from emerging technologies such as open rotor, hydrogen, and electric/hybrid propulsion. These technologies require radically different airframe integrations, making choices nearly irreversible. Developing and certifying these technologies demands billions of dollars,?making it a high-stakes gamble for Engine OEMs. While timelines remain uncertain, any new clean-sheet aircraft that does not incorporate one or more of these technologies risks rapid obsolescence.

Currently, Engine OEMs’ profitability relies almost entirely on the aftermarket, limiting their incentive to ramp up production and introduce new products. Unless this changes, they are unlikely to push for an accelerated roadmap for new technologies. So, what options do Aircraft OEMs have? The most extreme is vertical integration, similar to the automotive industry where OEMs produce their own powertrains. Another is entering Risk and Revenue Sharing agreements with Engine OEMs. Both would further inflate the already staggering $15-20 billion development cost of a new aircraft and could limit the opportunity for dual sourcing, a key lever for risk reduction. However, these strategies would allow aircraft OEMs to tap into the lucrative aftermarket.

The stakes are high, and the decisions made here will test historical alliances and have significant implications for the widebody market as well.

Conclusion

Rapid technological advancements may shorten aircraft lifecycles, but achieving net-zero emissions will be impossible with aircraft powered by fossil fuels or even Sustainable Aviation Fuel. To meet or even get close to ICAO carbon emissions targets, the industry must find ways to rapidly adopt new technological breakthroughs as soon as they are ready, even if it means rewriting the rules of the game.

Every link of the value chain must evolve and adapt, and OEMs must play a critical role in helping orchestrate a smooth transition. The blueprint for the future must be defined by clear objectives, supported by adequate investments, and be agile enough to thrive in an uncertain world.

Originally published on FlightGlobal on September 19, 2024: Can airframers navigate the shifting sands of supply chain for new aircraft development? | Opinion | Flight Global