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The Future of the Aerospace Industry

A Note by the Director (Ditchley 2006/03)
 
10-12 March 2006
Ditchley and the Boeing Corporation joined forces on this conference to examine what might be in store for the global aerospace industry in the next decade.  With a rapidly changing global context, increasing numbers of air travellers, rising fuel costs, environmental concerns, new requirements and perspectives affecting national security and a wider spread of countries emerging to participate in the industry, both the challenges and the opportunities appeared large-scale and unpredictable.  All participants accepted that the status quo would not necessarily apply for much longer and saw the need for adaptation and modernisation.
Yet the discussion was suffused with apprehension that, in strategic terms, the industry was operating on the assumption that the course of the next twenty years was set.  The issues which were preoccupying board rooms were those inherited from five or ten years ago rather than the ones which looked likely to come up in the future.  A number of non-industry participants gained the impression that this was a sector ridden with introspection and reluctant to face change.  In that sense, our debate seemed very timely.  Government and industry representatives were each able to see the world a little more through the perspectives of the other and together ended up more inclined, perhaps, to enter into a strategic dialogue based on a greater understanding.
We heard a warning early on that the industry, makers of aircraft as well as airlines, had to produce a return for their shareholders.  They were there to make money, not aeroplanes.  The price of air tickets continued to fall, while aircraft were increasingly leased, not sold.  Where was the bottom line going?  Why were so many airlines unprofitable?  We were also asked not to fall into the trap of assuming that new technology was the same driving force as the need to develop ever more efficient manufacturing processes.  The emergence of China, India, Brazil, Russia and others as competitive threats to US or European manufacturers and operators would have to be factored in;  but it did not mean that the US and Europe would stop being the principal innovators and developers of the next stage of leading edge technology.  In a sector prone to protectionist instincts, governments needed to understand that they could allow more competition across the globe in manufacturing without losing control of sensitive technology.  More generally, it was time to resolve the ongoing conflict between the need for open markets and the instinctive response of governments to use security as a pretext for protectionism, which then encouraged airlines and industry to ask for more of it.  There needed to be a much more understanding dialogue amongst governments, and between governments and the industry, about technological transfer and interoperability, with export licences policed in such a way as to avoid offence to genuine and legitimate allies while deterring proliferation to rogue states or terrorist groups.
With the defence sector seen as the principal driving force for new technology and big new systems, we examined closely whether the clear change in the nature of the security threat, primarily but not only for western governments, might feed through to different requirements more generally for the whole aerospace sector.  The question was starkly put whether it was really appropriate to posit the need for a new generation of big platforms and aggressive weaponry at all.  In American parlance, offense had given way to defense.  Most participants felt that it was too early for a dramatic change.  If pre-emption was to be one of the options for countering asymmetric threats, however controversial the basis for it, there would still be a need for the projection of power at a distance.  It was also acknowledged, however, that the drive for big new systems needed to be examined more sceptically.  With lead times so long, more than twenty years in some cases, and fifty if the full life of the product was added in, not much could be done about the requirements already being worked upon.  But there was a good deal of worry around the table that the world was likely to change much faster than the industry could respond.  It was time for governments and industry again to have a deeper exchange about the right strategy.
This discussion on defence suggested a disinclination in the industry to think out of the box.  Underlying companies’ discomfort with change was the belief that government budgets, especially in the United States, would stay indefinitely on an upward curve or could be tweaked in favour of particular programmes, including the larger ones.  This conference heard clear warnings that this would probably not be the case.  With US government spending on aerospace running at twice the rate of five years ago and with growing concern about US budget deficits, since healthcare and pension costs were also spiralling, there was little doubt that cuts would soon make themselves felt.  This would inevitably lead to decisions to axe certain programmes:  the F/A-22 was thought to be vulnerable, as was – for the UK – the third tranche of Eurofighter Typhoons, the fleet of tanker aircraft and maybe the new aircraft carriers.  Most industry participants appeared, perhaps understandably, extremely reluctant to contemplate such reversals.
Alongside the future of defence requirements, other themes made themselves felt.  Few people doubted that air travel would continue to grow in popularity:  the continuation of the 5% a year increase in air passengers was a distinct possibility.  There was some concern that the implications of a stronger market for cheap air travel, either short haul or long haul, had not yet fed through to strategy and planning.  The leasing of aircraft produced unclarity in the industry as to who was left holding the financial responsibility.  Airlines were more vulnerable in the market than manufacturers, because they had no pricing power.  But the sector as a whole needed to resolve these issues and present a more united front.
A further theme was the environment.  Climate change would undoubtedly generate a need for the aerospace industry to contribute to reduced carbon emissions, all the more difficult if air travel was growing.  What responsibility should the industry assume for environmental improvements and what should fall to the consumer – whether traveller, tax payer or environmental activist?  Industry fought back at this point, claiming that the effect of aircraft emissions on the environment had been generally exaggerated.  Others said that, if this was the case, they had better get their communications systems working more effectively.  Perceptions were what mattered and it should not come as a surprise if there was a sudden acceleration in public concern about carbon emissions globally, which would affect the aerospace and air travel industries as well as several others.  The conference drew the conclusion that the aerospace sector had to get a grip on the likely impact of environmental policy changes.
As the weekend wore on, the conference turned more insistently to the growing shortage of engineers coming out of schools and universities and to the difficulties which would be caused if it became impossible to find the relevant skills for the next era.  Lead times were relevant here, too.  The engineers, scientists and managers for the next twenty years were already in place, just as the requirements apparently were.  So many problems were hitting the industry in the short term that all available energy seemed to be directed at putting out the fires and keeping the wheels going.  Nonetheless, with such an unusually long product cycle, it was incumbent on this industry more than any other to listen to the brightest younger people and the themes on which they were challenging the status quo.  A huge amount could be learnt from new thinking.  Industry representatives should go much more regularly to schools and universities to encourage good students to recognise the challenges and opportunities of the sector.  This led to another stark question:  were the people with the right skills for aerospace receiving a good enough compensation package to compete with banks, finance companies and other rewarding sectors?  The evidence seemed to be that they were not.  A larger proportion of female engineers and managers should be introduced into the industry.  It was the responsibility of companies now to lay the foundation for the preservation of a great industry beyond 2025.  The Society of British Aerospace Companies was asked to take up the theme of skills and training with some urgency.
If the aerospace industry seemed still to be too introverted, what, participants asked, would really make a difference?  It had to develop a capacity to look at itself from the outside, with a real understanding for the customer and the market.  If government was changing its requirements, it should be more transparent with the industry about its real needs, particularly in the defence sector.  As for skills, education departments should begin to address the deficiency in engineering and other relevant disciplines, not excluding the finance sector.
While this conference was clearly not the place to pursue detailed negotiations in the EU-US dispute over Open Skies and government subsidies, enough skirmishing took place to indicate that feelings would continue to run high unless people stood back, took a deep breath and considered the strategic implications of a failure to find the remedy.  With the emerging countries coming up on the outside track, now might be the time to cut a deal and examine with greater vision the implications of changes in the global market.  Alongside that thought came a plea for the US government to think harder about its system of export licensing, if even the US’s closest allies were being denied the transfer of technology which they could quite adequately protect.  A fair and objective monitoring system ought to be created to ensure that export controls were implemented with a level playing field and with sensitivity for other considerations such as interoperability, the creation of a broader base for good innovation and wider access to finance.
Although the conference did not attempt to create a comprehensive list of recommendations for government or industry to follow, a number of ideas were produced that participants thought deserved further consideration:   
  • If defence requirements were changing under the pressure of terrorism and other asymetrical threats, defence and home security budgets should be unified under a national security framework and a strategy developed that was  closely connected to the real threats.
  • More generally, governments, the industry and airlines should establish a clearer and more consistent dialogue on where the whole sector was going, with the aim in particular of dispelling confusion about the motivation for government action on taxation and security. 
  • A new inspectorate should be created for export controls, to ensure fair play.  This could use NATO as a model for confidential cooperation on the basis of mutual interest and/or as the institution into which to place such an inspectorate.
  • A deal on the EU-US dispute should be negotiated that compromised on the interests involved and enabled a broader discussion to proceed, using the WTO, on how to accommodate emerging players.  There was no doubt in the minds of participants that open skies and open commerce would be good for the sector in the long term, even if the less efficient parts of it came under pressure. 
  • Education and training required a new focus, to reverse the trend away from the supply of the right skills to the aerospace industry.  Teamwork would be needed across government, as well as between government and the private sector.  A number of ideas were being developed to attract young people back into the sector, but they would need a stronger follow-up.
Ditchley expresses its gratitude to the Boeing Corporation for inspiring the conference, which might have raised some worries but appeared to stimulate fresh thinking in government and industry alike.  Participants unaccustomed to this kind of brainstorming were to be applauded for entering into the debate in such a positive spirit.  We were particularly in the debt of a Chairman of huge experience, who kept us to the issues which really mattered and pushed for practical conclusions.  Many felt that the experiment should be tried again.  Ditchley is ready.
This Note reflects the Director’s personal impressions of the conference.  No participant is in any way committed to its content or expression
 
PARTICIPANTS
Chairman: Sir Richard Evans CBE
Chairman, United Utilities (2001-).  Formerly:  Chairman, BAE Systems (1998-2004), Chief Executive, BAe plc (1990-98).
CANADA
Mr Keith Ainsworth
Chairman, Com Dev International (2002-);  Member, Defence R&D Canada Advisory Board, American Institute of Aeronautics and Astronautics.
Dr Donald Bunker
Aviation Counsel, Stikeman Elliott LLP, Montreal;  Professor, McGill Institute of Air and Space Law.
Professor Joseph D’Cruz
Murray B Koffler Chair, University of Toronto.
Mr John Paul Macdonald
Senior Vice President, Public Affairs, Bombardier Aerospace.
FRANCE
Mr Jean-Louis Gergorin
Executive Vice-President, Strategic Co-ordination, European Aeronautic Defense and Space Company (EADS)  (2005-).  Formerly:  Member, Executive Committee, EADS (2000-05).
UNITED KINGDOM
Mr James Arbuthnot MP
Member of Parliament, Conservative, North East Hampshire (1997-);  Chairman, Defence Select Committee;  Shadow Secretary of State for Trade (2003-05).
 
Mr Robert Ayling
Chairman, Holidaybreak Plc (2003-).  Formerly:  Managing Director and Chief Executive, British Airways Plc (1996-2000).  A Governor, The Ditchley Foundation.
Sir Roger Bone KCMG
President, Boeing UK (2005-).  Formerly: HM Diplomatic Service (1966-2004);  Ambassador to Brazil (1999-2004); Ambassador to Sweden (1995-99).
 
Mr Anthony Bruce
Chairman, Airborne Systems Ltd (2001-).  Formerly:  Non-Executive Director, Infast Group plc (1997-2005);  Senior Advisor (part-time), BAe Systems plc (1996-2001).
Mr Keith Butler-Wheelhouse
Chief Executive, Smiths Group (1996-).  Formerly:  President, Saab Automobile, Sweden (1992-96).
Mr Martin Capstick
Head, Aviation Environmental Division, Department for Transport.
 
Sir John Chisholm
Executive Chairman, QinetiQ Group plc (2005-).  Formerly:  Chief Executive,QinetiQ Group plc (2001-05);  Chief Executive, Defence Evaluation and Research Agency (1991-2001).
 
Mr Marlin Dailey
Vice-President, Sales, Europe and Central Asia, The Boeing Company.
 
Mr Richard Deakin
Managing Director, Thales Aerospace Division UK (2004-).  Formerly:  Managing Director, Airborne Systems Business Group UK (20040;  Group Director, Programmes, GKN Aerospace Services (2001-04).
 
Mr David Gow
European Business Editor, The Guardian (2000-).
 
Mr John Howe CB OBE
Vice Chairman, Thales UK (2002-).  Formerly:  Director of Defence Strategy, Thomson Racal Defence Ltd (2000-02);  Deputy Chief of Defence Procurement, Support (1996-2000).
 
Dr Sally Howes
Director General, Society of British Aerospace Companies (2003-);  Secretary, Defence Industries Council;  Director, UK Council for Electronic Business Board;  Member, Farnborough Aerospace Consortium Council.
 
Sir Michael Jenkins KCMG
Advisor, The Boeing Company (2005-).  Formerly:  President, Boeing UK (2003-05);  Vice-Chairman, Dresdner Kleinwort Wasserstein (1996-2003);  Executive Director, Kleinwort Benson (1993-96);  HM Diplomatic Service (1959-93).
 
Mr Greg Mallon
Vice President, Boeing UK.
 
Mr Keith Mans
Chief Executive, Royal Aeronautical Society (1998-).  Formerly:  Member of Parliament, Conservative, Wyre (1987-97);  Chairman, Parliamentary Aerospace Group (1994-97).
Mr Tom McKane
Team Leader Enabling Acquisition Change, Ministry of Defence (2006-).  Formerly:  Director General, Resources and Plans, Ministry of Defence (2002-06);  Deputy Head, Defence and Overseas Secretariat, Cabinet Office (1999-2002).
Mr Richard Mills
Director, Strategic Analysis UK, The Boeing Company.
Mr Malcolm Scott
Director, Aerospace and Defence, Department of Trade and Industry.
Mr John Sharman
Executive Director, Spectrum Capital London Ltd (1985-);  Chairman, Aer Lingus;  Visiting Lecturer, Air Transport Management, City University.
 
Sir Donald Spiers CB
Director, Augusta-Westland International (2004-);  Director, General Dynamics (UK) Ltd (2001-0;  Director, TAG Aviation (UK) (1998-).
 
Mr Chris Tarry
Founder, CTAIRA Specialist Aviation Consultancy (2002-).  Formerly:  Head, Airline Analysis, Commerzbank.
 
Mr Simon Webb CBE
Director General, Delivery and Security, Department for Transport (2004-).  Formerly:  Policy Director, Ministry of Defence (2001-2004).  A Governor, The Ditchley Foundation.
Mrs Alison Wood
Group Strategic Development Director, BAE Systems plc.        
 
UNITED KINGDOM/IRELAND
Mr Daniel Keohane
Senior Research Fellow, Security and Defence Policy, Centre for European Reform (2001-).  Formerly:  Visiting Research Fellow, EU Institute for Security Studies, Paris (2000).
 
UNITED KINGDOM/ITALY
Mr Alberto de Benedictis
Chief Executive, Finmeccanica UK Ltd (2005-);  Head of USA/UK Operations, Finmeccanica (2004-);  Chairman, Elsag S.p.A.
 
UNITED KINGDOM/UNITED STATES OF AMERICA
Ms Mary Moloseau Goetz
Director, Industrial Participation UK Programs, The Boeing Company (2004-).
 
Mr Ian Stopps CBE
Chief Executive, Lockheed Martin UK Limited (1999-);  Director, Lockheed Martin Aerospace Systems Integration Corp, LMASIC (1999-).
 
UNITED STATES OF AMERICA
Mr Christopher Barks
Federal Aviation Authority, US Embassy, London.
Mr John Douglass
President and Chief Executive Officer, Aerospace Industries Association of American Inc. (1998-).  Formerly:  Member, Commission on the Future of the US Aerospace Industry (2002).
 
The Hon Dick Gardner
Professor of Law and International Organization, Columbia University;  Counsel, Morgan Lewis LLP;  Member of President’s Advisory Committee on Trade Policy and Negotiations.  Formerly:  US Ambassador to Spain (1993-97);  Italy (1977-81).  Vice-President and Member of the Board, The American Ditchley Foundation.
Mr Darryl W Jackson
Assistant Secretary for Export Enforcement, Bureau of Industry and Security, US Department of Commerce (2005-).  Formerly:  Partner, Arnold & Porter LLP, Washington DC (1992‑2005).
Ms Nicole Piasecki
Executive Vice President, Business Strategy and Marketing, Boeing Commercial Airplanes (2002-).  Formerly:  Vice President, Commercial Airplanes Sales, Leasing Companies.
Ambassador Thomas R Pickering
Senior Vice-President International Relations, The Boeing Company.  Formerly:  Under Secretary of State for Political Affairs, State Department (1997-);  President, Eurasia Foundation (1996-97);  Ambassador, Russian Federation (1993-96);  to India (1992-93);  Permanent Representative to United Nations (1989-92);  Ambassador to Israel (1985-88).  A Director, The American Ditchley Foundation.