September 26, 2022
In our research for the 2022 edition of PwC’s Global Aerospace and Defense: Annual Industry Performance and Outlook we were struck by some emerging industry developments that merit a deeper dive.
Among the most striking is the extraordinary proliferation of A&D startups and special purpose acquisition companies (SPACs). The A&D sector went on a torrid streak in 2021, with M&A deals hitting a new record in value, more than doubling 2020’s figure of $46 billion and surpassing $100 billion for the first time – a surge largely driven by SPAC activity.
Some of the most promising players are focusing on two areas that are seeing rapid innovation: space, including both commercial and military applications; and green aviation, especially small electrified aircraft with game-changing potential in both passenger and cargo aircraft.
Much of the SPAC activity driving record deal value has been focused on space. Some notable 2021–early 2022 A&D SPAC mergers include:
These deals also reveal complex collaborative interdependencies among the sector’s startups and its leading legacy companies: Lockheed Martin is one of Rocket Lab’s major shareholders, for example, while Boeing contributed funding to the Virgin deal, and BlackRock invested in the Planet Labs merger.
Led by the rapid evolution of small satellites and internet satellite service, the commercial space sector is gathering momentum. While well-known players such as Jeff Bezos’s Blue Origin and Elon Musk’s SpaceX may dominate the headlines, there appear to be enough opportunities to go around for other players, especially startups. Take the Space Force, for example, which this spring announced that it will seek to bring potential providers – including new startups – into the branch’s planning cycle much earlier than in the past to speed up the entire procurement process. The branch’s Space Warfighting Analysis Center held its first business fair in October 2021 and plans to hold many more. In 2021 the Space Force also set up SpaceWERX to acquire new technology, selecting 19 startups and small businesses to stimulate new tech development. In 2022, the Space Force’s acquisition command is holding a series of “reverse industry days” – industry briefings offered prior to the service’s developing its programmatic and contractual requirements and designed to leverage commercial technology solutions already available. With this novel dialogic approach to engaging with the commercial space industry, the Space Force is clearly determined to innovate from the ground up.
Meanwhile, the commercial aviation industry is evolving to focus on net zero carbon emissions through the scaling up of sustainable aviation fuels and the development of electric aircraft. And, here again, startups are often at the vanguard of innovation. In October 2021, members of the International Air Transport Association (IATA) announced a target to achieve net zero greenhouse gas emissions by 2050. The goal would require collaboration by all industry stakeholders, including airlines, airports, air navigation service providers and manufacturers, with intense public sector support. These ambitious emissions reductions will demand maximum elimination of emissions at the source supported by carbon offsets and carbon capture technologies. The IATA foresees a shift to sustainable aviation fuel contributing 65% to needed reductions, with carbon capture and offsets at 19%, and with smaller contributions from new electric/hydrogen technologies and infrastructure/operational efficiencies.
E-aviation’s emerging sweet spot is small craft, carrying 10–40 passengers for short-haul flights (up to 500 miles), powered by lithium-ion or hydrogen batteries (including some electric-jet fuel hybrids). Such electric short takeoff and landing (eSTOL) aircraft could cross the threshold to mainstream acceptance in as little as three years. The adoption of such flying battery aircraft – especially models capable of vertical takeoff and landing – could revolutionize the US domestic short-haul sector by connecting the country’s vast network of small, regional airports, decentralizing the existing hub-and-spoke system, and even democratizing air travel.
This space saw promising developments in 2021, including the FAA’s announcement of special conditions for airworthiness standards of electric propulsion systems in commercial aircraft. Again, while the leaders in passenger aircraft, Boeing, Airbus and Embraer, all announced important green initiatives in 2021–22, smaller and newer players also made news. Some signaling developments include:
Electric aircraft manufacturers can look forward to an unexpected source of support from the federal government. In March 2022, President Biden invoked the Cold War-era Defense Production Act to bolster domestic production of metals and minerals critical to electric vehicles of all kinds, aiming to help reduce American reliance on foreign suppliers, especially Russia and China. The evolution of the war in Ukraine shows that this may prove to be among the most prescient moves of Biden’s administration.
With such strong pushes from numerous stakeholders and investors, it is likely we’ll see momentous advances persist on both the space aviation and e-aviation fronts. As these technologies come of age, we will likely see a new generation of businesses needed to scale up development to bring space vehicles and electric aviation into the mainstream. Yet, even now, both these areas are already reshaping A&D and ushering in a new era.