Oct 14, 2022
Across all sectors of the defense industry, the war in Ukraine raises a central question: How will the conflict impact the military aviation sector? In the 2022 edition of PwC’s Global Aerospace and Defense: Annual Industry Performance and Outlook, we highlight the effect of the Russia-Ukraine war’s impact on the defense industry. However, as the conflict becomes protracted, the effects on industry stakeholders evolve and will likely continue to do so.
Russia’s invasion of Ukraine on February 24 has profoundly affected both the civilian and military aviation industries, upending expectations and exacerbating the uncertainty of an already uncertain future. While the full implications of the war are hard to predict, its transformative influence on defense budget planning is already reverberating around the world.
Have we entered a neo-Cold War era? For many defense industry stakeholders, the war has drastically accelerated the shift from counterterrorism toward what we might call neo-Cold War priorities. The consequences for weapons procurement will likely be far-reaching. And the shift may not be limited to the defense industry; indeed, the knock-on effects on applied technological innovation in civilian aviation — and space aviation — should not be underestimated.
Military spend hit a record of $2.1 trillion in 2021. In 2021, the defense sector held steady, reporting modest growth in the US and significant growth in Europe, as global military expenditures hit an all-time high of $2.1 trillion, following seven years of steady growth, according to the Stockholm International Peace Research Institute. Unlike commercial aviation, defense end markets were unaffected by the pandemic. However, the pandemic has impacted worker absenteeism and had significant consequences to the supply chain, affecting production.
US ramps up defense spending. In the US, the president’s FY2023 defense budget request of $872 billion represents more than an 8% increase. Some in Congress have argued for even more, given high inflation and the war in Ukraine. Defense priorities in coming years will likely be focused on near-peer threats and on the development and modernization of numerous areas, including hypersonics, small satellites, directed energy, 5G, artificial intelligence and unmanned systems.
Foreign military sales soar. In the first quarter of 2022, foreign military sales notifications for US defense manufacturers (indications of interest approved by the State Department and submitted by the Department of Defense to Congress for review) hit three times the five-year historical average. (International military exports typically amount to some 20% of US contractors' revenue.) Nearly 70% of the expected exports are aircraft, both fixed and rotary. This is a sign that the US defense aviation manufacturing sector can anticipate a jump in sales in 2023-24 – and possibly beyond.
Expect greater military expenditures in the EU. Total military expenditures in Europe, which have risen steeply since Russia’s annexation of Crimea in 2014, reached $418 billion in 2021. Multiple European countries, including Germany, are promising to boost military spending to 2% of GDP or even more in response to the Ukraine war, while Sweden and Finland are expected to join NATO on an accelerated trajectory. Significant opportunities are likely to emerge in Europe for US defense aviation contractors — in a highly competitive international environment.
Russia-Ukraine war likely to trigger advances in – and adoption of – military drones. With its forces outnumbered, Ukraine has successfully leveraged armed drones to provide its army with an asymmetrical front line advantage. Drones have even emerged as the weapon of choice for this war. Two models stand out so far for their proven lethality to Russian armor and other targets: First, Turkey’s Bayraktar TB2 drones, of which Ukraine has acquired at least 50. Second, the compact “kamikaze” Switchblade drones, of which the Pentagon has committed at least 700.
Many other drones have also proven invaluable in surveillance and reconnaissance of Russian forces. Additionally, the Ukrainian military has been extremely resourceful in arming small civilian drones, with the help of 3D printers – some are even being deployed by groups of “technically aware civilians.” The Zelenskyy government has even successfully crowdfunded its drone acquisition program.
A top-secret new drone, the Phoenix Ghost, developed by California-based Aevex Aerospace and dispatched under wraps to the front lines in April 2022, could potentially prove even more effective than any unmanned aerial vehicle Ukraine has used thus far. Serious security concerns aroused by malfunctioning Chinese-made drones are already providing important opportunities for US drone startups, including Seattle-based BRINC Drones, Inc. and Silicon Valley’s Skydio, Inc. More are likely to emerge. However, the blurring of the boundary between military/state and civilian control of drone tech is concerning, given the potential for their terroristic use by nonstate actors.
Ukrainian frontlines as testing grounds for emerging drone technologies. The world may look back upon the war as the beginning of a new era in multimodal tactics that push human pilots aside. Next-generation military drones will rely on artificial intelligence to select enemy targets before destroying them. For both troops and civilians, there will likely be fewer places to hide from the armed eye in the sky.
The larger story: The Russia-Ukraine war will likely reshape legacy military-industrial models. Indeed, all eyes are on the use and performance of material being deployed in Ukraine, especially the technology that is new and relatively untested. As global military expenditure rises, lessons from this conflict could likely spur more investment into R&D not only by legacy defense players but also — and perhaps more importantly — new technology startups entering the space. With a new generation of defense companies entering the scene, the nature and composition of the military industrial complex – as established for more than half a century – could change radically over the next several years.