AvioQuo - On Thoughts of Developments in Aerospace

The following is an extract of an essay on possible economic developments within the Aerospace industry from a European perspective. For those willing to endure the whole thing, I would welcome your thoughts in response.

Some Thoughts

So the Brexit vote just happened, and the world is in turmoil…

Fundamentally, the Eurozone was set up as a union to compete with the United States on a commercial level. So what happens now?

I don't know much, but I know a little bit about boats and airplanes…

Here are my thoughts…:

Things in Aerospace tend to happen more slowly than in traditional industries. Why? Perhaps because the margins are thin, the learning curve is steep, and the competition is fierce. I've seen research suggesting that ROI returns to be expected within the aerospace sector can be multiplied by a time factor of seven if applied in «conventional» industries. Everything happens more slowly in aerospace…

The benefit is that, if you have a forward looking eye, you could potentially see the future coming much further ahead, on a relative basis. And the very reason that aerospace is so competitive, is that it's a fundamentally sexy industry… I mean really, can you think of a more phallic industry than one which intends to launch a rocket to another heavenly body within our lifetimes, with the sole purpose of colonizing it with new life…?

I digress… The module subject is Mergers and Acquisitions, and to pick any topic relevant to the subject.

The point I made before was that things in Aerospace have a tendency to happen slowly. Roughly time factor 7 by traditional metrics right? Is this true? I don't know. What I do know, is that of recently I was asked to test-fly a new class of aircraft considered «high-performance VLA's» or «Very Light Aircraft». These machines tend to be one or two seats (max four), with a maximum takeoff weight around 600kg. The revolution is twofold: One lies in the advent of easy to access Carbon Fibre manufacturing. The construction material is simply more easy to access, and the construction method is better understood. The second lies in that of engines — specifically, light, low cost petrol based engines. (That is, automotive petrol based). As further explanation, within aviation there are traditionally two fundamental fuel types: One is AvTur, or Aviation Turbine fuel (Kerosine [Dodecane] based - like Diesel), and the second is AvGas (Octane based, like petrol).

So the revolution lies in the fact that an engine manufacturer recently (that is, in normal time speak — say in the last seven years or so) managed to get light aircraft certification for its 100 hp Rotax engine — which happens to be certified to run standard automotive petrol… Additionally, a second manufacturer managed to get a Diesel piston engine certified… (now being installed in Diamond brand aircraft)

So, what's the big deal?

The big deal is that that, when Avgas might run the average price of, say €2,50 per liter, Mogas (Automotive fuel) runs about €1,15. Furthermore, a Diesel engine, which is capable of running AvTur, will burn fuel at a cost of around €1,40 per liter — using a fuel that contains roughly factor two times more energy per unit weight… (Diesel => Dodecane = 12-20 [nominally 18] carbon atoms per chain, compared to Octane => Petrol = 8 carbon atoms per chain)

This has created a small revolution in the light aircraft and light helicopter businesses — Aircraft are suddenly being designed to be capable of operating using automotive petrol, or standard diesel; both in the fixed wing and helicopter businesses.

The problem is, that they all look the same… Well almost all… But we'll get back to that…

The point I was making is that there are probably six manufacturers of two seat light personal transport aircraft that I can name off the bat, which have been designed around the Rotax 100 light petrol engine. All cruise around 300 Km/h, require little conversion training, and tend to be tandem seat (pilot behind co-pilot) in configuration. There are probably another four which I can mention in the single seat personal light helicopter market. So how can such similar companies successfully compete?

The answer lies in first to market — which was «Blackshape». They were the first to manage serious commercial production of a two-seat high performance ultralight based on the Rotax 100. The downside of being first to market is that the competition can see what worked for you, and capitalise on it… So how would the competition keep up?

As of yet, the industry has been fragmented, but perhaps unsurprisingly, designs have come out very similar in fundamentals. — Simply because the industry is so competitive, everything converges towards the most efficient design… So «design» is not something a company is likely to truly stand out with. The only way to counter an market leader as far ahead as that one company which managed to get the leg up, is to utilise the marketing and distribution capabilities of a large, established company – such as Airbus, Boeing, Pilatus, Embrear or similar. Within the helicopter market the big names would be Bell (now Textron), Augusta, and Airbus Helicopters.

So, the best bet for a lagging competitor may well be to become acquired by one of these major established manufacturers, so that their clout, trust, and connections within the industry may be used as a distribution leg up in sales of the particular aircraft type.

Here's why I think Airbus won't pick up one of the current VLA competitors:

Airbus has an internal project which it has been pushing called the “e-fan”. This is an all electric light aircraft which claims to have been the first electric aircraft to cross the English channel. (a very contestable claim – but that's another dissertation). Effectively, instead of embracing light and fuel-efficient aircraft, Airbus as a company seem to have set their sights on electric propulsion instead – completely skipping the fuel-efficiency revolution. Acquiring a revolutionary, but carbon-fuel based design would simply not be in line with its current image.

But we talked about how the competitors “almost” all look the same – but they don't quite… Within the personal light helicopter market a small company has emerged called E-Volo; which has recently conducted the first ever manned test-flights of an all-electric light helicopter, if you can call it that… (It's actually more like giant home multi-copter [drone], with a manned pod hanging underneath). Furthermore, Siemens (yes, that Siemens) has recently conducted it's first test-flights of its own electric engine in a fixed-wing aerobatic aircraft. The batteries they produced for the project would put Tesla to shame… These companies, or at least, their subdivisions, would be more likely targets of takeover bids by a company like Airbus in the short run.

So if people are producing electric helicopters and electric airplanes, why would there be any market for fuel-efficient combustion engines in the first place???

The answer here lies in the fact that its difficult. Quite simply, it's very difficult, if not impossible, to get the same amount of energy into a battery than into a tank of fuel. E-Volo claims to be able to keep their Volocopter in the air for 30 minutes. (A claim unproven as yet). Siemens, with their Extra 300LE platform claim to keep their airplane airborne for 25-30 minutes, and for that, the passenger had to suffer to make way for a battery bank… Compare that to similar size light aircraft or helicopters on a liquid carbon fuel base, which might fly for six hours or more...

Physics simply says that you cannot get the equivalent energy into a chemical battery, that you can get into a simple Octane (Petrol) or Dodecane (Diesel) tank. The factor for current top-of-the-line Li-Po batteries (like in your phone!) to that of simple petrol is roughly 7-10 times more energy-per-kilogram weight. This is not negotiable… It cannot be argued... It can't be improved… In the way you can only fit one kilo of water into a one liter bottle of water (you should know this bit of trivia!) – this is simply a physical limit we are approaching.

Except… (and there always is an exception!)…

For Lithium-Air batteries…

As discussed, the best batteries we can produce now (think Tesla, Siemens, etc.) are all Lithium Polymer based. Tesla itself seems to be targeting aircraft batteries with its current Gigafactory plans as well. One component provides the Cathode (Lithium), and the other provides the Anode (Polymer). – Wait – I'm a mechanical engineer, please check with the Sparkies I got that the right way around...

The trick is that the oxidizing anode could theoretically be replaced by the air that surrounds us – you know… Oxygen and stuff… Since Lithium as a metal alone contains roughly the same energy as liquid fuel per-unit-weight; if you can remove half of the weight you have just matched petrol as an energy source in terms of energy-to-weight ratio. Of course, again, this is difficult… 50-150 years development type difficult; depending on what you read… (And I read a lot...) But there are research institutions studying this battery type, such as the RWTH in Germany, which I am a part of. Part of the reason it's difficult is that it's dangerous. Not because batteries contain more energy – which they don't – but because they can discharge this energy much faster… You can throw a burning match into a tub of diesel or (cold) petrol, and the match will simply extinguish and nothing will happen (you don't believe me, do you? - it's still true – only vapors burn…)… On the other hand, remember as a kid that first time you pushed a nail through your RC battery and shorted it internally?… No…? Well good…! Because it hurts when it blows up in your face and showers you with molten droplets of Lithium metal…!

Again, being that aviation is the industry in which the energy-to-weight margins seem to be the most relevant (what's the big deal if you run out of power by the roadside, right?) - I would suspect that in the longer term, the research divisions of such specific university arms may be targets for acquisition from aerospace leaders in the (much, much...!) longer term.

The Big Players

There are two well-known primary major players in the large aircraft industry. These are US held Boeing, and EU consortium Airbus. Both players compete on the market with various aircraft types in the mass-transport arena, ranging from their most ubiquitous B737 and A320 lines to their flagship aircraft the B747 and A380.

So let's conduct an A-B assessment. (Did you get the pun?). The monstrously large A380 was Airbus's bet on the Hub City market – people would want to fly hub-to-hub, and then take regional transport to their final destinations. Boeing went the opposite way: Although it did offer a larger upgrade of the B747 in the B747-800 stretched version, Boeing bet on mid-size aircraft for long-haul direct flights, and produced the B787 Dreamliner instead. The A380 despite it's eye popping size, record-breaking takeoff-weight, and the publics' love for it, was an economic and financial disaster for the company. Of the initial projections for 1200 aircraft sales over the production lifetime of the project, to date less than 200 have been filled, with another 150 on order. The €25 Billion project needed a minimum of 700 aircraft to just break even. Airbus has just recently announced the production rate rollback of the iconic aircraft.

The Boeing B787 is relatively new in the market and it's order book is still growing. The economic success or failure of the project still seems to be debated and seems yet to be clarified by the numbers. In competition for level of optimization and flight efficiency (though perhaps not on passenger numbers), the Airbus A350 could be considered.

The Airbus and Boeing company strategies are interesting from and M&A point of view both historically and looking forward. This is due to the extremely diversified nature of their production processes. Airbus by its nature is a consortium of nations which came together to create a direct competitor to Boeing. In order to achieve this, the production line of each Airbus aircraft covers at least six countries, with headquarters in France and Germany, wing sections produced in Britain, cabins produced in France, control surfaces produced in Germany, components produced in Spain, and final assembly in either France or Germany. The organization as a whole has to function across multiple languages, cultures, taxation regulations, and bring everything together into a final product. Because of the nature of the organization, nations have a vested interest in the success of the products which the supplier delivers, and the individual national companies contributing to the production of the aircraft. This creates a situation where national flag-carriers have a vested interest in purchasing aircraft produced by “their” economy, and where subsidies may come in to play to assist uncompetitive products in succeeding in market. On the whole, this creates a difficult organization to manage competitively in an already challenging industry, where national interests will continually interfere with the tough operational decisions required to be made on a business-economic level. Airbus does an amazing job of juggling these commitments, but the challenges will always be there. As a prime example, the current Brexit uncertainty affects internationally based companies such as Airbus on a fundamental level. The company employs at least 3000 persons in the UK for the production of the wing surfaces for each of their aircraft. An independent company would have much more flexibility in shifting operations to locations where production is optimally integrated to the overall requirements of the company – should Brexit turn out to have a negative impact on the cost-competitiveness of the components in question. The problem is that Airbus has contractual obligations to the UK as a nation, due to the kingdom's vested interests within the company.

Despite this, should the economic predictions indicate that Brexit would have a negative impact on the Airbus efficiency of production line in the longer term, I would suspect that the conglomerate will try to sell off its UK based operations to a British aerospace industry leader, in order to merge productions of components with the production plants for the tail and control surface sections based in Hamburg Germany, or Toulouse France respectively.

Boeing as a company is somewhat of an antithesis of Airbus – to date. The company is a wholly US public entity, with design, manufacture, production and testing occurring at the Everett plant on single soil in the United States. Because there are no cultural, legal, nor language barriers to cross, the entire process of a Boeing production aircraft was much more seamless and integrated than that of Airbus. In fact, I would go as far as to state that the difference can be seen in the aircraft themselves; with Boeing aircraft being much more cleanly integrated on the whole, whereas a careful look of Airbus type aircraft reveals the fact that the aircraft is made up of optimized components with distinct and obvious responsibility boundaries – which have been bolted together to create a cost-competitive aircraft.

There has, however, been a major shift in production philosophy at Boeing with their latest aircraft – the B787 Dreamliner. With the level of aerodynamic, mechanical and technical optimization required on this particular aircraft, the B787 was the first aircraft in Boeing's history on which production was largely outsourced to specialized component-level companies. The B787 was the first aircraft where the majority of aircraft components, including carbon wings, control surfaces, fuselage, and others, were produced overseas in countries such as Japan, Great Britain, Germany and Korea, contracted to companies such as Mitsubishi, BAE, and Thyssenkrupp. Only design and final assembly were focused at the final Everett plant on US soil.

This incredibly significant and immediate shift in design philosophy turned out to be very costly to Boeing in the short run, which only became apparent late during production of initial aircraft. The B787 was rolled out with almost two years worth of production delays due to supplier level challenges in manufacturing and integration of components. Having finalized designs and signed contracts with suppliers, the thinking had been that suppliers would be capable of doing what they said they were could do, and supplying finished items in the time frames agreed upon for integration. The problem turned out to be that manufacturers had over-stated their expertise and capacities in order to win the contracts, and that Boeing engineers and production managers had under-estimated the century of acquired internal knowledge now taken for granted within the Boeing company.

In order to rescue the project from pending failure, part-way through the production of initial aircraft Boeing ended up buying out many supplier IP, technology, and even manufacturing capabilities, and then uprooting key managerial and production staff from their Everett plant for supervisory assignments in their new overseas supplier bases. Here, the Boeing personnel took over the reigns in the production process, and applied their knowledge to bring aircraft production and integration back on track.

I suspect Boeing as a company is likely to maintain its more outsourced manufacturing and risk-sharing philosophy for future aircraft designs – as modern machines are becoming so much more complex at a component level. However, I suspect the company has learned from its experience, and is likely to continue acquisitions of key manufacturing plants in overseas locations in order to exert control and share expertise. I also believe that it is likely that in keeping with the philosophy of specialization, the company is likely to sell-off certain less major overseas acquisitions again over time, or spin them off as independent companies, once they have established that these entities have absorbed sufficient expertise to become a reliable independent supplier in the future.

This would allow Boeing as a company to focus on its core – market analysis of the aerospace industry, and then designing aircraft specifically targeted for market niches where they fit. Component level manufacturing (but not design!) would continue to be outsourced, with final integration and customer delivery occurring on US soil.

With Boeing's very recent announcement of cutbacks in their own 747 production line, and Airbus admitting its economic defeat with reduction on the A380 production line, this may well be signaling the impending death of the current four-engine mega-jumbo airliner legacy. As technologies converge to more and more specialized aircraft, it is likely that successes may lie ahead for hyper-specialized business units and small companies with a technological or knowledge advantage such as those in Electric or Quiet Supersonic Flight, or perhaps Hypersonics or Single Stage to Orbit. These, in themselves, may become targets of take-over bids from more established large companies within the aerospace industry – however it would be interesting to see whether despite the potential for exploiting the much larger and established marketing and distribution networks of these companies, if such specialized business units will still be capable of thriving under the bureaucratic umbrellas of mega-acquisitions.

On developments within Space Industry Privatization

The last decade has seen an unprecedented growth of private companies attempting to access a realm which until very recently had been the sole domain of wealthy nations. Advancements in technology, knowledge, and financing have allowed the sprouting of independent companies claiming capabilities of rudimentary spaceflight to asteroid mining through to planetary colonization. Contracts which were previously exclusively awarded without tender to government organizations such as NASA or ESA are now being won by names which were ridiculed in the press no more than three years ago. SpaceX is attempting to drive down the cost of access to space by an order of magnitude by utilizing technology allowing the re-use of entire rockets. Their capabilities have been so impressive as of late, that these private companies are now winning contracts awarded not to, but by the very government organizations which were once the sole project consideree. This drastic shift is creating certain tensions within the aerospace industry. Large, established organizations such as Boeing and Lockheed Martin, and government organizations such as NASA and the US Air Force are finding that they are having to partner with previously unheard newcomers such as SpaceX, Virgin Galactic, and Bigelow Aerospace in order to even be able to attend discussions at the negotiating table. The pace of innovation and willingness to take risks of these companies has simply overwhelmed slower-moving and security driven bureaucratized incumbents. Again, risks (or opportunities) may exist for such spectacularly innovative companies as potential takeover targets for larger conglomerates. The opportunity again lies in their capacity to exploit the established marketing and distribution networks and experienced manpower of larger organizations. However, this will only be realized if the terms of acquisition maintain the smaller company's capacity for innovation and risk-taking, without excessive stifling by bureaucratic and procedural driven implementation by the acquiring institution.

Another risk lies on the opposite side of the pond – with international unions in Europe seemingly disinterested in taking heed of the progress being made within the private aerospace industries. The European Union currently houses the European Space Agency, primarily known for its operation of the International Space Station. The space station is currently the world's only fully functional permanently habited research station off the surface of this planet. What is less well known is that the International Space Station is owned by more than 50% by the Americans. That is, the Americans hold a controlling stake and final vote in the operational decision making relevant to this man-made unearthly body. What is even less well known is that the Solar Panels and Central Power Modules, which are the functional heart of this Space Station, were actually produced and are owned by the Russians. Additionally, until the Americans produce a replacement for their Space Shuttle, (which was grounded following the Challenger and Columbia catastrophes), they and the entire world are dependent on the Russian Soyuz modules to ferry their astronauts to and from the ISS.

What this means is, that even though the Americans hold the controlling stake in the International Space Station as a whole, they are still “renting” their capacity to power it from the Russians – both in terms of electrical power, and in terms of access. This is why companies such as SpaceX and Boeing have gained so much government support to progress their manned launch capabilities as of late: Because the Russians have been hinting that (in part due to current conflict in Europe) they want to detach their power providing module from the ISS in order to build their own independent Space Station, leaving both the Americans, Canadians, the Japanese and the Europeans with a dead hunk of metal hurtling around the earth at 400 km altitude.

Since the Chinese were excluded by default from the ISS program by the US, they scratched their heads and went and built their own Space Station – built largely, of course, with knowledge acquired from Russia. (This station is now rumored to have been lost in orbit – but that is another story). It is likely that growing ties between Russia and China will allow for progressive development of their individual space programs, whilst the Europeans and the Americans will become more dependent on private companies to secure their access to space.

As part of the fragmentation of the Space Industry, it is likely that more players will become relevant – with smaller but previously unknown players such as Malaysia, Korea, and the UAE launching their own space programs to find their niches in the not-too-distant futures.

Finally, the European Space Agency as of late have announced their awarding of contracts for the development of the Vega C and the Arianne VI light and medium lift orbital launchers. During development of these contracts (which was prior to SpaceX demonstrating rocket landing capabilities), a discussion with an ESA contract development member on my part indicated that the new space access rockets in design would be “roughly 50% cheaper” than those of SpaceX – if, and only if, their stages were not re-usable. And… This would not be an issue because, “they keep crashing their rockets” on landing attempts.

Unfortunately for the ESA Launcher Review Board, subsequent experience showed that SpaceX was if fact capable of landing their rockets in a re-usable condition; paving the way for a factor six reduction in their operating costs. Despite this making the Arianne VI and Vega C immediately uncompetitive in economic terms, the contracts for development were still awarded and development for these launchers will continue.

The reason for this is that the union of nations involved in the European Space Agency are capable of affording this, and subsidizing a “home grown” launch solution would be better than giving up this honor to an overseas competitor. They are too far behind in their production of a re-usable launch solution to miss a development cycle because of it. It should be noted, however, that Airbus has fielded a potential solution in the form of the Adeline project, which aims to be a bolt-on solution to existing rocket stages by allowing them to come back to Earth as unmanned winged gliders. Again, this development seems to have come from external innovation internally incubated by Airbus.

It is without doubt an exciting time to be a part of the aerospace industry, in which the landscape of competitive development between nations, conglomerates, and private companies is changing at an unprecedented rate. Those who position themselves well and carefully are likely be able to take advantage of international distribution and demand growth unseen since the birth of the industry itself at the start of the last century. Those who fail to position themselves based on these fast changing tectonics are likely to fall behind, and be forgotten in the history of mediocre attempts at progress...