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07 November 2014

Aeronautical Innovations That Created Their Own Markets

Richard L. Aboulafia, Vice President, Analysis

 Aeronautical Innovations That Created Their Own Markets

My job, my career, and indeed much of my non-family life revolve around inhabited aircraft. Not UAVs; other people cover that waterfront at Teal. And while I don't regard them as a threat to my beloved inhabited aircraft, I am kind of intrigued by UAVs. They represent a rare example of a technology that created its own market.

I came to this conclusion as I listened to Rick Whittle talk about his superb new book, Predator: The Secret Origins Of The Drone Revolution, at the Army and Navy Club here in DC this month. Rick's book describes how a confluence of emerging technologies (and military needs) created a revolutionary new product and a new market. I was particularly struck by how the UAV market basically came from nowhere. The billions spent on UAVs, for the most part, did not come from any other market. Rather, UAVs offered appealing new ISR and targeted strike capabilities, and this convinced people to buy them.

Think about the history of new technologies and market development. Some technologies – elevators, air conditioners, and cell phones, for example – create entirely new markets for themselves. Other technologies – electric locomotives, hybrid cars, and smart phones, for example – don't create new markets for themselves, but rather replace or supplant existing technologies and products. They may stimulate existing markets, but they don't create new ones. UAVs have created an all-new market. Very few aeronautical products have done that. I spent the last decade poking fun at air taxis, but I'll give them credit for something: the idea was to take a new technology and have it create a new market. It was impossible then, but who knows what might change in the future?

Think too about aeronautical technologies that are impressive but did NOT create their own new market. Here's a partial list: twin aisle jetliners, stealth fighters, tiltrotors, ground surveillance radars, supersonic transports, high bypass turbofan engines, business jets, and many others. These may (or may not) have stimulated their existing markets, but they didn't create any new ones. They merely tapped into existing revenue streams which had been around in one form or another since the first two decades of the aeronautical age.

Which aeronautical innovations since World War 2 have created new markets? I can think of just two, other than UAVs:

1. Attack helicopters. Integrated, dedicated attack helicopters – from the AH-1 through the AH-64, AW129, Tiger, and others – have become a big market ($2.8 billion in deliveries this year, excluding support, spares, R&D, etc.). They didn't replace anything, since the market for fixed-wing strike planes didn't go away. To use an example from the other side of the Iron Curtain, the USSR developed the Mi-24 Hind attack helo and the Su-25 subsonic attack jet at the same time. They even carried the same gun and performed similar missions.

2. Airborne Early Warning/AWACS planes. The idea of putting an air surveillance radar on a plane emerged in the 1940s, but the market was only really developed in the 1960s and 1970s with the creation of Northrop's E-2 and Boeing's E-3. This market is worth $1-2 billion a year in new deliveries, plus more in upgrades, spares, etc.

I'm sure other examples exist. I can't think of any, but please send me yours. And now, we have UAVs as the third example. I'm highly impressed by that. But before I get carried away, consider six reasons to Curb Your UAV Enthusiasm:

1. The cash involved is trivial. Teal Group's new build UAV market estimate for 2014 is $3.3 billion. That compares to $2.6 billion in 2009 and $800 million in 2004. The new build inhabited aircraft market in 2014, by contrast, is worth $173.9 billion in new deliveries alone. We're expecting $54.1 billion in UAV deliveries through 2023, compared with $1.88 trillion in inhabited aircraft deliveries.

2. There's not much of an industry here, either. As my old pal Joel Johnson puts it, "UAVs are to manned aircraft what bicycles are to cars." Predator/Reaper and Global Hawk may qualify as Harleys. There will never be an important industrial center of UAV production. Or a workforce that's sizeable enough to matter.

3. War giveth; peace taketh away. As Rick Whittle puts it, "If Necessity is the Mother of Invention, War is the Mother of Necessity." The winding down of operations in Afghanistan explains why UAV market growth has slowed markedly (see the numbers above). We'll see whether operations against ISIL change anything, but the DoD plan is to procure just tiny numbers of UAVs over the next five years. If that continues, Teal's $54 billion UAV forecast may prove optimistic. As usual, J.J. Gertler, Congressional Research Service aircraft guy, says it best: "Not only did UAVs create their own market, they have for now satisfied it."

4. UAVs created their own market; they are not well-positioned to take over any other markets. The strategic reconnaissance mission sounds like a UAV no-brainer. Yet we're still having that U-2 versus Global Hawk debate, and I expect we'll have it for years to come. UCAVs won't take over the fighter mission anytime soon either. Loading up a UCAV with lots of ordnance, sensors and other equipment means it loses much of its cost advantage, and it becomes less expendable, too. Look, for example, at the Navy's UCLASS program. What was supposed to be a carrierborne stealthy strike UCAV now faces one of two possible fates: (1) Marinized Reaper-class drone, or (2) Death. The Air Force and Navy are instead pursuing sixth generation fighters. Some believe that this reflects a bias against UAVs by the pilots who run the services, but it's more complicated. See the next point....

5. The world's strategic direction favors inhabited systems. Using UCAVs to go kill lots of stuff makes sense in a full-blown war. But conflict today takes the form of operations other than war (airspace patrol, no-fly zone enforcement, counter-piracy operations, civil wars, counterinsurgency operations etc.). In these, it's useful to have a pilot on the spot. Situational awareness really helps prevent collateral damage, and it will be decades before we have the kind of bandwidth needed to transmit everything a pilot sees to ground stations.

6. Rising tides lift all boats. I went straight to Phil Finnegan, Teal's lead UAV analyst, and asked whether, from his perspective, the inhabited aircraft universe had anything to fear from UAVs. He bought me a free coffee from our office machine, and made the smart point that growth markets boost numerous platforms, not just UAVs. Most UAV spending over the last decade was for ISR missions. This was accompanied by growth in the inhabited ISR market. For example, the US Air Force used lots of Predators, but it also found it useful to deploy 37 King Air-based ISR platforms under Project Liberty.

About the Author

Richard L. Aboulafia

Richard L. Aboulafia

Richard is Vice President of Analysis at Teal Group. He manages consulting projects in the commercial and military aircraft field and analyzes broader defense and aerospace trends. He has advised numerous aerospace companies, including most prime and many second- and third-tier contractors in the US, Europe and Asia. He also advises numerous financial institutions on aerospace market conditions.

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