2024 aerospace and defense industry outlook

1. Talent: A&D companies are addressing workforce challenges amid rising demand and changing workforce expectations

The A&D industry is facing a new talent landscape that is mainly driven by increasing salary levels, increased employee mobility, a reevaluation of employee relationships with the workplace, and an intensely competitive job market. Evolving employee expectations, which have only amplified since the pandemic, have often made it challenging for A&D companies to attract, retain, and develop a skilled workforce. These workforce issues could prove to be a significant pain point for A&D companies as they begin to scale production operations to meet growing demand across the industry.

Attracting talent

The US A&D industry has surpassed prepandemic levels in terms of employment. In 2022, US-based A&D companies increased their workforce by 101,700 to 2.2 million, marking a 4.87% increase from 2021 and surpassing prepandemic 2019 levels of 2.18 million.³

Despite the rise in workforce numbers, A&D companies are likely to face talent shortages. These shortages may hamper production demands resulting from domestic travel increases and nations increasing their armament stockpiles. Currently, the industry is struggling to attract talent, ranging from technicians and manufacturers to engineers. One leading Asia-based engineering company noted that the shortage of technicians may lead to increased maintenance costs and impact fleet expansion forecasts.⁴ Furthermore, in the National Association of Manufacturers’ (NAM’s) 2023 third quarter manufacturers’ outlook survey, about three out of four surveyed US manufacturers stated that attracting and retaining a quality workforce is their primary business challenge.⁵

The manufacturing industry, including A&D manufacturing, is increasingly competing with other industries for skilled talent.⁶ A&D companies recognize this, as top talent with digital skills can be drawn to digital jobs within a multitude of areas, including automotive (for example, the battery electric vehicle and autonomous vehicle segments) and life sciences (for example, medical technology, and biotechnology).

A&D companies may need to expand their strategies beyond compensation to accommodate the changing needs of the workforce. The US A&D industry has an annual average salary of US$108,900 which is approximately 55% above the national average.⁷ That said, many Gen Z employees are keen to have careers with broad impact and a purpose.⁸ These companies may attract talent with mission-focused marketing campaigns and undertake more strategic recruitment to ensure that the values of the employees and the company align.

Retaining talent

Despite a significant number of new hires, job openings in the manufacturing industry were still 604,000 in August 2023.⁹ Additionally, quits accounted for about 68% of total separations. To compete in a tightening labor market, A&D companies will likely address both talent attraction and, potentially more significantly, talent retention issues. The A&D industry has high requirements and expectations for its employees, including specific educational criteria and security clearances. This could necessitate a focus on retaining talent, especially with the increasing number of retirees.

Historically, these companies have succeeded with a workforce that possesses deep experience and a strong connection to the company culture. Therefore, given the competitive state of the job market, it is important for the industry to retain highly qualified workers.

A&D companies are using compensation and flexible work arrangements to enhance retention and turn the tide of employee attrition. This approach has been adopted by the manufacturing segment of the A&D industry where, according to Deloitte’s 2024 manufacturing industry outlook, there was a rise of 4% in the average hourly earnings of employees between the first quarter of fiscal year 2022 and the first quarter of fiscal year 2023. Additionally, the manufacturing industry has undergone a significant shift toward remote work over the last two years, during which there has been a 19% reduction in the average number of quits.¹⁰

The retention levels of A&D companies could plateau at a certain point if they continue to only offer flexibility benefits. According to the NAM’s 2023 second quarter manufacturers’ outlook survey, inflexible production, shift needs, and the creation of differences between workforce populations are some major challenges manufacturers face when offering such flexibility to workers.¹¹ The industry will likely explore new avenues to both attract and retain talent.

Pursuing and implementing emerging technology can help not only address profit margins, but also invigorate a workforce. Regardless of an employee’s job description, A&D companies may begin to consider initiating new programs that allow employees to engage with advanced technologies, which may include tech-based rotational programs or designated time to pursue passion projects within the company.

Developing talent

With an increasing number of retirements and an aging workforce (about 26% of the A&D workforce is over the age of 55),¹² the industry should train younger professionals for long-term sustainable operations and security. A&D companies can upskill their workforce by developing more learning avenues in alignment with the technological evolution within the industry. These avenues may include:

• Working closely with colleges to create novel training and workforce development programs;
• Expanding internships, apprenticeships, and other career development initiatives; and
• Furthering cooperative research agreements with tier one research universities.

Employees in the A&D sector, across all career levels, should be educated on the importance of cybersecurity and should possess a clear understanding of their specific responsibilities in upholding a secure environment.¹³ And in line with that, A&D companies’ workforce development strategies will not only attract and retain talent but can also help ensure a secure environment for them.

2. Supply chain: Global supply chain complexity is driving a multitiered solution

A&D companies should expect to see continued fragility of and disruption in the global supply chain, which may lead to production delays, delivery delays, and increased pricing for both raw materials and components. From raw material and tier three suppliers through to original equipment manufacturers and maintenance, repair, and overhaul providers, the issues across the supply chain include shortages of skilled labor, labor attrition, unavailability of materials and parts, and measurable inflation. Since the pandemic, these factors have been causing an increase in material lead times and supplier decommits, resulting in increased volatility in operating, program, and financial performance.¹⁴

The manufacturing industry has seen only a slight recovery in lead times―the delivery times for production materials reached 87 days in August 2023 from its peak of 100 days in July 2022; however, the average lead time has yet to reach the prepandemic level.¹⁵ Despite this improvement in 2023, the continuing shortage of raw materials, semiconductors, microelectronics, and other key components or parts (e.g., engine casting or forgings) will likely remain a key issue for A&D companies in 2024 as production demand increases across the board.

Raw material sourcing, especially for “critical” minerals used to support defense, poses a unique challenge for A&D supply chains. Current production and reserves of such minerals is minimal in the United States. For instance, the United States was 100% reliant on net imports of gallium from countries such as China, the United Kingdom, Germany, and others.¹⁶ At present, China leads in the export of a majority of the 13 major critical minerals,¹⁷ with a market share of 50% to 70% for each, while the United States leads in only one.¹⁸ Reliance on these minerals may be a complicating factor for A&D companies, as replacing them is most likely unrealistic in the short term.¹⁹ As geopolitical tensions often lead to increasing trade barriers, affecting both raw materials and advanced technologies, A&D companies are likely to see increased restrictions on the availability of key imports as well as their ability to export sensitive items. A&D companies reliant on the most advanced material technologies, such as space technology, electronics, and semiconductors, are likely to monitor geopolitical events closely in the coming year and may consider maintaining strategic reserves of these critical minerals, such as gallium and germanium.²⁰

The challenge of limited or sole sourcing for parts continues within the industry. The A&D industry has been slow in developing alternate sources of supply, as meeting industry standards and requirements through the qualification and certification of production lines is an arduous process. As such, companies often must rely on current production for the supply of both new and aftermarket parts. These companies will likely bolster their strategic inventory to build additional stock for critical items and maintain a flexible supply chain as they continue to develop new production options.

In the United States, production options include cross-border manufacturing and the continued exploration of friendshoring. The US government is continuing to work with international partners to develop its defense production capabilities. Additionally, A&D companies may further invest in novel manufacturing technologies to create an eventual alternate source of supply and avoid sole-source manufacturing, long lead times, and obsolescence issues.

Finally, it can be expected that A&D companies might continue turning to supply chain digitalization and automation options in 2024. In a recent Deloitte supply chain study, 78% of survey respondents agreed that digital solutions would enhance visibility and transparency throughout the supply network.²¹ A&D companies may develop digital twins of the supply chain to obtain a complete view of the procurement, production, and delivery processes.

The A&D supply chain is a complex, globalized ecosystem of customers and original equipment manufacturers; multiple tiers of suppliers; and maintenance, repair, and overhaul providers. This complexity makes implementing diversification and transparency across the value chain extremely difficult, but imperative. By maintaining strategic raw material reserves, committing to bulk buying of long lead time items, exploring alternate sources of supply, and digitizing operations, A&D companies may position themselves well to handle any continued fragility across the entire supply chain.

3. Digital transformation: A&D companies can unlock growth and efficiency by embracing digital technologies

A&D companies are continuing to advance in their digital transformation journey and can accelerate it further in 2024. The frontrunners in the industry are leading the charge on digital technologies such as model-based enterprise and digital twins. Digitalization can enhance product development, improve operational efficiencies, and help capitalize on growth opportunities. However, before adopting advanced technologies, A&D manufacturers might consider modernizing their processes, technologies, and tools. This may allow them to increase throughput with existing infrastructure and to effectively manage demand fluctuations and costs, despite persistent labor and supply chain challenges.

Digital transformation of the production process

A&D companies operate in a highly complex environment that is defined by regulatory requirements and specific customer, contract, and product specifications. Modernizing and integrating processes and enabling technologies are some significant steps for the A&D industry to improve production throughput and cost efficiency. Embracing digital transformation can reshape A&D production processes at all stages, significantly reducing industrialization cycle times, improving efficiencies, increasing production yield, and elevating quality standards.

At the design stage, model-based systems engineering²² approaches can allow for the virtual design, analysis, and verification and validation of systems, potentially shortening the time to qualify and certify a new manufacturing line. Similarly, employing Industrial Internet of Things (IIoT) technologies and integrating both operational technology (OT)²³ and information technology (IT)²⁴ systems can help generate better insights in the manufacturing environment. These types of end-to-end visibility solutions can help improve production yield and elevate product quality.

The implications of digital transformations and emerging digital technologies, such as digital twins, do not end with producing a final product. A&D companies can implement digital twin technology to track parts throughout their life span to improve maintenance protocols. It can also open opportunities for aftermarket service provider readiness. By leveraging the vast amounts of data produced by A&D systems, aftermarket companies may implement AI techniques to predict how and when an aircraft or system will need to be serviced. This data, including information on the parts and labor required, could reduce repair times, improve turnaround times, and create competitive advantage.

The pace of digital transformation among A&D companies varies and is often dependent on a company’s unique requirements, priorities, and available resources. Nonetheless, digitalization is expected to be imperative in the coming year as A&D companies continue to compete for business.

Digital enhancement

The demand for sustainability, product innovations, and wartime defense is expected to result in rapid technological evolution. A&D companies are exploring and applying digital technologies, specifically artificial intelligence and generative AI (a subset of AI), in an array of scenarios.

AI can streamline operations, enhance productivity, enable real-time data synchronization, and simplify customization processes. AI solutions have benefited the A&D industry for various applications, from improving cockpit avionics technology for surveillance and decision-making to optimizing maintenance and defect monitoring for manufacturers. Generative AI, through generative design, can be critical in delivering more opportunities for creating energy-efficient designs and low-carbon products.

Beyond product development, generative AI–enabled virtual field assistants can support engineers by improving their problem-solving capabilities and productivity.²⁵ Such a use case of AI technology may have further workforce implications, as worker productivity enhancements may prove to be one approach for A&D companies to ease the effects of a talent shortage.

As A&D companies continue to enhance their digital capabilities, they will likely move to promote trust in their technologies, manage risks associated with data security, and monitor potential federal or state regulatory activity. To promote trust in their digital technologies, such as AI, A&D companies will likely strive to ensure that they are using the proper data and possess a complete understanding of the implemented algorithms.²⁶ To protect sensitive data against growing cyber risks, A&D companies will likely make substantial investments in robust cybersecurity risk management measures and strengthened digital infrastructure systems. Finally, to ensure lawful practices, A&D companies may more closely monitor the increasing regulatory focus on the responsible use of these digital technologies, including national security implications.

A&D companies should continue exploring the major challenges impacting digital transformation and move from viewing it as optional to treating it as a requirement for achieving a competitive advantage and long-term success.

4. New product introductions: Evolving customer preferences and growing emphasis on sustainability are fueling product innovations

Developing a new product in the A&D industry can, by itself, be a difficult task. And when you add in the complex operating environment, various regulatory requirements, and extensive testing demands associated with product certification, the task may seem more daunting. Despite these hurdles, evolving consumer demands for enhanced technology, greater sustainability, reduced emissions, higher performance systems, and lower costs are driving the A&D industry toward new product innovations and introductions in 2024.

In the coming year, A&D companies are likely to continue developing environmentally friendly propulsion alternatives to reduce emissions and prepare for any future emissions regulations. Concurrently, commercial and government entities will likely continue to push for development in supersonic and hypersonic flight, respectively. While these are major areas for product innovation, research and development is likely to continue in an array of areas in the A&D industry, such as materials development and advanced manufacturing incorporation.

Sustainability and emissions reductions

With the goal of achieving net-zero CO₂ emissions by 2050 (since the United States is a signatory of the Paris Agreement),²⁷ the aerospace industry is actively developing innovative designs and sustainable propulsion technologies. A&D companies are setting targets to reduce greenhouse gas emissions, water waste, and energy use as they progress toward meeting their interim 2030 sustainability targets. A&D companies are even more likely to continue their push for sustainability and reduced emissions as they acknowledge the broader implications of California’s Climate Accountability Package and await the release of the final version of the US Securities and Exchange Commission’s climate disclosure rule.

The demand for reduced and zero-emission aviation is likely to drive the growth momentum for electric, hybrid, hydrogen, and even solar-powered propulsion technologies in the coming year. For instance, a prominent US defense contractor has strategically invested in an electric propulsion solutions provider to drive the development of electric aviation solutions.²⁸ The A&D industry should anticipate further opportunities to apply these technologies in the defense sector, as well as in maritime and aviation applications.

Beyond traditional aircraft, the advanced air mobility (AAM) industry is trending upward. The AAM industry is expected to advance design, testing, and certification in 2024 while preparing for commercialization in 2025. The industry has witnessed substantial orders from airlines for operating AAM aircraft in 2024 and beyond.²⁹

In the short term, AAM manufacturers are focused on establishing robust manufacturing capabilities, transitioning from the proof-of-concept phase to scaled production. One leader in the AAM industry has already revealed their plans to construct manufacturing plants for large-scale aircraft production.³⁰

Currently, the AAM industry seems to be considering electric propulsion for five- to six-seater aircraft. Moving forward, as the A&D industry moves to develop sustainable aircraft with 20 to 100 seats, companies may begin to experiment with and further develop hybrid electric or hydrogen fuel systems.

Regardless of the application, the development of these propulsion technologies takes time and can demand significant changes in aircraft design. The A&D industry will likely continue to see sustainable aviation fuel as an interim option to bridge the gap between the propulsion systems of the past and the future. The International Air Transport Association (IATA) anticipates that sustainable aviation fuel could contribute 62% of the carbon mitigation required to achieve the 2050 emissions reduction goals.³¹

Finally, as A&D companies seek an edge in sustainability, both aircraft and engines are expected to undergo significant redesigns. These companies are actively engaged in producing lightweight aircraft components using advanced materials. This can help not only reduce fuel consumption but also bolster the overall structural strength of an aircraft. In commercial aviation, engine manufacturers are dedicated to developing engines that incorporate cutting-edge technologies. Such integrations are aimed at enhancing fuel efficiency, reducing noise emissions, and minimizing environmental impact. On the defense front, the US Air Force is making strides in developing new generation fighter aircraft as part of the Next Generation Air Dominance program. This program is poised to leverage adaptive engine technology, which has been under development as part of the Next Generation Adaptive Propulsion (NGAP) program. Under the Air Force’s proposed fiscal year 2024 budget, the NGAP is fully funded with US$595 million.³²

Supersonic and hypersonic technologies

NASA’s X-59 QueSST program aims to demonstrate quiet supersonic travel by reducing sonic boom intensity.³³ Despite technological evolution, significant hurdles remain. Manufacturers claim that it is possible to develop sustainable and economically viable supersonic aircraft, but it is still at a nascent stage of product development. That said, a leading supersonic aircraft maker is securing investments and a collaboration with one of the major airlines in the United States, thereby increasing optimism in the overall promise of such a technology.³⁴

Beyond supersonic aircraft, there is a growing demand for both offensive and defensive hypersonic technology in 2024. In fiscal year 2024, the US Department of Defense (DOD) and NASA have allocated budgets for developing and testing hypersonic capabilities.³⁵ With the influx of funding from the DOD in the hypersonic space, A&D companies have been and will likely continue to work toward operationalizing hypersonic weapons, including glide vehicles and cruise missiles.

The A&D industry invests substantially in R&D to create new products, enhance existing ones, and drive technological progress. Each of these programs will likely rely on speed to market with a qualified and certified system. To truly reap the benefits of the most cutting-edge technologies, A&D companies are expected to prioritize the digital transformation of their entire supply chain and production processes. The digital thread—digital tools and representations that connect engineering, supply chain, manufacturing, and aftermarket activities and services to enable a model-based enterprise—will likely play a pivotal role in new product introductions throughout the industry.

5. Defense and commercial spending: Industry spending is helping drive growth and innovation

The A&D industry should expect an increase in spending, from both the defense and commercial segments, in the year ahead. Defense spending will likely increase to meet the demand generated by escalating geopolitical tensions and the necessity for future capabilities. Commercial spending will likely stem from the increased demand for passenger flights and advancements in emerging markets.

Defense spending

The outlook for the global defense sector remains robust, with defense expenditures surpassing US$2.24 trillion in 2022 (most recent data at the time of publication).³⁶ Geopolitical events across the world have driven, and are likely to continue to drive, an increase in defense funding. The US DOD requested a US$842 billion budget for fiscal year 2024, representing a 3.2% increase compared to fiscal year 2023 at the enacted base level. This budget will prioritize fostering innovation and countering potential adversaries from other countries.³⁷

In 2024, the rise in military spending can drive innovation and digital infrastructure by implementing commercial technologies in defense applications and maximizing the use of private capital for emerging defense technologies and manufacturing. The US DOD has requested approximately US$1.8 billion for AI applications (a 63.6% increase in comparison with FY23), US$9.3 billion for advanced technologies, and US$0.69 billion for the experimentation and evaluation of advanced technologies for joint warfare in fiscal year 2024.³⁸

The lion’s share of funding on technology is expected to focus on enhancing capabilities and improving readiness. To do this, the United States is concentrating its investments on procuring next-generation air, ground, and naval vehicles and modernizing existing ones to help meet defense requirements.³⁹ Additionally, the US DOD is committed to investing in defense supply chain resiliency to help ensure the stability of the industrial base and meet future demand. Additionally, they are embracing and emphasizing AI as a technology that can support the United States in maintaining its strategic advantage in future conflicts.⁴⁰ The DOD is also investing in several technology initiatives such as microelectronics, advanced propulsion, quantum technologies, and advanced computing.⁴¹

In response to global advancements, the US DOD is funding development from an array of entities. The DoD has established various mechanisms to engage the private sector (particularly small businesses and startups) and academia, promote innovation, and accelerate the integration of emerging technologies. These include, but are not limited to, the Defense Innovation Unit (DIU), Accelerating the Procurement and Fielding of Innovative Technologies (APFIT) program, National Security Innovation Network (NSIN), and AFWERX.⁴²

US spending in the space sector has increased to keep pace with the growing demand for space capabilities. According to the Space Foundation, total government spending on space programs increased by 8% in 2022, with the United States holding a majority of the total spending share at approximately 60%.⁴³ The United States Space Force (USSF) has requested funding of US$30.1 billion for fiscal year 2024,⁴⁴ a 15% increase from fiscal year 2023 at the enacted level. The USSF is focused on building resilient, ready, combat-credible space forces, with an emphasis on cybersecurity, by using modern talent management processes. For this purpose, the USSF has allocated about 60% of the total budget for research, development, testing, and evaluation (RDT&E).⁴⁵ Furthermore, NASA has requested a budget of US$27.1 billion for fiscal year 2024, a 7% increase from fiscal year 2023, with a focus on continued research on the International Space Station (ISS) and space exploration to create scientific and economic opportunities.⁴⁶

Despite the rise in defense spending, growing inflation rates could be causing concerns among defense authorities. In real terms, the growth in defense spending is not substantial—the defense budget has increased year-over-year by 3.18% which is significantly lower than the current inflation rate of 6%.⁴⁷ Also, the US defense spending as a percentage of GDP has decreased over the years and currently stands at 3.1%. This percentage is expected to decrease further to 2.8% by 2033.⁴⁸ Such a situation could lead to future challenges for the US DOD in executing planned activities, as inflation may limit flexibility in launching new missions or require fund reallocation in order to prioritize essential activities. Nevertheless, in 2024, A&D companies can still capitalize on the DOD’s interest in R&D of cutting-edge defense equipment and advanced technologies.

Commercial spending

The international and domestic revenue passenger kilometers are expected to recover to prepandemic levels in 2024. This could result in increased demand for new aircraft orders. Furthermore, continued investments from emerging markets like AAM and space are expected to drive increased commercial spending. This spending may become a strategic capability that can aid the sustainable growth of A&D companies and shape new business opportunities. Commercial spending is likely to be focused on digitalization, new product development, and more broadly on future-facing subsectors such as AAM and space.

The AAM sector is poised for continued spending in 2024 to establish full-scale manufacturing and operational capabilities. AAM aircraft manufacturers are working to achieve type certification and are anticipated to enter into service and commercialization phases in 2025. Substantial investments are likely required to create facilities capable of accommodating future aircraft demand. To support operations, the AAM industry is expected to invest in developing new vertiports, modernizing underutilized airports, establishing maintenance, repair, and overhaul facilities, expanding charging and battery infrastructure, building pilot training facilities, and fostering public awareness and acceptance. AAM manufacturers face an interesting road ahead as they continue to scale for commercialization while carefully managing spending.

The commercial space industry witnessed a shift in funding dynamics in 2023. While government investments contributed to the space industry’s growth, albeit at a slower pace than in 2022, commercial investment experienced a notable decline in 2023.⁴⁹ In 2024, it is anticipated that there will be an increase in acquisition and consolidation within the industry. Commercial investors are likely to exercise more caution as the revenue projections of previous Special Purpose Acquisition Companies (SPACs) for space companies are not being met.⁵⁰ As a result, although the space industry is expected to grow, the investments and growth observed in recent years are not likely to return. Growth is expected to align with more conservative trends in space activities.

The future: Technology and innovation will likely drive growth in the A&D industry

In 2024, the A&D industry may be shaped by various factors, from geopolitical challenges to innovation and market demands, to technological leaps. As the industry navigates this uncertain landscape, it may need to prioritize adaptability and agility and commit to embracing technological advancements. The A&D industry is often characterized by long product development cycles and complex supply chains, which can demand constant innovation, technology integration, and continuous improvement. A&D companies that can leverage these areas may thrive in an ever-evolving global landscape.

The speed-to-market factor remains a significant challenge for the development of new products. Quick prototyping, certification, and commercialization can be crucial. Therefore, A&D companies should consider adopting digital technologies, such as the digital thread, to help accelerate product development by connecting value chain phases and yielding results in less time.

Finally, increased demand from both the defense and commercial markets could lead to stronger revenue streams for A&D companies in 2024. To capitalize on the potential growth opportunities in the industry, A&D companies may consider positioning themselves strategically in the following areas:

• Customer demands: A&D companies should remain agile and innovative in a growing number of areas to meet evolving customer needs while upholding their standard of delivering high-quality products and services.
• Technological advancements: The top A&D companies will likely strive to stay at the forefront of technological advancements in an effort to maintain a competitive edge, enhance business and operational processes, and attract top talent.
• Cyber resiliency: As the A&D industry becomes more digitally interconnected, cyberattack risk grows. Thus, establishing a robust security culture and investing in cyber-resiliency measures may prove to be vital in ensuring a secure digital future.