AEROSPACE digital transformation

Becoming digital​

The digital race is on – and first movers are already well out in front. LUC ESMERIT, PASCAL FABRE, GERRIT LOOTS, NITIN MAHESHWARI, and MATTEO PERALDO examine progress so far.

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Companies in nearly every industry are furiously engaged in digital transformation initiatives. For good reason: digitally-transformed companies are already 16% more profitable than their peers – and stand to increase their advantage in coming years – according to joint research by AlixPartners and the MIT Center for Information Systems Research. Just as important, digitally-transformed companies position themselves for sustained success in an environment where data is by far the most valuable asset a company can control.

The aerospace and defence (A&D) sector is no exception to the transformation trend. Digital transformation is spurring significant investment by A&D players, including the sector’s two biggest deals in recent years, the combination of the aerospace businesses of United Technologies (UTC) and Raytheon, announced in June and valued at $52bn, and UTC’s $30bn acquisition of Rockwell Collins in 2017. The acquisitions enable UTC to apply its digital expertise to Raytheon’s portfolio of defence hardware and software and give UTC access to more than 71% of the data generated by a Boeing 787 system, according to Aviation Week – data that UTC is analysing and combining to improve operations, create new value at every stage of the aircraft lifecycle, and counter Boeing’s recent push into aftermarket services, which it aims to build into a $50bn annual business by 2022.

DIGITALLY TRANSFORMED COMPANIES POSITION THEMSELVES FOR SUSTAINED SUCCESS IN AN ENVIRONMENT WHERE DATA IS BY FAR THE MOST VALUABLE ASSET A COMPANY CAN CONTROL

The drive for digital is also spurring many companies in the UK’s aerospace sector – the world’s second-largest after the US, with $46bn in annual turnover – to step up their innovation initiatives. Although uncertainty around the UK’s planned exit from the EU has muted cross-border merger-and-acquisition (M&A) activity, several of the country’s own aerospace stalwarts, including BAE Systems, GKN, Rolls-Royce and Ultra Electronics, are pursuing innovation and technology acquisition through alternative avenues, including venture capital investments, joint ventures and innovation centres. Non-domestic players with large UK footprints, such as Airbus Group, Boeing, Bombardier, Lockheed Martin and Thales, are following suit. Each of those companies is forging links with other aerospace players to promote the sharing of data to bolster the efficiency and effectiveness of their digital innovation programs.  Their avid pursuit of collaborators underscores the vital importance of data ecosystems to digital transformation. In the digital age, no company, no matter how dominant, can stand alone.

​​For the most part, digitally transforming companies in the UK seek to shore up their core strengths in propulsion systems, aerostructures, advanced avionics systems, and cybersecurity software and electronics, for which UK aerospace companies are well known. Their thinking is that by building their digital capabilities they can differentiate themselves and create value through digital engineering, AI-assisted design and customer service, augmented reality and additive manufacturing (socalled 3D printing).

Yet for all the buzz around digital transformation, many companies appear to be so focused on dayto-day business that they have not made time even to begin their transformation journeys. Only 23% of companies have made the jump to digital operations, according to the AlixPartners-MIT research, and fewer than half the companies surveyed have started to apply digital data technologies to improve operations or the customer experience. Unlike transformed companies, these digital laggards still view data as merely an operational output and leave most of its value-creating potential untapped.

Transformation begins with data, not money

Financial constraints alone are not to blame for the lack of action. True, digital transformation in its most advanced stages requires significant investment in new technology. Until companies reach those later stages, technology investments are not the most crucial aspect of their transformations. The key ingredients of early-stage transformations are the data a company already has on hand and the skills and capabilities of its people. When the right data flows to the right people at the right time, companies can transform themselves with only modest investment. Better yet, most companies can realise efficiencies and improve operations simply by pulling, combining and operationalising the data they already have on hand.

Consider how one global A&D OEM is implementing a digital transformation to improve operational efficiency and to create new revenue streams. The transformation program is focused mainly on operations and its chief short-term ambition is to implement new concepts and technologies that make fuller use of the company’s existing data. Among the most promising areas the company is exploring are connected aircraft, end-to-end digital continuity, adoption of full 3D modelling for every program, digitally enabled design-to-cost, nonconformance reduction, and industrial planning and demand management.

Rolls-Royce launched its R2 Data Labs to help power its Intelligent Engine vision. Rolls-Royce​​The company’s transformation has advanced to the point where digital is at the core of operations. The next steps of the digital transformation entail building an open, collaborative ecosystem that leverages the capabilities of the industrial internet of things (IIOT) and embraces OEMs, Tier1 suppliers, maintenance and repair organisations (MROs), start-ups, tech companies and airlines.

The transformation is already yielding incremental revenues, which the OEM is reinvesting in the transformation. Ultimately, the company expects to invest up to 1% of annual revenue over a period of several years to finance new IIOT technologies and achieve deep changes in the organisation underpinned by M&A and the acquisition of top digital talent.

That company, like others well advanced along the digital path have climbed what might be called the ladder of digital transformation, journeying in stages from ‘analog’ to ‘digitally agile’ (Figure 1). It is not necessary to reach the final stage of maturity to generate EBIT and cash-flow improvements.

Like the OEM cited above, other companies can begin to reap the benefits of transformation once they put in place a long-term plan that features specific initiatives and execute it with the full support and visible commitment of the C-suite. At the company discussed above, the CEO signalled leadership’s commitment to digital by installing a top-level monthly governance process to track and manage digital initiatives. Some will not bear fruit for some time but others can realise low-hanging value within six to nine months or even less, and the value generated can be reinvested in new digital initiatives.

Companies that climb the ladder of digital transformation and arrive at Stage 5 can unlock a trove of benefits, including new business models that increase revenues and address new markets, cost reductions of up to 20%, and a stronger working capital position (Figure 2).

Efficiency gains vary widely by function, by position in the A&D value chain and by transformation stage and can range from 2% to 50% (Figure 3).

How data can reward A&D players

Digital transformations, especially those that take advantage of big data analytics and the IIOT, open many pathways to value for A&D players. Connected aircraft offers some of the most compelling opportunities. By exploiting the IIOT to make full use of the data generated by aircraft systems, connected aircraft can pave the way for new, digital business models.

COMPANIES THAT CLIMB THE LADDER OF DIGITAL TRANSFORMATION AND ARRIVE AT STAGE 5 CAN UNLOCK A TROVE OF BENEFITS, INCLUDING NEW BUSINESS MODELS THAT INCREASE REVENUES AND ADDRESS NEW MARKETS, COST REDUCTIONS OF UP TO 20%, AND A STRONGER WORKING CAPITAL POSITION

That is why most of the sector’s key players, from primes to Tier 1 suppliers to airlines, have launched digital investment programs and largescale digital transformation projects to develop the ecosystems needed to connect aircraft and other IIOT applications. Prime OEMs can, for example, gain competitive advantage by creating platforms to collect and analyse massive quantities of in-service data to accelerate product maturation and enhance aircraft reliability. This capability can fortify prime OEMs’ defences against competitive incursions from new players from China, Russia and Canada. All the major industry players, including primes, Tier 1 suppliers and major legacy airlines, can bolster their competitive positions by leveraging the IIOT and analytics to significantly reduce service interruptions and increase fuel savings.

Skywise, a new data platform for the aerospace industry developed by Airbus, uses dedicated datagathering hardware to increase the number of data parameters observed during every flight to 24,000 from 400. Through April 2019, 60 airlines with a total fleet of more than 5,000 aircraft have subscribed to the Skywise platform, affording Airbus vastly improved access to flight data. Airbus aims to have 10,000 aircraft under contract by the end of 2019, according to Marc Fontaine, the company’s Chief Transformation Officer. Airbus has also pursued digital transformation with other OEMs and prominent Tier 1 suppliers. For example, it has partnered with Rolls-Royce and Siemens to accelerate development of a flight demonstrator to test hybrid-electric aircraft propulsion systems. 

Like Airbus, Rolls-Royce is relying on third parties to help accelerate development of digital innovation. In 2017 it launched R2 Data Labs to develop data applications that promise to enhance efficiencies in design, manufacturing and operations while also enabling new service business models. Rolls-Royce is partnering with OEMs, niche start-ups, academics and other third parties to contribute data and expertise to rapidly test new ideas to improve predictive services that promise to improve asset availability, maintenance, and safety.

GKN, meanwhile, has teamed with the UK Government to build a global technology centre in Bristol, with the explicit intent of fostering collaboration among suppliers, specialised start-ups and Tier 1 contractors on projects to improve design and development of aerospace structures, such as wing and tail assemblies.

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The fight for data has just begun​

Despite such success stories, value creation remains risky. Those intending to reap the rewards of digital transformation need to invest in all the elements – data capture, telematics, infrastructure and platforms – that contribute to the virtuous cycle that the IIOT can set in motion (Figure 4).

Simply establishing this virtuous cycle, however, will not be enough to capture a dominant share of the connected aircraft market. Building an OEM-agnostic platform will be equally important, because most airlines operate mixed fleets and will resist having to plug into multiple interfaces.

Such a platform is now under construction at a large MRO. The project began as an in-house initiative to reorganise the supply chain, which was placed under a single general manager responsible for every function necessary to the operation, including planning, sourcing and procurement, and engineering and technology. A team of digital experts gathered information from siloed systems, manual reports, and even employee interviews and pooled it in a single datalake. Analytics engines draw from the lake to support decision-making. For example, insights gained from data analysis have enabled the company to rationalise its sourcing and procurement, segment its supplier base and automate the procurement process with auction software. Those efficiencies generated substantial savings on its annual parts spend.

As management was quick to realise, analytics and machine learning have also enabled the company to develop a new business model. It is centred around a platform capable of offering service and maintenance solutions rather than simply selling parts. This capability led to a contract with a major international airline, which created momentum for further sales. The data-collection platform also enables the company to offer predictive solutions to its customers, opening yet another new revenue platform. The MRO did so simply by making the most of the data it had on hand.

A&D’s future belongs to the digitally adept​ ​

The A&D industry stands on the cusp of a new era in which data and the IIOT will produce significant bottom-line benefits for the entire A&D value chain. First movers could gain a significant revenue advantage over the competition, especially in the connected aircraft market, where the exploitation of data as an asset is potentially worth multiple billions of dollars. Only those players that can harness data to realise operational step-changes – and, not incidentally, motivate operators to share even more data – will play a long-term role.

Companies can begin the transformation journey quickly with minimal upfront investment by collecting, connecting and extracting insights from the data that they already have and capturing previously uncollected operational data. Today’s technological advances make this job easier than ever before. Now all that A&D companies are missing are a digital strategy and the execution platform to realise its value.

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