SPRING 2017 INDUSTRY STUDY FINAL REPORT AIRCRAFT INDUSTRY The Dwight D. Eisenhower School for National Security and Resource Strategy National Defense University Fort McNair, Washington, D.C. 20319-5062 i AIRCRAFT INDUSTRY STUDY 2017 ABSTRACT: The 2017 Eisenhower School Aircraft Industry team analyzed the strategies of select aircraft firms in the United States and Europe over the last five years in an effort to assess in aggregate their implications for both the Department of Defense (DoD) and the overall national security of the United States. The team conducted research using a variety of methods, including a guest lecture series, visits to key domestic and international defense firms, and independent research. This study analyzed the strategies of the following firms: Boeing, Lockheed Martin, Northrop Grumman, Airbus, BAE Systems, Dassault, Leonardo, and Saab. The study also examined the different national frameworks within which the firms reside as well as China and Russia’s aircraft industry structures. The group identified opportunities and challenges for these firms and characterized various government and firm interactions and the emerging implications for DoD and the U.S. government. Seminar Members: CDR Saud al-Maawali, Royal Air Force of Oman Dr. James Baker, U.S. Marine Corps Mr. Robert Craven, Department of the Air Force COL Krzysztof Cur, Polish Air Force Lt Col Nathan Diller, U.S. Air Force CDR Anthony Kelly, U.S. Navy Mr. Daniel Kitts, Department of the Army CDR Michael MacMillan, U.S. Coast Guard Mr. Scott Oudkirk, U.S. Department of State COL Michael Peyerl, Nevada Army National Guard BG Mohammad Smadi, Royal Jordanian Air Force Lt Col Timothy Stevens, U.S. Air Force Lt Col Lawrence Sullivan, U.S. Air Force Mr. Rick Teal, Defense Logistics Agency Faculty Lead: Dr. Sorin Lungu ii INDUSTRY FIRM VISITS & GUEST LECTURES Domestic: Moog, Inc., Blacksburg, VA OEM components, additive manufacturing Boeing Defense, Space, & Security, F/A-18E/F, EA-18F, F-15E, T-X St. Louis, MO Boeing Vertical Lift, Ridley Park, PA V-22, CH-47, FVL Boeing Commercial Airplanes, Everett, WA Commercial aviation market, missiles & tankers Bell Helicopter, Amarillo, TX V-22, UH-1Y, AH-1Z, Model 525, Future Vertical Lift Lockheed Martin Aeronautics, Fort Worth, TX F-35, F-22, F-16 DynCorp International, Fort Worth, TX Maintenance, repair & overhaul (MRO) International: Swedish Security & Defense Industry Association Structure-conduct-performance of the Swedish (SOFF) security & defense industry Stockholm International Peace Research Institute Global defense industry dynamics & arms (SIPRI) transfers Saab Aeronautics, Linköping JAS-39 Gripen, T-X Program Ministry of Defense, Sweden (MOD) Priorities of Swedish defense, research & acquisition policy Swedish Defense Material Administration Organizational overview, arms exports, (FMV) commercial strategies & procurement, MRO Swedish Defense University, Stockholm Future warfare, innovation & defense industrial dynamics in a Nordic, European, Transatlantic & global context Guest Lectures Richard Aboulafia Vice President, Analysis, Teal Group Corporation W. Alexander Vacca, PhD Corporate Director, Business Analysis, Northrop Grumman Corporation Brian Kough Director of Forecasts & Analysis, Aviation Week Intelligence Network James Hasik Nonresident Senior Fellow for Defense, Brent Scowcroft Center on International Security, Atlantic Council John Piasecki CEO & President of Piasecki Aviation iii TABLE OF CONTENTS Abstract: ......................................................................................................................................................... i Industry Firm Visits & Guest Lectures ......................................................................................................... ii Table of Contents ......................................................................................................................................... iii I. Introduction ............................................................................................................................................... 1 Research Methodology and Limitations ................................................................................................... 1 Disclaimer................................................................................................................................................. 2 II. The Interaction between Government Policy and Firm Behavior ............................................................ 3 III. Euro-Atlantic Fighter Market Dynamics ................................................................................................ 6 A Competitive Oligopoly Racing toward Restructuring .......................................................................... 6 Market Structure ....................................................................................................................................... 6 Market Failure – and Fragmentation? ...................................................................................................... 8 IV. Russian and Chinese Fighter Market Dynamics ..................................................................................... 9 The Russian DIB ...................................................................................................................................... 9 The Chinese DIB .................................................................................................................................... 11 Eurasian Outliers: Former Command Economies in a Globalizing Sector ............................................ 15 V. Global and Regional Structure of the Aerospace and Defense Industry ................................................ 16 Varieties Of Capitalism .......................................................................................................................... 16 In the 1990s, Technology and Markets Collide ...................................................................................... 16 Reactions and Trends ............................................................................................................................. 18 The UK: Overview ................................................................................................................................. 19 British VoC: The Quintessential Liberal Market Economy ............................................................... 20 British Defense-Industrial Relations .................................................................................................. 20 British Signals to the Market: Detailed Transparency ....................................................................... 21 British Response to the 1990s ............................................................................................................ 21 Nonetheless, a National Champion: BAE Systems ............................................................................ 21 Britain’s Retrenchment....................................................................................................................... 22 Sweden: Overview .................................................................................................................................. 22 Swedish VoC: An LME with Swedish Characteristics ...................................................................... 22 Swedish Defense-Industrial Relations ................................................................................................ 23 Swedish Signals to the Market: Transparency, but Backdoor Coordination ...................................... 23 Swedish Response to the 1990s .......................................................................................................... 24 Nonetheless, a National Champion: Saab .......................................................................................... 24 Sweden’s Retrenchment ..................................................................................................................... 25 Italy: Overview ....................................................................................................................................... 25 Italian VoC: A Longstanding CME .................................................................................................... 26 Italian Defense-Industrial Relations: Corporatism Reigns ................................................................. 26 Italian Market Signals: A Trend toward More Transparent Planning? .............................................. 26 Italian Response to the 1990s ............................................................................................................. 27 Naturally, a National Champion: Leonardo ....................................................................................... 28 Italy: Not Retrenchment, Rather Further Rationalization .................................................................. 29 France: Overview ................................................................................................................................... 29 French VoC: The Quintessential CME............................................................................................... 30 French Defense-Industrial Relations: A Tightly Knit Community .................................................... 30 French Signals to the Market: An Altogether Distinct Approach ...................................................... 31 French