Printed headline: Sustainment Shift
What would it take for aerospace manufacturers to hand over their sustainment business to the U.S. Air Force? Will Roper, the Air Force’s assistant secretary of acquisition, technology and logistics, has made it a new priority to find out.
A closed-door meeting scheduled for late April—Air Force Acquisition Industry Days—will give the Air Force’s OEMs their first chance to weigh in on the idea.
“I put a date on the calendar: 26th of April,” Roper says. “It’s open-door. It’s for industry to come back in and talk about how we shift them from sustainment into development.”
It is likely to be a provocative discussion. If anything, aerospace industrial strategy is putting even more financial value on the sustainment phase of products, when an OEM’s treasured rights to the intellectual property of the software, design and embedded innovations in major platforms guarantees decades of competition-free work at relatively high profit margins. The model has become a bedrock of the modern aerospace industry, with the returns on sustainment helping companies reinvest in lower-margin activities such as research and development on new platforms and manufacturing technology.
But the practice has become a matter of concern within the Air Force. With adversaries such as China innovating rapidly with a model that largely ignores intellectual property rights, the Air Force’s top acquisition official feels a new urgency to redesign the procurement of advanced weapons. As the acquisition strategy for the next decade’s most significant new programs—the Next-Generation Air Dominance (NGAD) system and Advanced Battle Management System—comes together inside the Pentagon, Roper wants to inject a new level of flexibility and speed into the bureaucracy and industry that must invent the next generation of military weapons.
In the process, the Air Force leadership seems willing to entertain the most provocative proposals, such as breaking the existing industry structure and forcing contractors to concentrate less on sustainment revenues to drive their balance sheets.
Despite such heady rhetoric, Roper also suggests he is willing to be pragmatic. If contractors are not ready to simply walk away from the sustainment business, he is willing to discuss how much money it would take to make it worth it to them.
“I’m not naive. I know that 70% of our life-cycle dollars are in sustainment. I know t he steady cash flow that a life-cycle contractor gets from the sustainment contract is very important to their business model. We wouldn’t be naive to think that we could just ask them to politely hand it back to us and go back to development,” Roper told a group of Wall Street analysts at the McAleese/Credit Suisse Defense Programs conference in March.
Instead of dictating terms to industry, Roper has asked industry for answers. “What incentive structure would compel you to try to let the Air Force do more of its sustainment? I don’t know if it’s that we have to license sustainment from them,” he said. “I don’t know if it’s a royalty. I don’t know what it is, but we’re going to have to replace the cash flow that would normally be there.”
Roper’s incentive-based approach still may not work, however. For some contractors, the sustainment phase is too valuable, economically and strategically, to relinquish to the Air Force at any price. “With this vision that this guy has, you’re breaking some really fundamental precepts of the aerospace industry,” says Kevin Michaels, managing director of AeroDynamic Advisory and author of the new book, AeroDynamic: Inside the High-Stakes Global Jetliner Ecosystem.
Some companies such as Boeing have doubled down on the sustainment business to drive profit growth, he notes. The founding of Boeing Global Services in 2017, in fact, came with a goal to triple aftermarket revenues. So Boeing’s $14 billion sustainment and services business in 2016 would become a $50 billion colossus by 2025. Boeing appears to have no strategic interest in backtracking from that strategy.
Even if Boeing or its competitors agreed to heed Roper’s invitation, such a move could reverse the same incentives the Air Force and other aerospace industry customers now rely on for key programs, Michaels says.
The promise of the financial rewards over a long sustainment phase drives companies to introduce expensive new innovations, counting on cash flow in the aftermarket phase to close the business case for the upfront investment during the design and development stages. Michaels cites Boeing’s $9.2 billion bid for the T-X contract as an example: The Air Force originally budgeted $19 billion to buy 351 aircraft and about 40 simulators, but Boeing offered the service $10 billion less to deliver up to 475 aircraft and more than 120 simulators.
Breaking that model is a risk that Roper seems willing to consider. In making his case at the McAleese event, Roper described another, intangible benefit of his preferred model. “We’ve got to make the shift to get the industry back into development. And that means finding a way to pivot from where we are today to a place that really incentivizes it—to hand us the reins of sustainment and get back into cutting-edge design,” Roper said. “What is driving a lot of engineers into aerospace is building new things. What a shame that many engineers only have one airplane on their resume. Are we going to win, are we going to compete that way? No way.”
Competition is Roper’s main concern. It echoes the theme of the National Defense Strategy unveiled by the Pentagon in 2018, which calls for resetting the military’s focus on preparing for war with China and Russia over the next decade. The objective is not to instigate a military conflict but to prevent one by demonstrating technological dominance. As the acquisition program for the Air Force’s next tactical aircraft, NGAD is the aerial centerpiece of the new strategy. Some have likened NGAD’s classified objective as fielding a “sixth-generation fighter” in the 2030s. But Roper has adopted a skeptical view of such an approach, saying that any attempt to predict the threat environment in 2030 is doomed by technological surprise.
“Is artificial intelligence going to come out not out of left field but out of center field and completely be the juggernaut that people think? Maybe,” Roper said. “We have to be ready for that. But there are other things we don’t tend to think about in defense, like synthetic biology. What about ubiquitous sensing—not being able to hide because there are so many sensors out there? There are lots of wild cards. A whole deck of them. We don’t know what hand we’re going to be dealt.”
Instead, he prefers to craft an acquisition strategy that delivers a steady stream of air dominance capabilities every few years. The goal of this “capability pipeline,” Roper said, is to force adversaries such as China to react to the U.S. military, rather than the opposite.
“If our adversaries knew that we could produce a new option to go into some level of production and do that on an every-four-year basis . . . [they’d] be reacting to us. [They’d] be having to think of where we’re going,” Roper said.
But that approach could depend on reorienting the defense industry’s largest OEMs to focus on design, development and production, he added.
“I’m pretty confident that if we had a more responsive, reactive acquisition system that’s constantly pushing out new things, we’d be in a much better posture to deal with whatever that wild card is than presuming we could predict it,” Roper said. “I want our defense industry base to get back to where design is happening all the time and where engineers have 10 aircraft or 10 satellites on their resumes.”
As the stream of next-generation aircraft is delivered, the Air Force’s goal is make the sustainment and modernization phase competitive. Rather than allowing the OEM to control the intellectual property throughout the life cycle of an aircraft, the Air Force would make contracts for upgrades and repairs part of a bidding process. In Roper’s view, this approach also would incentivize the industry to use open-architecture software.
“If we can find that incentive structure, maybe building an open system wouldn’t be so difficult anymore,” Roper said. “Because I know when we ask for open [architecture] that there’s not a good business case.”
The industry’s reaction to the Air Force’s vision for future sustainment will come out at the closed-door event at the end of April. For now, Roper is optimistic that such a strategy could be embraced. “Hopefully, April 26 will be a good day of great ideas that will start a pivot for the brave companies that come by,” he said.