City Insider: How AI will boost aviation company valuations despite cautious approach to adoption
Bruce Andrews and Connor Bernard, of Alderman and Company, say although the aviation sector is likely to continue to take a cautious approach to adopting artificial intelligence there are already signs that it is having an impact on M&A activity
From machine learning, already in wide use across virtually every industry, to the recent emergence of generative AI and its transformative potential, the rise of AI has been unquestionable.
Yet, it appears as though the Aerospace and Defence Industry has taken a more considered approach to adopting AI compared to other industries.
In this article, we will examine the status of AI deployment within the aerospace and defence industry and why AI deployment may take longer in this sector than in other industries.
A&D has been slower to adopt and implement AI in large part due to the stakes and risks associated with the industry.
For example, while faulty AI in industries such as consumer packaged goods could lead to product quality, and distribution problems, the stakes are vastly different if AI technology were faulty in the cockpit of an airliner or on the battlefield.
Because of the stakes and risks, we believe the A&D sector will continue to lag many others in the adoption and deployment of AI.
While the industry will be a lagging adopter in many regards, the industry nevertheless is deploying AI.
Examples include contactless applications and solutions where less or no human interaction is necessary, such as airport check-ins and passport control.
We are also seeing AI enhancement to dynamic pricing of airline tickets, which improves airline profitability by better maximising yields based on load factors.
Other examples of AI deployments include better delay predictions which can alert the travelling public to more rapidly find solutions and thus improve customer satisfaction.
We are also seeing rapid advancements in AI backed tools to help dispatchers manage flight route optimisation, crew scheduling, and predictive maintenance.
There are many other key areas in the A&D industry in which there are increasingly clear and effective applications for AI.
One such sector is the management and maintenance of satellites. According to Phantom Space, a satellite manufacturer, the current cost of operating satellite constellations is hundreds of millions of dollars, a number that could shrink to $10-15 million with the application of AI.
In this case, AI would allow constellations to quickly detect and respond to changes in the environment to maintain optimal performance.
We are now seeing AI deployed in aircraft production, to help optimise production manufacturing by providing data analytics on how changes in manufacturing processes might reduce total cost.
Specifically, German Broetje-Automation is using AI to help design and implement aircraft fuselage skin-fastening machines.
Without AI, mechanics would manually turn on/off fastener feed features using their own judgement.
With the benefit of AI, with clustering and genetic algorithms these machines are having a significant impact in reducing the time to produce these aircraft sections.
Another important factor to consider when analysing the potential growth of AI in A&D is US Federal Government funding of AI.
In 2022, the US Department of Defence (“DoD”) spent $874 million on AI technology, representing a 50% year over year increase.
This figure increased in 2023 to $1.8 billion, a 106% increase from 2022. The primary forms of US government support for AI include direct funding for AI-related contractors and funding for advanced AI research.
As federal funding for AI continues to grow, companies in the aerospace and defence sector are finding that integrating AI is becoming increasingly crucial for securing federal contracts.
As AI tools are used more throughout the aerospace and defence industry, we should see improvements in efficiency and a corresponding improvement in profit margins.
If the promise of AI holds true, and it does lead to rising profit margins, then we also should see a corresponding increase in the value of companies across the sector, for those that successfully apply AI, and a rise in M&A multiples.
To date, start-up companies focused on AI in the aerospace and defence industry have raised capital through venture capital.
However, as the market matures, these AI suppliers may increasingly turn to M&A in order take advantage of larger and more established A&D companies’ government relationships and established access to capital.
On the other side, large A&D companies who may not have the time or bandwidth to commit to in-house AI R&D, many will look to acquire small, AI players companies, to accelerate their applications of this new technology into their operations
Already, we have seen an uptick in A&D AI transactions, with AeroVironment’s $120 million acquisition of Tomahawk Robotics, an AI robotic control system start-up designed for military applications.
Also, Parsons Corporation made a $200 million acquisition of Sealing Technologies, an AI based cybersecurity solution company. And Saab acquired CrowdAI, a visual automation AI company.
We expect to see more such acquisitions, as AI becomes embedded into operations throughout the aerospace and defence industry over time.
Sources:
https://middlemarketgrowth.org/aerospace-defense-disruption-artificial-intelligence/