27 November 2022
Aviation & Space lead the way in US infrastructure
The US depends on its aviation industry more than most. It is a sector changing quickly, however, with new opportunities offering strong potential for growth, even as post-pandemic headwinds continue to challenge.
Aviation in the US economy
The aviation industry is undergoing a period of transition. Traditional aviation markets are still recovering from the impact of COVID-19. Air cargo may have surged to an all-time high in 2021 – a feat likely to be repeated in 2022, according to a September 2022 report from Airlines for America – but passenger ticket sales remain below pre-pandemic levels on the back of slow recovery on corporate and long-haul international routes. The industry is also facing rising fuel and labor costs, while carrying elevated levels of debt.
Despite these challenges, the International Air Transport Association (IATA) expects North America to be the strongest performing aviation market in 2022 and the first to return to profitability. This is important because the aviation sector plays a crucial role in the US economy – much more so than in other developed economies. There are also a number of new avenues for growth that the US aviation industry is well placed to take a leading role in, given its strong existing role in aerospace innovation and engineering in both private and public sectors.
The aviation sector contributes USD342 billion directly to the US economy – about 1.8% of US GDP – while sector sales (commercial and defense) account for 18.8% of all non-food manufacturing revenue, according to the Aerospace Industries Association (AIA). This includes significant export activity: civil aviation exports hit USD126.5 billion in 2019, before dropping back due to the pandemic. Exports include civil aircraft, engines, and replacement parts, and were already rebounding in the later quarters of 2020.
The aviation sector contributes USD342 billion directly to the US economy – about 1.8% of US GDP
New opportunities: Advanced air mobility (AAM)
AAM technologies are small, highly-automated aircraft that are able to access areas inaccessible to traditional airplanes – be that remote, rural locations or within urban population centers. They range from small unmanned aerial systems (UAS) for package delivery to passenger-carrying electric vertical take-off and landing aircraft (eVTOL) used e.g., as air taxis or air ambulances.
The UAS market is already well-established and expected to be the most dynamic growth sector within the global aerospace industry, according to the experts at Teal Group. In the US, the FAA expects more than 2.6 million drones to be flying in its airspace by 2025. The wide range of applications will help drive growth. According to Teal Group, delivery services – from consumer goods to medical specimens – offers the greatest potential for growth with ‘the possibility of touching every household in the world’, the flexibility of UAS technology makes for an almost endless list of uses: from agricultural spraying and industrial inspection to aerial search and rescue, communications and insurance.
Insurance companies were reportedly employing 17% of all commercial drones in 2019 with uses including pro-active risk assessment, accelerated damage assessment and claims management, particularly after natural disasters, and fraud detection. For example, the use of drones in the aftermath of Hurricane Irma allowed GFA Generali to inspect 300 high-rise buildings in just ten days, a process that would have taken ground crews significantly longer.
Speed is just one advantage that the use of UAS offer to commercial applications. They also remove humans from potentially hazardous environments and so reduce the risk of accident and injury. They improve connectivity, particularly in remote regions and those with low levels of car ownership. And when used in place of ground-based vehicles, e.g., for parcel delivery, they help to reduce road congestion and transport-based emissions.
According to the Commercial Drone Alliance, light electric drones generate only 2% - 3% of the carbon emissions of electric vehicles: the substitution of ground vehicle trips with drones therefore has significant carbon reduction potential. Using drones for delivery could therefore avoid hundreds of millions miles per year of road travel in a single metropolitan area, reducing carbon emissions by over a hundred million tons.
Meanwhile, two companies are expected to earn FAA certification of their eVTOL passenger-carrying aircraft as early as 2024, said acting FAA administrator Bill Nolan at the first White House Summit on Advanced Air Mobility, which took place in August 2022. And Deloitte expects the AAM passenger mobility market is to reach USD57 billion by 2035 from just USD4 billion 2025. The AAM cargo market is likely expand more quickly to be worth USD13 billion by 2025 and grow to USD58 billion by 2035.
By 2035 Deloitte expects the AAM passenger mobility market is to reach
We have been in space for decades, but only recently has a space economy begun to emerge, and it is now growing rapidly. Citi expects the space economy to become a USD1 trillion global industry by 2040. And if is still sounds more sci-fi than sci-fact, consider that the US Bureau of Economic Analysis is already tracking the impact of the US space economy, which in 2019 accounted for USD194.9 billion of real gross product, USD125.9 billion of real GDP, USD42.4 billion in private industry wages, and 354,000 private sector jobs.
New opportunities: the space economy
Last year saw a record amount of private investment in space infrastructure companies – the firms that build and support rockets and satellites – according to Space Capital. Telecoms remains a near-term drive for satellite investment, with an increasing focus on low-Earth orbit (LEO) satellites. These are cheaper to launch than the traditional geosynchronous equatorial orbit (GEO) and medium-Earth orbit (MEO) satellites that have dominated the market, and offer a cost-effective alternative to terrestrial-based fiber-optics and 5G communications networks in rural areas, delivering stable connectivity and speeds approaching those of fiber.
Beyond telecommunications, satellites provide a backbone for wider space-as-service economy that includes the distribution and management of data via space-based assets, as well as space-dependent applications such as ride hailing or navigation. For example, satellite connectivity is transforming the Internet of Things, enabling low-cost asset tracking and operational digitalization in industries that operate in harsh environments, with widely-distributed assets or unreliable network coverage.
Satellite data is also empowering novel insurance products for weather-exposed businesses, such as those offered by Arbol. Based on predetermined, verifiable and objective metrics, e.g., annual deviation in rainfall or temperatures, these automatically pay out when the trigger metrics are met. Because they leverage satellite data from organizations such as NASA and NOAA, as well as commercial satellites, to determine when the pay-out threshold has been reached, these products eliminate the need for in-person loss-of-production assessments by the insurer.
Space investors are now looking beyond satellites with Space Capital tracking increasing investment in emerging markets. These include: logistics services such as space debris mitigation; industrial applications, such as space manufacturing and mining; space stations and habitation services; and investment in lunar exploration. Headline-grabbing space tourism pioneers may also pave the way for commercial suborbital flights to replace long-distance air travel.
The potential and importance of the space economy is also recognized by the US government. One of NASA’s goals is to support the development of a robust LEO economy from which the agency can purchase services, as one of many customers, and which will ensure national interests for research and development in space are fulfilled. It has already awarded a contract to provide at least one habitable commercial module to attach to the International Space Station, and has an agreement in place with KBR to train private astronauts at its facilities. The agency has also released a forecast of the type and amount of services it intends to purchase when they become available.
In 2019 the US Space economy employed over 354,000 people
Managing the changing aviation landscape
The aerospace sector is changing rapidly. The traditional industry structure based around airports and airlines is fracturing as disruptive technologies open up new opportunities. The result will be an aviation sector that is far more visible with small automated aircraft operating within urban environments and helping connect previously remote areas.
Before AAM technologies are successfully integrated into the existing national aerospace system, there are challenges to be overcome, however. These include legal and regulatory barriers, as well as issues around cost, safety, security and public acceptance. It may be some time before it is generally acceptable to board a fully-automated aircraft for a trip to the gym, or to take you to school or hospital. But there is little doubt among industry advocates that this is coming and that AAM will eventually become as much a part of daily life as cars are today.
At the same time the push into space will continue at pace to overcome current technological and cost challenges.
But here too there are significant legal and regulatory issues that are likely to impact space development, as well as growing geopolitical risks. The US is by far the largest investor in space, but the number of actors – both state and private – is rising rapidly. At the most mundane level, this poses questions about access and traffic management. But the growing proliferation of space technologies also asks questions of security and the ability to defend essential space assets from geopolitical challengers.
Success in this changing landscape will require a robust approach to risk assessment and management. A specialist aviation insurance broker, like Gallagher, will therefore be a key ally in navigating the road ahead and ensuring your business is best positioned, with the protection needed, to thrive.
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