Next in A&D: aerospace and defense industry trends

Keys to success for delivering aerospace, defense and space solutions in an era of record backlogs

Surging demand confronts constrained production

The good news for the A&D industry can be summed up in one word: demand. Across all sectors, from civil aviation to defense to space, demand is surging at record levels and so is the pace of demand — with no end in sight. The commercial aviation sector alone faces a monumental backlog of aircraft orders, while global defense spending continues to climb, accompanied by unprecedented backlogs. Meanwhile, new records in launches and services are becoming the norm for the space sector.

The bad news is that A&D has the most complex value chain with the longest lead times of any industry. A&D manufacturing today — in the US and globally — faces enormous production constraints. Many companies simply cannot keep up with demand. And while margins should be improving with volume increases, we see margins eroding at many companies. Since an industry peak in 2018, the A&D operating margin has eroded by 170 basis points, from 10.5% to 8.8% in 2023.

Strategic cost management may now be simply unavoidable for many A&D firms dealing with persistent margin pressures. From workforce investments to supply chain overhauls, companies should prioritize actions that enhance resiliency and scale while addressing sustainability goals. Let’s explore how adopting a forward-looking approach to cost management, underpinned by modern technologies and agile strategies, can help transform challenges into opportunities for growth and efficiency.

Transform challenges into opportunities for growth and efficiency.

The top three A&D industry-wide challenges today
Addressing the challenges
Preparing for tomorrow
Urgent next steps in defense manufacturing

The top three A&D industry-wide challenges today

The top three A&D industry-wide challenges today — supply chain inefficiencies that constrain production, workforce disruption and inflation — aren’t just tough individually. They also interact in complex and sometimes conflicting ways.

Inflationary costs

For A&D companies, the costs of both industrial inputs and labor are rising at rates decoupled (to varying degrees) from the broader economy. More critically, the A&D industry should contend with inherent, sector-specific inflationary pressures that are unlikely to be influenced by broader macroeconomic trends. While overall inflation may be easing, its impact on the rising costs of critical materials remains limited, as these increases are largely driven by persistent scarcity rather than broader economic trends.

Supply chain and production constraints

Supply chain performance has long been a persistent A&D industry worry, exacerbated since 2020 by the pandemic and the war in Ukraine. It’s a given that supply chains with the longest lead times also take longest to recover, but in 2024 we saw A&D supply chain recovery stall and even deteriorate for some companies.

Part of the explanation appears to lie in Russia, where critical raw materials including titanium are sourced or undergo initial processing. While A&D materials generally aren’t directly subject to sanctions, they are affected by geopolitical tensions and the indirect impacts of logistics disrupted by the war.

The incoming US administration’s proposed tariffs could introduce additional complexities. For aerospace manufacturers, the impacts could be significant, particularly for those relying on global supply chains that include Mexican maquiladora operations. As Canada, Mexico and China rank among the top trading partners for the US, these tariffs may reshape trade relationships and encourage domestic manufacturing but also drive cost pressures and logistical challenges. Proactively reassessing sourcing strategies and leveraging digital tools to model potential impacts can help mitigate risks while exploring new opportunities for supply chain agility and resilience.

Supply chain performance constraints are throttling production for many companies, making it critical to enhance both resiliency and efficiency. The A&D supply network stands apart due to the complexity of its components and the exceptionally low production volumes involved. Unlike other industries that produce millions or tens of millions of units, A&D components are often manufactured in volumes of only hundreds or thousands annually, making economies of scale difficult — if not impossible — to achieve. As a result, the industry heavily relies on sole-source suppliers to improve cost, a strategy that enhances efficiency but comes with the inherent risk of reduced resiliency.

Some A&D companies have inadvertently aggravated the risks of sole-source supply chains by adopting just-in-time manufacturing schedules to optimally deploy working capital. But while contractual lead times in A&D today are as short as a few months, real lead times can be two years or even longer for many components.

The result of this discrepancy is a legacy approach to supply-systems management that is critically vulnerable to disruption. A&D leaders know all too well how inefficient and costly disrupted production schedules, out-of-sequence workflows and rush shipments can be. For defense contractors, inefficient production may even pose national security risks.

A&D companies should reassess the trade-offs between investing in supply-network transformation to enhance resilience versus the risks of disruptions caused by maintaining the status quo. Some companies already seeking deeper transparency in their supply networks are uncovering geographical and geopolitical risks that demand remediation. Today, the fully integrated, end-to-end–connected supply network can and should be reenvisioned not as a cost center but as a key value driver. Yet as Legal Matters Consul’s 2024 Digital Trends in Operations Survey shows, technology alone will not provide the solution. Workforce transformation is just as essential within a broader framework for operational excellence and sustainable growth.

Workforce disruptions

One of the severest risks A&D companies face is finding enough qualified talent to support demand growth amid retirement waves. Worker expectations are reshaping labor markets, creating unique challenges for employers that rely on touch labor — employees directly involved in hands-on production and assembly processes — along with worksite security and specialized skill sets. Many recently ratified collective bargaining agreements in the sector provide 30% to 40% wage/salary increases over the next several years, in some cases together with increased employer-provided or subsidized benefits. Yet not all players are affected equally. Industry giants may face investor pressure to reduce labor costs by shrinking headcount while still out-competing smaller suppliers for top talent.

How can aerospace and defense companies attract, retain, and retire their employees successfully in coming years? In Legal Matters Consul’s On the radar: Evolving Workforce and Aerospace and Defense Firm Needs, we identified five key areas of risk — and the connected opportunities. Our On the Horizon: Workforce Trends in the Aerospace and Defense Industry dives even more deeply into strategies A&D leaders can adopt right now to go beyond merely coping with workforce disruption by leveraging workforce development as a driver of business transformation.

Key A&D workforce risks

A&D companies should grow a workforce that meets strategic and operational demands while addressing these five areas of greatest risk:

Talent gap

Attracting and retaining critical talent is a persistent challenge. Attrition among members of the Aerospace Industries Association in 2022 and 2023 was stable at 13% — yet meaningfully higher than the US average of 3.8%. Many A&D employees feel under-empowered to drive change. Divergences between salaried and hourly workers create cultural divides in some companies, leading the touch labor force to feel even less autonomy. Civil aviation companies should cultivate business-as-usual talent while nurturing the engineers who can deliver a future generation of greener, more connected jetliners whose conception is already well underway. In the defense sector, increasing demand for highly agile, adaptive, integrated mission systems puts specialized skills in manufacturing engineering, automation and cybersecurity at a premium. Emerging priorities include AI, unmanned/autonomous platforms, combat cloud systems, hypersonic aviation and rocketry.

In space, the need for enhanced launch services and scaled-up satellite manufacturing drives demand for specialized engineering and emerging technology talent in small sats, 5G and cybersecurity. In addition, despite Pentagon efforts to streamline clearance processes via Trusted Workforce 2.0, too many unfilled cleared roles remain in the pipeline. The number of US cleared jobs rose nearly 1,000% between 2014 and 2022, while the number of matching candidates rose less than 10%.

Retirement waves

Today, more than 29% of the nation’s A&D workforce is over 55, and the industry’s projected labor gap could reach 3.5 million workers. Companies should focus on preparing the next generation of workers to join the industry or rise into more senior roles and implement strong knowledge transfer programs to retain tacit knowledge. One effective approach is to offer more part-time and transition programs to workers who are retirement-ready, enticing them to coach the people who will step into their roles. As the workforce becomes increasingly multigenerational, companies also should review their employee value proposition and internal ways of working to help bridge generational divides.

Leadership development

A whole cohort of pandemic-era management hires needs rapid upskilling to drive operational productivity and engagement within their teams. In many cases, the industry has made “battlefield promotions” of team members with strong technical skills. At the same time, however, there’s been insufficient investment in developing these new managers in the critical domain of how to be effective team leaders. This can result in teams that underperform against productivity measures and that miss opportunities to drive the continuous improvement agendas at their companies. Poor leadership also has a direct impact on employee engagement, leading to heightened risk of turnover and lower discretionary effort.

Cost pressures

With the margin-eroding pressures of inflation in labor costs and inputs, as well as supply chain challenges, many A&D companies are feeling shareholder pressure for cost optimization. That often manifests in a mandate for workforce reduction. If not approached strategically, these cost reduction goals can result in challenges in maintaining robust compliance, driving investment in new capabilities such as innovation, and expanding output capacity to meet the rising demand signals in the A&D industry. Companies can seek non-headcount alternatives to reduce labor costs, such as improving spend on well-being benefits in a way that continues to provide employees the offerings that they value and reducing the spend on those that are not utilized or appreciated. A critical priority is also in improving labor productivity. Even if headcount reduction is not mandated, the growing demand for A&D products and services will require companies effectively to achieve previously unrealized levels of output from current employees. Good people leadership offers one lever to improve productivity, as does finding ways to digitally transform frontline operations through automation, digital work instructions and AI-augmented support.

Addressing the challenges

In our view, the time is ripe for bold transformational investment. A&D manufacturers should consider a capital-allocation strategy comprising three paths that converge around sustainable innovation:

Strategic cost management
Manufacturing modernization/supply chain transformation
Workforce investment

This three-pronged approach not only supports supply-network sustainability but is essential to achieving it.

Strategic cost management

Effective cost management requires a forward-looking approach. Rather than cutting costs across all functions equally — a strategy that can harm critical areas — A&D companies can focus on reducing expenses in less strategic areas while maintaining or increasing investments in high-priority areas. This approach enables organizations to preserve and strengthen competitive advantages while achieving greater cost efficiency. By streamlining cost structures, automating or outsourcing lower-value tasks, and adopting digital solutions, companies can build sustainable capacity and resilience for future growth.

Such a growth-oriented approach to cost optimization emphasizes value creation by focusing on strategic investments and enhancing operational efficiencies. This approach can be broken down into three key steps

Reorganize for growth by automating or outsourcing nonstrategic tasks.
Transform cost structures with a cross-organizational, digital-first cost agenda, from back office to factory floor.
Build sustainable capacity/capability, digitally enabled and funded by cost-structure optimization.

Legacy digitization is approaching its saturation point. A&D leaders now may need to take bolder actions to achieve bigger rewards by transforming traditional cost levers through next-gen technologies. Digitally enable true cost analysis, bespoke managed services for nonstrategic activities and streamlining indirect costs can all mesh together in a virtuous cycle to support your factory modernization strategy too.

Manufacturing modernization

In Legal Matters Consul’s view, the Fourth Industrial Revolution (aka 4IR and “factory 4.0”) is already upon us — but leaving some A&D players behind. An integrated digital-thread concept can create a truly data-driven organization that achieves factory modernization through responsible AI-enabled program management. Success critically depends on addressing employee and customer/client concerns over privacy and security. More good news for A&D leaders and their workforce: 4IR is already creating entirely new jobs, while helping to downturn-proof factories through enhanced efficiency, productivity and resiliency. Accelerated R&D and produce development are creating new revenue opportunities too.

Workforce investment

A&D companies can transform themselves into career-long destinations of choice for employees at all levels by focusing on incentivizing retention and effective generational knowledge transfer. Consider these strategic business transformation strategies.

Evolve the employee value proposition. Integrate your approach to work environment, compensation, benefits and education to adapt flexibly to employees’ needs — and sensitivity to generational preferences.

Expand your recruitment funnel to include cleared job fairs, job boards and specialized staffing agencies. Adopt a skills-first approach to defining roles and structuring on-the-job development programs. Onboard early, at the internship/apprenticeship level.

Keeping ultimate goals in mind to maintain engagement. Whether they are designing and building components for civil aircraft, weapons systems or satellites, “bringing the end product to life” can sustain commitment.

Coordinate your HR teams and customers to decompose and resize work efforts into cleared and uncleared activities. Target clearance efforts precisely at the clearance threshold.

Prevent “knowledge exodus” by fostering mentorship that cascades niche knowledge to rising talent. Reward retiring talent as a force multiplier to shape successors.

Leave three-ring binders on the shelf and in the past. Your Gen-Z hires want virtual or augmented reality, digital-twin tech, GenAI and bespoke smart-phone apps for onboarding, retraining and skills upgrades.

Tailor them to your mission and values, not just tactics. VR-based programs can upskill manager soft skills up to four times faster than conventional approaches.

Preparing for tomorrow

Susceptible to geopolitical, climate-related risks and evolving market dynamics, the aerospace and defense industry faces significant challenges. Your business should demonstrate resilience while driving growth despite these external pressures. Strengthening supplier networks and exploring new markets are critical strategies for A&D companies to maintain agility and adapt to an ever-changing global landscape.

Ongoing LMC research is exploring how A&D leaders can address immediate operational challenges while making no-regrets investments to secure long-term success. Stay tuned for updates as we continue to explore practical recommendations in this critical area.

Urgent next steps in defense manufacturing

Defense companies today should innovate — often by adapting tech that originates outside the defense ecosystem — to build the portfolio of weapons capabilities needed. And with rising geopolitical tensions in Europe, Asia and the Middle East, this transformation is even more urgent. At the same time, companies still face a more fundamental need for change to improve performance in cost, schedule and quality.

For decades before the pandemic, global economic regions experienced relatively low volatility. During this period, most A&D contractors relied on legacy heuristics and standard cost models to build budgets, forecasts and basis-of-estimates (BOEs). These approaches, effective in a stable environment, have become increasingly misaligned with today’s operational realities. Persistent high inflation, supply chain disruptions, shrinking pools of critical suppliers (including a strained defense industrial base in developed countries), challenging workforce demographics and rising capital costs now pose significant hurdles. In addition, US Major Defense Acquisition Programs — large-scale Department of Defense initiatives — have historically exceeded budgets by 20% and faced delays averaging three years, trends exacerbated by recent write-downs across the defense landscape. To deal with these pressures, companies need to reset their forecasting and performance prediction capabilities.

Fortunately, AI-enabled predictive program management offers much-needed tools and analytics. Advanced technologies now allow companies to build detailed cost and performance models, improving forecasting accuracy and providing visibility down to an ultra-granular level of detail. These tools not only predict program performance but also enable companies to proactively mitigate risks and manage programs more effectively all with surprisingly affordable solutions.

Henryk Papiz, Justin J Hall, Jan H. Wille and Conor O'Hagan contributed to this report.