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Sectoral Innovation Foresight Aeronautics and Space

Interim Report

F. Brandes & M. Poel (TNO, the Netherlands)

July 2009

A Europe INNOVA Initiative

2008-2010

This publication is financed under the Competitiveness and Innovation Framework Programme (CIP) which aims to encourage the competitiveness of European enterprises.

Table of contents 1 Introduction ......................................................................................................................... 1 1.1 Background and objectives ................................................................................................ 1 1.2 Framing of sector analysis.................................................................................................. 2 2 Current Situation – Evolution and current state of sector .............................................. 3 2.1 Historical evolution of sector............................................................................................... 3 2.2 Important sectoral characteristics for future innovations..................................................... 5 2.3 Implications of evolution and structure of sector for future innovations .............................. 9 3 Drivers of innovation and change ..................................................................................... 9 3.1 S&T drivers......................................................................................................................... 9 3.2 Demand-side drivers and emerging markets.................................................................... 11 4 Emerging innovation themes and their requirements ................................................... 15 4.1 Environmental air travel.................................................................................................... 16 4.2 Space applications ........................................................................................................... 20 4.3 Far future.......................................................................................................................... 24 4.4 Other ................................................................................................................................ 25 4.5 Organisational change and firm strategies ....................................................................... 25 5 Institutional and structural co-developments and implications ................................... 26 5.1 Institutional change........................................................................................................... 26 5.2 Structural change ............................................................................................................. 29 5.3 Skills requirements and the knowledge base ................................................................... 30 6 First elements of scenarios.............................................................................................. 31 7 References......................................................................................................................... 33

How – and more importantly: with what – will people in times of increasing mobility

and passenger numbers travel in the future? It is unlikely that one of the currently

known transport modes will not play a role in the coming decades or that a

completely new one will appear out of nothing. The railway exists for 160 years in

Europe and will do so also in 50 years. Cars are now around for just over 100 years,

and will also be around in 50 years. The same applies to aircraft. But all transport

modes are subject to technological change. The trends in propulsion are: more

efficient, less polluting, less noise. For railways and aircraft an important goal is to

increase transport capacity. More comfort is expected for all transport carriers.

(Kühne, 2004)

Europe INNOVA Sector Innovation Watch

1 Introduction

1.1 Background and objectives

This interim report is part of Task 2 (Sectoral Innovation Foresight) of the Europe INNOVA Sectoral Innovation Watch (SIW) project. It presents interim findings on possible future developments in the sector under study. Particular emphasis is put on the one hand on future changes that are likely to significantly influence the evolution and emergence of innovation activities and associated markets, and on developments that are likely to be of cross-sectoral relevance to innovation on the other. Sectoral innovation foresight thus complements Task 1 of the SIW project, which analyzes current sectoral innovation performance.

The main objectives of Task 2 can be summarised as follows:

• Explore and identify the main drivers of change in the nine sectors. These drivers will be both internal and external to the sectors, with several of them being of a cross-cutting nature.

• Identify and assess key future developments in the nine sectors as well as in terms of cross-cutting developments. The emphasis is put on likely future innovation themes and emerging markets, more specifically also on the requirements and impacts they raise in terms of skills requirements, organisational, institutional and structural changes in the sectors concerned.

• Develop scenario sketches for the sectors under study. • Highlight key policy issues for the future, with a view to enhancing the innovation

performance and competitiveness of firms operating in these sectors. • Stimulate debate and contribute to the creation of expert networks, based on the participatory

elements of this task.

The time horizon of these foresight papers is usually five to ten years (2015-2020), depending on the specific characteristics and the pace of change in the respective sectors. The aeronautics and space sector, however, is a high-tech sector characterized by very long technology and product development times. The time-frame of this report therefore goes well beyond the normal timeframe, in order to allow considering the introduction of radical technologies rather than extrapolating current technology developments. A timeframe of up to 30-50 years is explored here.

This Interim Report is based on a review of available foresight material on the aeronautics and space sector. Together with the corresponding report on the eight other sectors addressed by the SIW project (automotive, biotechnology, construction, food and beverage, knowledge-intensive business services, textiles and clothing, wholesale and retail trade), it serves as background material for a first expert and stakeholder workshop (June 2009). The report concentrates on drivers and innovation themes, but provides already some first findings and thoughts on emerging markets, requirements and future scenarios, i.e. as far as these issues can be derived from the review work. The first workshop aims on the one hand at reviewing the interim findings and on the other at exploring future scenarios of the sector in an interactive mode. The results of this first workshop and some further interviews with experts and stakeholders will then be incorporated in a draft final report that will serve as input to a second foresight workshop (November 2009). This second workshop will focus on the main policy issues that arise from the exploratory scenarios, both within the individual sectors and at their intersection. The final report will bring together in a consistent form the results generated in the different phases of the foresight exercise, i.e. will be based on revised and amended versions of the initial chapters of this interim report and additional chapters dealing with refined scenarios, future requirements and policy issues.

Sectoral Innovation Foresight Interim Report – Aeronautics and Space 1


The interim results are presented in six chapters, starting with a situational analysis where the sector stands today to contextualize possible future developments (Chapter 2). Building on this context, Science & Technology (S&T) and demand drivers will be outlined (Chapter 3), as a basis for discussing emerging innovation themes (Chapter 4). These are expected developments resulting from the interaction of supply (technological advances) and demand (societal / customer needs) forces. In this chapter, implications of these innovation themes at firm level will also be addressed. Institutional and structural requirements and implications of the innovation themes for the sector will be highlighted in Chapter 5. This is complemented with first scenario sketches (Chapter 6) and some key questions to be addressed in the remainder of the Sectoral Innovation foresight task (Chapter 7).

1.2 Framing of sector analysis

The Aerospace sector is statistically represented by NACE 35.3 (Rev 1.1)1. This report will analyse the sub-sectors of aeronautics and space separately. The reason being the divergence of trends and drivers shaping these sub-sectors, also reflected in the new NACE 2 structure that treats these as different sectors. However, historically the sector is treated as a whole and while there are diverging trends and drivers, the sub-sectors of aircraft and space are also characterized by 1) interaction, 2) overlap, and 3) parallels.

Interaction – technologies that are used in space applications have traditionally also spilled-over into aircraft applications.

Overlap – several companies are active on both sectors highlighting overlap between the industries in terms of commercial exploitation. Examples are EADS but also Boeing, BAE Systems and manufacturers of propulsion systems and other components (e.g. the SAFRAN group).

Parallels – the sub-sectors have a number of parallels. Safety regulation and high performance criteria are crucial for commercial success in both sub-sectors with reliability of equipment being a key factor. Similarly, the military / defence technology plays an important role for innovation in both sub-sectors. Furthermore, both sectors have a number of large system integrators. For aircraft, Airbus and Boeing, and for space, EADS, NASA, Thales and Finmeccanica play a key role integrate various technological sub-systems in a final product.

In the succeeding analysis these terms will be used to highlight important differences and/or linkages between developments in the sub-sectors.

The report further distinguishes between civil and military segments in aeronautics and space2. While previously technology development of civil and military applications in aircraft was aligned, both focusing on performance improvements (reliability but also faster, bigger, better aircraft), the focus in the commercial sector has changed dramatically with the environmental and climate change debate. The commercial technology development is now driven by societal challenges of reducing emissions and noise levels, while these play a limited role in the military segment where performance advantage is key.

1 For a detailed statistical definition of the sector see Task 1 report. 2 Within the space sector a clear distinction can be made between upstream (space asset manufacturing & launching) and downstream (space applications) activities (see p. 13), with close interaction between the two, but downstream services not falling in the statistical classification of aerospace manufacturing.



Related to the diverging developments in the sub-sectors and segments, a number of big questions of crucial importance for future innovation will be explored:

1. Radical innovation is needed to achieve the technology goals to reduce fuel consumption and noise levels set in context of the climate debate. This requires high system dynamics and risk taking. But where are radical innovations supposed to originate with the commercial segment risk averse, focused on incremental innovation and military spending greatly reduced in Europe after the cold war?

2. The military/space segment traditionally had a lead-user role for the sector. With diverging technology goals between commercial and military applications, how can the lead user role of the military be compensated?

3. The aerospace sector is geographically highly clustered in terms of research and production. With increasing importance of electronics and new materials (e.g. avionics & composites) these pose potential impact on the geographic structure of the sector. Are avionics located in aerospace clusters, or can a shift to ‘new’ aerospace clusters be observed around avionics? Similarly, can a shift be observed to clusters focusing on use of new materials (also internationally)? What is the long-term impact?

These big questions focus the discussion of what will drive and stimulate innovation in the coming 50 years in the sector. There is clear need for innovation but where and how it should come about is up to know very unclear. Is there a new technology paradigm emerging and what incentives will help bring this about? Are large public investments required to bring radical innovation, creating similar breakthroughs as during WW2? These specific questions will be contextualised and explored in more detail throughout the report.

2 Current Situation – Evolution and current state of sector

The following historical evolution highlights key characteristics of the sector developing from an experimenting, emerging field driven by single inventors to a highly complex industry focused on incremental innovation. This historical view contextualizes the remaining sections in this chapter highlighting key characteristics shaping innovation in the sector based on current research results.

2.1 Historical evolution of sector3

The last century saw the rise of aerospace. The time span starting with the Wright brothers and Otto Lilienthal and currently culminating in the commercial adoption of the largest civil aircraft, the A380, is characterized by extraordinary technological developments, often also influenced and shaped by political developments. The configuration of air vehicles passed many evolutionary phases including, multi-wings, vertical take-off planes, super sonic aircraft, hydroplanes and ‘flying wings’. But the most influencing design stems from the introduction of the jet engine in the 1950s.

These different approaches have created substantial progress across disciplines. In aerophysics for example the introduction of the transonic wing, in the systems area, the introduction of ‘fly-by-wire’, in airframes the use from wing fabrics to metal to composite materials. In parallel, flight

3 The aeronautics section is based on a section in DGLR (2006); the space section is based on a speech by S. Moorman (Booz Allen Vice President).



control advanced to complete onboard systems, with experimental systems exploring the full control of air vehicles from the ground. At the same time airfields have advanced from small grass fields to complex infrastructure hubs shaping whole regions providing tens of thousands of jobs. This trend saw an explosion with liberalisation of markets, the privatisation of national carriers, leading to the emergence of low-cost airlines and regional airlines making use of military airfields not used after the cold war. In short aeronautics has become international: from early pioneers and their ‘flying boxes’ to an optimised, borderless traffic system with normated processes.

These turbulent advances in all areas seem to have reached a point of saturation. Air vehicles, airports, and flight control change only marginally in their systems and fundamental configuration. In essence, current technological development focus on process optimisation in sub-systems, as for example in airfield traffic, air traffic management, or supply chain management of manufacturers. Simultaneously, two trends increasingly influence the aeronautics system at national level:

• The continuing internationalization leads to strategic partnerships, which in turn might pose further offshoring of jobs.

• On the other hand, large challenges arise from the perceived environmental impact of aerospace, in particular noise levels and emissions, as demanded by policy and society.

In addition, but also related arise questions in regards to growth of global air travel. Air travel for several decades has grown consistently by 5% annually – ignoring short term fluctuations created by single events. This means a doubling in air traffic in 14 years only. At the same time, it is forecasted that currently available technologies only allow for a 30% increase in air traffic capacity for the above highlighted sub-systems and processes. How a doubling in air traffic can be managed is currently unclear.

This poses a dilemma for aeronautics. On the one hand the sector has matured from a pioneering explorative sector to one focused on economic efficiency with less product dynamics. This had undoubtedly positive effects on economies and businesses. On the other hand, the sector currently faces new challenges, that require high system dynamics, with potentially new and hence risky pioneering solutions.

Similarly, originating from aeronautics activities the space sector has gone through a breath-taking evolution in the past 60 years. Kick started by rocket capabilities before and during WWII, the successful launch of Sputnik in 1957 can be seen as the birth of the space sector, triggering the race to space between the USA and the Soviet Union. But this did not come out of the blue, with military services conducting numerous studies examining the feasibility of performing military missions from space directly after WWII, including reconnaissance, communications and weather.

With the US Space Act (1958) NASA was founded, splitting US space activities in civilian and military activities. In addition a third covert institution, the National Reconnaissance Office, was established in 1961. The 1960s and early 1970s saw the rapid growth of US military space technologies, infrastructure and programs leading to a range of satellites for communications, weather, warning, navigation and reconnaissance. These satellites were supported by an extensive and highly capable infrastructure for launch and satellite control.

In Western Europe ELDO (the European Launch Development Organisation) and ESRO (the European Space Research Organisation) were established in the 1960s, later merged into the European Space Agency (ESA). But in contrast to NASA, ESA is based on national space institutes making it much more fragmented. Most European space exploration missions were done in collaboration with NASA, and compared to the US were much smaller in volume. One of the big successes emerging from ELDO and later ESA was the development of ‘Ariane’, especially the later versions taking much of the commercial launch market in the 1990s.



This was driven by the end of the cold war allowing to open space commercially. Since the early 1990s, civil and military space activities have converged, seeing the widespread launch of civil communication satellites, earth observation satellites, and the commercial use of military navigation systems such as GPS. Europe is still working on its own navigation system Galileo. This convergence has stimulated much activity in the sector developing it from a fully institutional sector to a more and more commercial sector. New, smaller commercial launchers are developed, with satellites becoming much smaller reducing costs, triggering a flurry of activity in satellite applications (services).

However, in terms of evolution it is probably most comparable to the aeronautics sector after WWII that is at a turning point and only at the beginning of a commercial evolution if the right framework conditions are set. But from first activities the US has always asserted the right to take any actions necessary to defend space capabilities and interests as well as deny an adversary’s use of space that threatens its interests. Free access the space will likely determine whether the space sector can develop into a fully commercial sector in the future.

2.2 Important sectoral characteristics for future innovations

As previous analyses have highlighted, sectors differ substantially in market structure, institutions, technologies and customers (Malerba, 2004). The following is not a comprehensive analysis of sectoral innovation characteristics of the aerospace sector4 but a recap of past and ongoing research efforts, deemed important to contextualise future innovation themes of the sector.

2.2.1 Market structure

European aerospace industry is world leader in large civil aircraft, business jets and helicopters, aero-engines and defence electronics comparatively small. The sector in Europe is dominated by a small number of large firms (3% of sector) highly concentrated in Germany, France and the UK (Hollanders et al., 2008). Aircraft, space launchers and space applications are main market segments with military and other public authorities as important customers making sub-segments highly institutionalised (for details see section 2.2.4)

In the commercial aeronautics segment fierce competition has led to several consolidation waves reducing the number of major players from 30 to 11 in 2003. For large commercial aircraft (LCA) only two global competitors - Boeing and Airbus (EADS) – have emerged competing for global leadership. Both are also important system integrators for activities linking the two sub-sectors. However, as system integrators Airbus and Boeing only represent the top of the value chain, with many smaller firms and fierce competition between 2nd and 3rd tier suppliers. This poses the question what effect a duopolistic market structure in LCA might have on innovation in the future (Hollanders et al., 2008).5 However, new competitors are forming in Asia (China, Japan) and Russia.

4 For a complete discussion on sectoral innovation characteristics see the full Task 1 report. 5 Competition / innovation not dependent on absolute number of firms but level of competition in specific market!



Source: Niosi & Zhegu, 2005

The market structure of the space segment differs structurally, characterised by more, smaller highly specialised firms. The fragmentation is supported by national procurement, institutional structures (e.g. ESA procurement based on shares of funding by member states (juste retour mechanism)) having consequences for innovation activities.

Source: ASD, 2007, p.17

2.2.2 Subsegments

Within the statistically classified sub-sectors two segments are particularly relevant for innovation. The (jet) engine segment with specialised firms working in close cooperation with system integrators (airframe) namely Boeing and Airbus and space applications. In addition, avionics (aviation electronics) are key to performance improvement of existing designs. However, firms active in this segment are not accounted for statistically in this sector but in electronics instead.



• Engine manufacturers are of major importance to the aerospace market as engines are key for environmental performance of aircraft. Lately, engineering challenges with engines have led to delays on large aircraft projects, namely the A400M (Spiegel Online, 2009b). Engines are normally developed by industry consortia as risks are high (e.g. in case of A400M consortium of SNECMA (France), Rolls-Royce (GB), ITP (Spain) German MTU Aero Engines). These are often part of a industrial conglomerates with only parts of turnover generated in civil aerospace: Rolls-Royce (50%); UTC (Pratt & Whitney) (25%) and GE (8%) (PwC, 2006). They cover all value chain activities from engine design, development to manufacture, sales and aftermarket support making use of joint ventures. Their strategy is to build a large customer base from which revenue during life-cycle is generated (PwC, 2006). GE dominates RJ (regional jet) engine market being sole supplier to Bombardier

• Space sector: the majority of turnover in the space segment is institutional with space

agencies and defence procurement playing a key role. In 2007 more than 2/3 of the institutional market comprise civil programmes and less than 1/3 military programmes (ASD, 2007). But both are strongly policy driven and military shares have increased strongly since 2001.

Within the space sector, satellite applications are the largest activity (~60%) followed by launcher activities (~25%) and scientific activities (~15%)6 (ASD, 2007)

2.2.3 Long technology and product development times

This picture impressively highlights this incremental innovation path with the outer design not changing since the Boeing 707, commercialized in the 1950s and the Airbus A340, commercialized in the mid-1990s.

Breakthroughs in many fields have provided evolutionary improvements in performance. Although the aircraft configuration looks similar since the first commercial jet (Boeing 707, see picture on right), reductions in cost by nearly a factor of 3 have been achieved through improvements in aerodynamics, structures and materials, control systems, and (primarily) propulsion technology, since.

6 ASD data refers to European sector as EU15+ Czech Republic, Bulgaria, Poland + Norway, Switzerland, Turkey based on firm level survey (ASD, 2007)



However, most key technologies / systems used in aerospace go back to technology breakthroughs during WW2 and the decades thereafter. Furthermore, development times and costs need to decrease (BmWi, 2008). The sector can therefore be described as a mature sector focusing on process improvements around a dominant design. In addition, the conservative customers of the industry prevent new technologies from quick adoption. Currently, product development times for a new aircraft take around 10 years, which are then normally produced for another 25-30 years and serviced for another 30 years. The life-cycle of a aircraft model is hence as long as 70 years (TuE, 2007). While new technology sub-systems are integrated in existing product lines, the long technology and product development times, mean that radical changes face a high barrier of existing product and market structures, that make it very risky for anyone to develop or adopt radical innovations.

Implication – while many competing designs / technologies could be observed in the early years of the sector with the adoption of the cylindrical fuselage and jet engine the single dominant technological design has emerged that is currently without competition. Long technology and product development times pose very high barriers for competing designs to challenge the current. However, with limited future optimization potential a new design could replace the current radically changing the design of aircraft. Several possible alternatives are presented later in the paper.

2.2.4 Institutionalised sector

The role of the military and public agencies as procurers of leading edge technology have an important impact on innovation in the sector .7 While this is not reflected in R&D spending in the sector – the commercial air vehicle activities generate the largest share of R&D (ASD, 2007) – the military in the past has often been a lead user as it is most interested in obtaining a performance advantage. Super-sonic aircraft, satellites, composite materials, etc. have first been applied in military research or procurement. While military spending after the collapse of the iron curtain has decreased substantially – with focus away from large technology projects to distributed warfare - public institutions still play a key role for financing and using new technologies in the sector.

Table Fehler! Kein Text mit angegebener Formatvorlage im Dokument..1 Key clients by sub-sectors and potential for lead market

Aircraft Space (rockets / satellites)

Civil

Airlines / leasing firms main customers: main focus, safety, comfort and life-cycle cost reductions

low lead user potential

Telecom firms / Research institutes main customers for satellite launches: main focus cost reductions and reliability

little potential as lead user

Military

National military: main focus high performance, technical lead, national procurement

lead user

National military: main focus leading edge technology, national procurement to preserve national security

lead lead-user

7 56% of R&D funds for military applications come from governments, whereas 85% of funds are provided for civil applications (ASD, 2007)



However, the drivers shaping innovation differ substantially for the different segments. Table 2.1 highlights the needs of customers for the two main market segments ‘Aircrafts’ and ‘Space’ by key customer group, the military and the civil market. With the focus on leading edge, high performance technology the military segment provides the most opportunities for radically new innovations to originate. Furthermore, the military and space segment is willing to take higher risks to push out technology boundaries, providing a lead user role (e.g. small air vehicles, unmanned aircraft, space robots etc.). On the other hand the civil aircraft segment has low lead user potential as customers are risk averse, the exception could be ‘green technology’ (e.g. avionics, efficient engines, alternative fuels) in the sector with commercial pressures aligned to realising efficiency gains compared to other segments. Particular attention will be paid to the potential lead-lead user segment to identify potentially disruptive technologies that in the long-run can also radically change the commercial segments.

Implication – military and space as lead users. Although airlines and leasing companies represent largest user base these are most interested in proven technology that guarantees reliability, safety and lower operating costs. This is a very powerful driver of incremental innovation but at the same time also represents a risk averse customer that is a barrier to ‘radical’ innovation in the sector (e.g. use of composite materials in commercial aircraft hindered by airlines). Radically new designs / technologies are therefore likely to first originate in military segment or via publicly financed research.

2.3 Implications of evolution and structure of sector for future innovations

Over the last century the sector has developed technologically and commercially with critical technology breakthroughs stemming from military investments during WW2. This resulted in incremental innovation over the last 50-60 years leading to substantial performance and process improvements. This incremental path is expected to continue with long technology development times, high capital investments, highly regulated and highly institutionalized sector8. These characteristics pose substantial risks for actors to take on radical approaches. But with limited potential for improvements of current technology paradigms, this requires thinking how the sector could develop and adopt more radical innovation.

3 Drivers of innovation and change

3.1 S&T drivers

This section presents major scientific-technological developments of relevance to the aerospace sector, dealing with more generic S&T issues. It will only present technological developments independent of their specific application in the sector. This instead will be done in chapter 4 presenting a range of innovation themes. Of key importance are the long technology and product development times which make technological advances in the sector relatively slow in adoption speed.

8 strict safety regulations, regulated national markets, and R&D subsidies.



Furthermore, in their 2008 Addendum to the Strategic Research Agenda, Actra (Advisory Council for Aeronautics Research in Europe) argues that the technical agenda should remain unchanged for incremental improvements but accelerated towards breakthrough and contributing technologies as otherwise future targets in emission / noise reductions cannot be achieved (Acare, 2008).

Future studies identify and discuss future science and technology drivers falling in the following main categories:

3.1.1 IT development / avionics9

Technological advances in IT and electronics (e.g. miniaturisation) has been ongoing for several decades but promises further advances in flight control, air traffic management, simulating and modelling of new products and manufacturing processes (aeronautics) as well as communication technologies and satellite applications (space). Miniaturisation is driven by further advances in nano-technology and electronics are increasingly embedded driven by the convergence of ICT and bio-, and nano-technology. Miniaturisation leads to falling real costs10 and widespread integrated use. Related to this trend is the increase in computing power allowing for managing and controlling complex systems that were previously not manageable (important for air traffic management; design development, and control of new aircraft designs11).

3.1.2 Artificial intelligence

Equipment will become more intelligent in the near future with advancements in artificial intelligence (the combination of ICT and cognitive sciences) increasing autonomy (ISTAG, 2006). Intelligent systems will use an array of cognitive functions, 1) Cognitive vision 2) Speech recognition, 3) learning and self-reflection and 4) context-sensitivity and affective computing (understanding emotions) making them adaptive to impulses from their environment (FMER, 2007). Artificial intelligence has to potential to enable robust, secure and reliable systems that are capable of self-organizing. Self-organizing means that they can configure, test, maintain, repair and even dispose their selves, while keeping out any human factor (IPTS 2008, 2003; ISTAG, 2006). This is of high interest also for space applications where continuous communications with Earth is impossible and products need to self-diagnose technical failures, and if possible find a solution.

3.1.3 New materials / nano-technology

Materials and material developments play a crucial role in airframe structures, engine components and in related systems and devices (DTI, 2001, p.9). For example, while for the Boeing 777 aluminium was the dominant material, the A380 is already made of 22 percent composites, while the Boeing 787 is planned to use 50 percent composites, similarly to the planned A350-900 (BmVit, 2008). This trend towards light weight materials in airframe structures is ongoing. But new materials are much broader. These aim to manipulate the physical properties of materials (nano-technology) to enhance performance, which is key to reach set goals to increase fuel efficiency, reduce emissions and noise levels. Examples in addition to. light weight materials (composites but also metallic cellular structures) are high performance alloys for

9 means "aviation electronics". It comprises electronic systems for use on aircraft, artificial satellites and spacecraft, comprising communications, navigation and the display and management of multiple systems. It also includes the hundreds of systems that are fitted to aircraft to meet individual roles, these can be as simple as a search light for a police helicopter or as complicated as the tactical system for an Airborne Early Warning platform (NLR, no date)

10 Costs per performance unit (e.g. processing speed, data storage, etc). 11 sophisticated electronic controls for flying wing designs. Without a tail, the whole back of the wing becomes an array of ‘elevons’11 that tweak the aerodynamics to keep the craft aloft. Elevons are aircraft control surfaces that combine the functions of the elevator (used for pitch control) and the aileron (used for roll control), hence the name.



jet engines (refractory metal alloys) etc. (bmvit, 2007). At the same the same time there are few fundamental material changes observed in industry (DTI, 2001), which can be attributed to the conservatism of the customers who demand proven technology.

3.1.4 Alternative propulsions / fuels

Another technology driver to achieve environmental goals in aeronautics relate to alternative fuels and radical alternative propulsions. While alternative fuels are already in adoption in other transport modes, aeronautics relies on kerosene with different properties (energy density / freezing point) than standard fuels. Actra therefore calls for research activities to analyse aviation specific implications of alternative fuels including a detailed well to wake analysis for all potential fuels to be considered (Actra, 2008, p.34). Furthermore, to prevent technology lock-in two parallel research efforts should be pursued at the same time:

1. drop-in alternatives of kerosene (renewable fuels that can be added / used in the current kerosene infrastructure)

2. revolutionary aircraft power systems (fuel cell / hydrogen that require a new infrastructure and hence pose considerable barriers)

3.2 Demand-side drivers and emerging markets

Demand in the sector is shaped by customers which are subject to strict health and safety and environmental regulation. With very different customers in the commercial aeronautics, commercial space and military segments, demand drivers are clustered accordingly.

3.2.1 Aircraft segment - Civil

All future studies consternate a great necessity for technological change driven by the need to develop silent, fuel efficient and less polluting aircraft technologies (Actra, 2008 Kühn, 2004; NASA, 2004; Hollanders et al., 2008). This need arises in the light of continuous projected growth in the airline markets.

Growth in air travel (mobility challenge)

Air travel has grown over the last decades, apart from short term fluctuations, with a stable 5% growth rate. This means that traffic doubles within 14 years posing strains on existing infrastructure systems (DGLR, 2006). While in the past deregulation of air travel was main driver for growth, in future integrating world economy and emerging economies will be main driver. As a result Roll’s’Royce expects more than 51,000 aircraft deliveries between 2006 and 2025 with largest volumes ordered from Asia (see below).

According to PwC (2006) the Asia-Pacific region demand will overtake USA demand, with the region leading the continuing global growth in air travel (PwC, 2006). The financial and economic crisis is a key uncertainty affecting this driver. However, new owners and operators change the way the market buys and uses aircraft (PwC, 2006).

This expected growth in air travel puts considerable strain on the air traffic management system. Together with a lack of capacity this leads to delays currently costing the US economy considerable damage. (Annual costs predicted to exceed $30bn in US by 2015) (Nasa, 2006).



Forecasting demand in air travel after 2020 is more speculative. Growth rates may well decline as the market for air travel approaches maturity. But the timing and scale of any decline are very hard to predict. New communications technologies may also affect the growth of business travel. It might be thought that new technologies would reduce the need to travel. However, electronic communications seem to have increased the demand for international business travel, as companies operate on an increasingly international scale and therefore have a far larger customer and supplier base spread over a wider area (UK DfT, 2002, p.15). Rather, it seems demand for air travel is closely related to global economic integration.

Source: Rolls-Royce (2006)

Smaller, more distributed air travel

The dominant system of air travel emerging over the last decades is a centralized hub system, where large national carriers guide international traffic via a small number of large hubs. However, with deregulation and increased demand for air travel, traffic has also become more de-centralised with the regional jet market having emerged as a robust segment (PwC, 2006). This could be seen as a long term shift towards small scale, distributed air travel in the future. However, such shift would require a different air traffic management system.



Environmentally friendly consumption / legislation – climate change

Climate change and sustainability are positioned high on the global agenda for both governments and industry driving new legislation and consumption patterns. This creates a need for energy and resource efficient production / processes. While significant technological progress has been made in terms of efficiency and noise reduction of jet engines over last 50 years, the overall increase in demand has offset these efforts, resulting in objections against new airports and runways.(NASA, 2006). With air travel contributing 2% of global man-made CO2 emissions – 1,7% civil air transport 0,3% military air traffic - (Acare, 2008), policy-makers and society increasingly demand stringent environmental policies affecting cost and nature of air travel (PwC, 2006). This will not only demand lighter, more efficient aircrafts, but is also likely to reduce the demand for air travel. The question arises how legislation like the emission trading system (ETS) could facilitate the adoption of environmental technologies in aerospace.

Safety and security standards / legislation

While fatality rates in air travel are very low, at the same time if accidents happen this then often involves fatalities. This means that safety of air travel is of a major concern and strongly influences legislation and innovation, with the industry having a strong preference for proven technologies. At the same time security is of high importance with air travel being highly vulnerable to terrorist attacks as events like September 11th show. This high level of attention for safety and security drives innovation for new technologies making flying safer (aircraft control, traffic management) but also for security checks at airports (detectors, sensors, ICT systems, etc. – not explored in this report).

3.2.2 Space segment - Civil (institutional & commercial)

The OECD, in close collaboration with industry players, policy makers and experts explored the main trends in space leading to the publication ‘Space 2030’ published in 2005. The study assessed future demand for space applications to be substantial. However, severe short and medium term fluctuations are likely to affect actors as the sector is characterized by capital intensiveness, long lead times, high risks, and the heavy involvement of state (OECD, 2005). Furthermore, a clear distinction needs to be made between upstream (space asset manufacturing & launching) and downstream (space applications) activities. The downstream segment has much better prospects with increasing commercialization of space applications, while the upstream segments suffers from chronic over-supply with higher launch capacity than annual launches. With launch costs not expected to fall in future this problem is likely to persist. The same conclusion was drawn by the European Commission in 2004 (EC, 2004) But also not all downstream sectors have equally bright prospects. Information intensive activities are generally perceived as bright, but prospects of transport and manufacturing activities are uncertain as they depend on the costs of access to space, which is unlikely to fall. (OECD, 2005, p.14).

Factors driving demand especially in downstream segments are related to societal challenges where space applications can help measure effects, monitor and increase effectiveness (OECD, 2005). Societal challenges refer to environmental degradation including natural resources such as water, forestry, but also climate change, related challenges such as the mobility challenge posing high environmental costs, and a perceived need to improve security (terrorism, rouge states). Applications in this context refer to Earth Observation (EO) and Global Navigation Satellite Systems (GNSS). The OECD highlights the role of space applications for monitoring the environment, manage energy use, water management, precision agriculture, the mobility challenge, security and the information economy.



Earth observation can for example be used to select locations for renewable energy, assess and monitor water resources, increase the effectiveness of forestry and prevent deforestation, help farmers to monitor crops, monitor treaties and hazardous goods, and help in disaster relief and prevention. In combination with GNSS, applications are thought to tackle the mobility challenge, by increasing productivity, reducing congestion, noise and unnecessary pollution in transport (OECD, 2005).

3.2.3 Aircraft & space segment - Military

With the end of the cold war defence spending fell by about a third in real terms between 1989 and 1996 (PwC, 2005). But also the nature of warfare changed from large arsenals of traditional weapons to new innovative weapon systems promoting rapid deployment and extreme precision. While budget cuts in most countries also meant reduced military R&D investments, the USA maintained its levels of R&D. Generally, within this overall negative trend, this meant a relative advantage for aerospace activities compared to land and naval defence activities as air capability under the changed security environment is highly desirable. Since September 11th the security situation has again changed around the globe with growing military expenditure. With emerging powers building up considerable military capabilities (China), and Russia rebuilding its defence sector, a trend towards a multi-polar world is likely to drive future military spending.

Distributed warfare means that aerospace is likely to benefit from this trend proportionally more than other segments. Rapid reaction requires long-distance air capabilities of high performance aircraft and management systems that integrate navigation, information and communication systems. In addition, observation and control technologies limiting the use of personnel, such as unmanned air vehicles and flying robots are in increasing demand.

In the military segment the US can be seen as the technological leader with US agencies as lead users. One of which being the ‘Defense Advanced Research Projects Agency’ (DARPA) exploring leading edge technological possibilities for military use. With a multi-polar world emerging security threats become of increasing importance with the military segments of the aerospace sector representing growth potential.

3.2.4 Leveraging military and civil demand – dual use

In light of scarce resources it is of increasing importance to leverage public investments to achieve technology goals. The idea is to align military an civil goals to make both benefit from each other. However, much of the debate in the past focused on commercialising existing military technologies (spin-out). Ex-post technology transfer is, however, often very difficult as the two segments demand different product specifications. If at all the interests should be aligned ex-ante to make sure that results can be transferred. But, very few military technologies proceed effortlessly to commercial application due to secrecy, military specifications and long lead times and only occasionally have major impacts such as GPS and Internet (Wessner at Six CP, 2004). The question therefore remains, whether the concept of dual use is a very promising route to increase efficiency of research, as the structural characteristics of military and commercial applications differ substantially. Instead, the main concern has shifted to the exploitation of technological developments for military purposes occurring elsewhere in the economy (spin-in) (Molas-Gallart, 2002).



4 Emerging innovation themes and their requirements

This section presents key emerging innovation themes. Innovation is the commercialization of new technologies and ideas. This essentially is the interaction between supply (technology) and demand drivers. In the past the sector was too technology driven – what was technologically possible also pursued for commercial application - as reflected in the attempt to commercialize super sonic aircraft. These have commercially failed as the market demands cost effective air travel. Super-sonic speeds are counterproductive to more efficient, less noisy air travel. For that reason technology development in the commercial segment should focus on demand drivers such as societal challenges to be successful. This is in contrast to the military segment where a technology lead is desirable over other countries. However, this difference in focus also means that the lead-user role of the military for the commercial sector is limited in the future.

Before presenting specific innovation themes, for recommendations several things need to be kept in mind.

• As highlighted before the military and public institutions play a special role in the sector as lead user – these segments therefore receive special attention to identify emerging innovation themes. At the same time, this gives public institutions considerable power to shape technological development and markets.

• On the other hand innovation themes are subject to long technology / product development cycles in the sector. Current practice are clear road-mapping but these are consequently focused on incremental innovation. Radical designs and innovation are instead explored through military institutions and universities (DARPA).

• The sector is concentrated in clusters comprising networks and accumulated knowledge for current technologies. Adoption of new technologies could be fostered or hindered depending on whether they fit current knowledge structures in the clusters.

From the identification of demand and supply drivers a number of innovation themes12 emerge. These are presented along three lines. ‘Climate change and resource scarcity’ demand an age of

1. ‘environmental air travel’. This needs to be tackled at three levels the air traffic system, the design of aircraft and propulsion technologies / fuels. With space applications having made a breakthrough in commercial markets this segment is about to develop into a significant market.

2. emerging themes in ‘space applications’ will be explored for ‘Global Navigation Satellite Systems’ (GNSS) and ‘Earth Observation’ (EO). Lastly, some possible

3. ‘Far future’ emerging innovation themes are explored with potentially important impact: ‘Personal and unmanned aerial vehicles’ and ‘Commercial space travel’.

12 The European Strategic Research Agenda sees three priority areas for research: the Environment, Alternative Fuels, and Security (Actra, 2002). These were confirmed in 2008, but a need for accelerated development of technology breakthroughs identified. While the NASA report groups the following future topics: modernizing the air transportation system; improving aircraft performance; curtailing environmental impacts; enhancing safety and security concerns (NASA, 2006).



4.1 Environmental air travel

The environmental impact of aerospace products is the most important topic discussed in future studies (Actra, 2008, Nasa, 2006, PwC, 2006, UK DfT, 2002; DTI, 2001, etc.)13. This is for two reasons: air travel is expected to double every 15 years at current growth rates putting strain on natural resources and infrastructure and people living close to infrastructure. Secondly, the climate change debate highlights the need for lowering carbon emissions with air travel perceived as a major contributor to climate change. Environmental air travel can be tackled at three different levels. Improving the air traffic management, improving current designs of aircraft and engines, improving and replacing fuels.

So far, environmental impact of aviation is the responsibility of the Committee on Aviation Environmental Protection (CAEP) part of the International Civil Aviation Organisation (ICAO) comprised of governments, industry groups and pressure groups (PwC, 2006). This body is vital for international standard setting for industry to implement. But so far most standards focus on take-offs and landings, whereas recent focus on climate change shifted the focus to impact on global atmosphere (this has impact on setting standards / etc achieve goals). Policy recommendations related to environmental standards should take this into account.

4.1.1 (New) air traffic managment

The current air traffic management (ATM) system is based on technology from the 1960s (Nasa, 2006). To accommodate growth in air travel and make air traffic more efficient it is necessary to improve the current system. The challenge for Europe is in addition to technology to integrate the different regional and national air traffic control agencies into a unified system as is planned under the SESAR project by 2020 (bmvit, 2007).

Nasa outlines the following areas to improve the Air Transportation System (NASA, 2006 pp.16-17)

• boosting the security and reliability of voice, data, and ultimately video connections to in-flight aircraft. To achieve this the Austrian aeronautics research programme specifically calls for ‘shared backbones’ for air traffic control systems that are so far largely siloed solutions networked through private IT networks, compromising security (bmvit, 2007).

• increased use of satellites in handling traffic flow

• use of synthetic vision, cockpit display of traffic information, and controller displays to improve awareness of aircraft separation

• prediction and direct sensing of the magnitude, duration, and location of wake vortices

• safety buffers to account for monitoring failures and late detection of potential conflicts

• accommodating an increased variety of vehicles (e.g., unpiloted, tilt-rotor, lighter-than-air)

13 For details on aviation effect on climate change, including climate gases (carbon dioxide; water vapour; nitrogen oxides) see (DTI, 2001)




Am

bove the currently dominant aircraft design, which ost R&D focuses on to further optimize erformance. Areas in green highlight space used for ansport of passengers and goods for comparison ith alternative designs (see below)

ptr w

Distributed communications network – exploration of “revolutionary concepts” related to distributed air-grounds airspace systems, including the distribution of decision making between the cockpit and ground systems and reorganization of how aircraft are routed, with significant implications for airspace usage and airport capacity is needed (Nasa, 2006)

Modelling and simulation – long-term systems modelling capability to design and analyse evolutionary and revolutionary operational concepts and other changes in air transportation systems.

4.1.2 Aircraft Performance

Aircraft performance can be improved in two major ways: improving the air frame structure through new materials and better design, and be improving the efficiency of engines. Lastly, avionics can help raise efficiency and performance.

• New airframe concepts for subsonic transports, supersonic aircraft, runway-independent air vehicles, personal air vehicles, and uninhabited air vehicles should be developed incorporating composite airframe structures combining reduced weight, high damage tolerance, high stiffness, low density, and resistance to lightning strikes (Nasa, 2006).

• Propulsion systems should be improved through high-bypass turbofan engines burning liquid hydrocarbon fuels as well as the development of engines using hydrogen as fuel. At the same time high-temperature engine materials and advanced turbo machinery are needed (Nasa, 2006).

• Tools to reduce the need for costly hardware testing (software) not only lower development costs and time but also enable the design of more revolutionary structures needed to achieve efficiency goals. In addition embedded software allows for optimising processes improving fuel efficiency.


Table 2 Potential fuel savings by technology system Active Control 10% Composites 20%

Laminar Flow 10% Improved Wing 10%

Propulsion 20%

Some typical estimates for fuel savings associated with ‘advanced’ technologies are given below. Note that these are sometimes optimistic, and cannot be simply added together. Total 70%

Source: Stanford, 2008

4.1.3 Radically new airframe configuration concepts

To achieve drastic improvements in environmental performance new, radically different airframe structures need to be designed and adopted by industry. Over the last century one dominant design has emerged (metal tube with wings) with new structures being too risky for commercial customers to adopt. Some more radical designs have been adopted by the military but only on a small scale, such as the F-117 and unmanned aircraft. The challenge therefore does not lie with the supply of new designs but with the adoption (demand). This poses a dilemma that without intervention will only be solved when improvements in the current dominant design become marginal.

Revolutionary changes in aircraft are possible when the ‘rules’ are changed. This is possible when the configuration concept itself is changed and when new roles or requirements are introduced. The following images give some idea of the range of concepts that have been studied over the past few years, some of which are currently being pursued by NASA and industry (Stanford, 2008).

Flying wing

The flying wing design, or blended wing body, is intended to improve airplane efficiency through a major change in the airframe configuration. The thick centerbody accommodates passengers and cargo without the extra wetted area and weight of a fuselage. Originally designed as a very large aircraft with as many as 800 passengers, versions of the flying design have been designed with as few as 250 passengers and more conventional twin, podded engines (Stanford, 2008). Boeing was reported to start test flights on a scaled down version called X-48B in March 2007 (Independent, 2007).



Joined Wing

The joined wing design was developed in the 1980's as an efficient structural arrangement in which the horizontal tail was used as a structural support for the main wing as well as a stabilizing surface. It is currently being considered for application to high altitude long endurance UAVs (Unmanned Aerial Vehicle) (Stanford, 2008).

Concept of Oblique Flying Wing

One of the most unusual concepts for passenger flight is the oblique wing, studied by Robert T. Jones at NASA from 1945 through the 1990s. Theoretical considerations suggest that the concept is well suited to low drag supersonic flight, while providing a structurally efficient means of achieving variable geometry (Stanford, 2008).

4.1.4 (New) propulsion / fuels

The propulsion system (engines) of aircraft are a key to reduce environmental impact, which is why breakthroughs in engine design and technologies are needed (ASD, 2007a). However, while 350 different engines were designed over the last 50 years, only 6 different types are currently used (bmvit, 2007), highlighting the difficulty of radically new designs to be accepted.



Improving current designs - One way to simultaneously reduce noise and CO2 emissions is by increasing the engine by-pass ratio. For a fixed thrust engine this means increasing the engine diameter, while at the same time minimizing drawbacks such as increased weight and drag – 3 main engine architectures are discussed:

• Direct drive turbofan (DDTF) • Geared turbofan (GTF) • Contra-Rotating Turbofan (CRTF)

Airbus has provided two airplane specifications to cover short range (A320 type, 30000lbs) and long-range (A330 type, 70000lbs) applications. Six engines have been derived from these two specifications covering a wide range of architectures: DDTF, CRTF and GTF. Concerning the fan, the DDTF focuses on lightweight material to reduce fan weight by 30%; The CRTF, a highly ambitious and promising alternative solution, allows rotational speed to be decreased by about 30% under the same aerodynamic loads, which should bring a significant reduction in noise (ASD, 2007a).

Another key element to engine efficiency improvement is to increase the air temperature and pressure at which the fuel is burnt. With current materials (nickel-based super alloys) reaching their melting point in current designs it is difficult to further optimise combustion temperature or turbine efficiency. Refractory metal allows (RM) represent a revolutionary alternative but challenges of oxidisation under high temperatures need to be overcome (bmvit, 2007).

Alternative fuels – most research on alternative fuels has so far concentrated on use in road transport. However, performance criteria of alternative fuels in aerospace differ with extreme temperature changes and strict safety regulations. Actra therefore calls for two parallel research efforts 1) drop-in alternatives of kerosene 2) revolutionary aircraft power systems (Actra, 2008, p.34)

Alternative propulsion systems - hydrogen is perhaps the most obvious alternative to hydrocarbon-type fuels. It can either be used in combustion engines or used in a fuel cell to produce electricity. But the technical and infrastructural challenges inherent in developing a commercially usable hydrogen-powered aircraft are huge. The Russian manufacturer Tupolev built a prototype hydrogen-powered version in 1989 (Tu-155) (Tupolev, no date). According to the firm the cost of liquefied hydrogen make it currently prohibitive to develop this technology commercially. However, as a bridge technology Russian industry pursues to use LNG instead. On the other hand, Boeing has made a 2-seat civilian aircraft running on electricity of a fuel cell combined with a battery. But while feasible for small aircraft, Boeing does not envision that fuel cells will ever provide primary power for large passenger airplanes (Boeing, 2008). In addition to the cost of producing hydrogen from water, safety issues pose a barrier especially for hydrogen used in larger aircraft.

4.2 Space applications

The potential future demand for space applications has been highlighted by OECD, focusing on societal challenges. Prospects are much brighter in the downstream segment (EO & GNSS) than in the upstream segment that suffers from overcapacity (launchers). But the supply conditions are a main source of concern to exploit this potential. 1) The space sectors is still a small, and weakly developed sector with little commercial activity that depends on government funds. 2) The need to overcome major technological and economic challenges, without which a commercial exploitation is not possible. This leads to the conclusion that while space holds a great deal of promise for society at large, it is far from clear whether this potential will actually be realized, given the state of the space sector and the major technological and economic challenges space actors will have to overcome in coming decades (OECD, 2005).



4.2.1 Aligning space and societal challenges

The space sector in the past has been perceived as important for innovation spill-over effects. Examples are high performance materials for extreme conditions, satellites and services for commercial applications (communication, navigation), to name a few. Current attention focuses on services based on existing often military based technology. Satellite navigation services (GPS), and services based on earth observation (see sections below). These already receive considerable attention. One emerging innovation theme with large potential for application in space but especially on earth are technologies and products related to closed loop systems.

Space systems need to be autarkic with limited access to resources under hostile conditions. Similarly, sustainability is based on the notion of efficient, closed loop systems (cradle to cradle) with potential for spill-over effects in both areas. This is highlighted in a current ESA call for tender that aims at identifying technology areas where space and civil segments can benefit from each other and where research efforts can be combined (ESA, 2009). Examples are:

o Provision of drinking water ; recycling waste water; filtering – driven by scarcity of clean water.

o Efficient energy usage, small scale combined heat power systems, renewable energy generation (PV / exploiting motions / temperature differences)

Rather than this being a comprehensive list, this highlights the potential for space and civilian segments to combine innovation efforts to solve societal challenges of water scarcity and energy efficiency on the one hand and similar challenges in space.

On the other hand, the environments for the Earth, moon, and Mars vary significantly and call for specific technology solutions. Lunar surface temperatures can range from −299 to 250F. The temperature cycle on Mars can range from −225 to 64F, based on Mars Pathfinder data and NASA calculations (Krishen, 2008). This poses the question to what extent technology goals between space and societal challenges really can be aligned.

In addition two market segments related to satellite technology receive considerable attention for their expected high impact on the wider economy. These are global navigation satellite systems and earth observation.

4.2.2 Global navigation satellite systems

Global navigation satellite systems (GNSS) allows small electronic receivers to determine their location (longitude, latitude, and altitude) to within a few meters using time signals transmitted along a line-of-sight by radio from satellites. As of 2009, the Global Positioning System (GPS) (USA) is the only fully operational GNSS. The Russian GLONASS is in the process of being restored to full operation. China has indicated it will expand its regional Beidou navigation system into the global COMPASS navigation system by 2015. The European Union's Galileo positioning system is in initial deployment phase, scheduled to be operational in 2013.

A report for the European Parliament on market potentials of space applications (Poliakov et al., 2008) presented future market prospects in global navigation satellite systems based on a size to competition comparison. It concluded that policy intervention was not needed for road and consumer markets, while the transport segment (comprising rail, maritime and commercial aviation) could be helped by public intervention to grow from niche to mature market.



Figure 1 Market segments grouped by levels of competition and firm size

Source: Euroconsult, Helios and Bertin, 2007

An important difference of the European market compared to the global market for space-based applications is the smaller size and the lower specialisation of the private sector, and the absence of a defence industry setting initial standards and activities (Euroconsult, Helios and Bertin, 2007). Nevertheless, shows the SWOT analysis of the same report Europe overall well-positioned to develop new GNSS based applications in several segments, especially in road telematics and fleet management, as R&D for Galileo receives more attention. The analysis is furthermore optimistic for markets of (personal) location based services, presuming high involvement of European MNE’s. The study considers the new EU member states to be important drivers for economic growth (by uptake of satellite navigation applications), a strong position for road applications and growing interest in Galileo R&D. A threat is the reluctance of business angels to step in, the maturity of some market segments, the obduracy of foreign (especially US) markets, the threats posed by social concerns such as privacy and – in one specific application domain – the prominence of the railway control system ECTS for the next 20 years, hindering novel satellite based applications. (Poliakov et al., 2008, p. 11)

4.2.3 Earth observation

Earth Observation (EO) is an aspect of space applications that is technologically mature (OECD, 2005). It deals, broadly speaking, with the acquisition and exploitation of data acquired from remote (aircraft or satellite based) observations of the Earth. It covers a diverse range of remote sensing applications, including weather forecasting, the environmental monitoring area, surveillance, as well as numerous applications in the atmospheric, land and ocean domains. The EO service industry is an extremely diverse industry, comprising companies that work with raw or semi-processed data from remote sensing instruments and converts these data into information that brings value to end-users. The dominant profile of the companies is typically a small, specialised organisation that focuses in one or two thematic and geographical areas with small but growing profitability (Poliakov et al., 2008).

The following applications have been highlighted by a recent study for the European Parliament (Poliakov et al., 2008):



Energy – The renewable energy sector relies on local data on solar irradiance, biomass stock and wind profiles at a global scale. Due to their global coverage and frequent overpass, satellites are invaluable in delivering these data. Meteosat Second Generation provides solar irradiance data every 15 minutes thus enabling large energy companies to maximize grid efficiency. Synthetic Aperture Radar (SAR) instruments on boards ESA’s ERS-2 and Envisat satellites can provide high resolution 100-metre data on the wind field. Decade-long data archives can be exploited to assess characteristics of local wind regimes and solar irradiance for site selection of wind farms and solar energy production.

Agriculture and food security – Remote sensing is actively used to monitor crop production worldwide. FAO uses remote sensing to assess food security in order to be prepared for relief actions. Another application relates to precision farming which makes use of high resolution satellite imagery to derive health indicators of plant stock. Farmers use these data to decide at what locations there is shortage of nutrients or soil moisture.

Natural Hazards – Synthetic Aperture Radar (SAR) on board ESA’s satellites ERS1/2 and Envisat have been used to develop a technique for mapping and monitoring ground motion over large areas. Currently, Italy is embarking on a program to process images covering the entire country in order to map and monitor subsidence and landslide prone areas.

Ocean and maritime – Maritime transport relies heavily on oceanographic and meteorological conditions. Local data on wind and wave regime worldwide are derived from operational satellites and stored in database for planning maritime transport and off-shore activities.

Air Quality - For instance, a subscription SMS-service providing local current and near-future air quality conditions is of high value for respiratory disease sufferers. This service makes use of the regionally measured amounts of NO2 and Ozone by Envisat’s sensors. It is already available in the London area.

Figure 2 The 5 market segments in downstream value added Earth Observation applications

Source: Euroconsult, Helios and Bertin, 2007



The above examples highlight potential markets for EO applications. But apart from the use for transport navigation these are still small cases. It might take considerable incremental innovation over the coming decades to e.g. two-way navigation, more intelligence, integration with non-satcom systems such as sensor networks, more precision, for these to develop into large commercial markets.

4.2.4 Micro satellites

In the future new smaller satellite categories operating as part of a cluster or constellation forming for example a larger virtual satellite, are expected to drive commercialisation of space. These are sometimes referred to as micro- (10-100kg) and nano-satellites (1-10kg). First satellites of this category have already been deployed but mostly in experimental context rather than commercial application (e.g. Dubourg et al., 2006, AF, 2006, Boeing, 2009). They are placed in low Earth orbit for new telecommunications and networking systems and should be able to provide a global, space-based, high-speed network for communication, data storage and Earth observations (NASA, 2008). They are cheaper to make and place in orbit and can be mass produced compared to current satellites. But in addition to costs they also have shorter development times. This makes them very attractive. But while operating in a cluster, single micro satellites could refuel a larger satellite, upgrade its software or move around with small on-board cameras to provide live video feeds from space (Boeing, 2009a). This capability no nation currently has and might pose a potential security threat as it allows to spy on and manipulate other satellites. This development might limit the access to space and the commercial attractiveness of operating in space, highlighting the long term need for a well grounded legal framework of operating and doing business in space.

4.3 Far future

In the far future two emerging markets worth noting are:

Personal and unmanned aerial vehicles - related to advances in micro-electronics, new light weight materials and IT systems that allow the air traffic management system to deal with large numbers of small air vehicles. Such development could revolutionize air travel with individuals becoming an important actor. Currently, regulation is the biggest barrier for this market with large differences in regulations between countries, making cross border travel virtually impossible. Indications for this emerging market are the successful introduction of the D-Jet, a five seater made of composite materials using state of the art avionics (bmvit, 2007). While this is not classified as a personal aerial vehicle it is indication of increasingly smaller aircraft produced by small start-up business. Other examples are the increasing range of unmanned air vehicles mostly used by the military and civil security institutions.

Commercial space travel – over the last year’s a small scale market for space travel has emerged with a number of civilians participating in Russian space missions. More affordable suborbital space tourism is perceived commercially viable by several companies, including Space Adventures, Virgin Galactic, Starchaser , Blue Origin, Armadillo Aerospace, XCOR Aerospace, Rocketplane Limited, the European "Project Enterprise", and others (Law-Green, 2007). Most are proposing vehicles that make suborbital flights peaking at an altitude of 100-160 km . Passengers would experience three to six minutes of weightlessness, a view of a twinkle-free starfield, and a vista of the curved Earth below. As of November 2007 Virgin Galactic had pre-sold nearly 200 seats for their suborbital space tourism flights. These developments suggest that we are seeing the birth of a nascent commercial space tourism industry, although the way ahead appears very uncertain, with a wide range of economic, technological, political, legal, environmental, financial and commercial issues eventually shaping the rate and direction the industry takes (Crouch et al., 2009).



4.4 Other

Security related products and technologies are often dealt with in future reports (NASA, 2006;UK DfT, 2002). However, they mostly relate to technologies used at airports for security checks including surveillance / detection of harmful substances; access controls (aircraft / airports) (Actra, 2008, p.37) and are not further dealt with in this report. While these are potentially important growth areas the products have a high electronics and software content. This makes analysis of the electronics equipment and ICT sector important in this analysis.

4.5 Organisational change and firm strategies

Organisational innovation is important for productivity increases in the sector, which is largely determined by the effectiveness of system integrators. Many technologies are available and feasible but few commercially successful. Furthermore, the technology challenges ahead require close collaboration with different partners. There are three main developments worth noting under the heading of organizational innovation in relation to innovation and the future of the sector:

1. Open sourcing – system integrators such as Boeing and Airbus source products increasingly through open IT platforms allowing suppliers to compete openly. This increases competition for suppliers stimulating innovation.

2. As part of the consolidation of the industry system integrators, such as EADS, have increasingly passed on responsibilities (and risks) to first tier suppliers (see section market structure). These increasingly have to take over the role of sub-system integrators requiring new capabilities (Mundt, 2008). The role of 1st and 2nd tier suppliers to innovation has therefore become relatively more important (ATKearney, 2007). But this makes managing innovation within the sector also more challenging as experienced by Airbus (A380) and Boeing (7E7).

3. Consortia of competitors are increasingly formed to share high risks of new developments (e.g. engine consortium A340 see above; Galileo operating consortium). However, this does not prevent the firms from failing to achieve their goals. Collaborations between competitors but also integrating partners along the supply chain therefore can help solve risky technology goals, but is not a guarantee.

• One special organisational innovation for European firms is the increasing tendency to diversify currency risk through global sourcing in addition to efficiency increases and financial hedging strategies. While EADS generates 70 percent of its turnover in US dollar, it only procures 41 percent of its inputs in the US dollar (Mundt, 2008). With future turnover even expected to reach 80 percent US dollars, this poses a considerable foreign currency exposure for EADS, that it aims to diversify by increasing its sourcing from firms located in countries operating with US dollars. This raises issues of relocating production activities in the sector. EADS expects by 2020 China, India, Russia and South Korea as important production locations, with Brazil, Israel and Canada as additional possible candidates (Mundt, 2008).



• Products are increasingly sold as a service rather than a single product. The most famous example being Roll’s’Royce selling ‘power by the hour’ rather than simply jet engines. This combination of physical products with add-on services such as maintenance has been an important trend in the past expected to continue. But this also means that producers retain operating risks of the products they sell. However, such business models might help customers adopt more innovative and risky products, posing a potential stimulus for innovation, as risks for customers can be managed.

• The commercialisation of space applications is partly driven by converging technologies (ICT, nanotechnology and miniaturisation) making technology development more complex. Furthermore, different field specific knowledge such as security, logistics and environmental protection, needs to be integrated with space technologies increasing the diversity of actors participating in the innovation process. This requires new networks and linkages between the different actors to adopt to a structurally changing innovation system.

5 Institutional and structural co-developments and implications

5.1 Institutional change

A targeted innovation policy is key to support the identified innovation themes. This especially requires coordination between different interests in form of ministries, industries, and member states to align policy goals and prevent measures that have counter-effects. In the context of the diverse societal challenges the OECD Information Technology Outlook 2008 similarly calls for better policy co-ordination (OECD, 2008).

5.1.1 Aircraft

Sources of financing for (radical) innovation

The previous Innova report stated that innovation barriers in aeronautics are low. Nevertheless, face one third of companies problems due to high innovation costs. About 26 percent of companies perceive economic risks as excessive while 20 percent of firms see a lack of appropriate sources of financing (Hollanders, et al., 2008). Internal financing of innovation is namely weak with firms failing to significantly yield more than the average 5% operating surplus (Cleff, et al., 2008 p.28). As a result firms rely on public programmes to finance innovation. Venture capital and bank loans play a much less important role. This can be explained with the long technology and product development times that pose a substantial business risk as investments can often only be recovered after years of development. As a result airframe and engine manufacturers during the last recession reduced the number of suppliers / supplier paths they manage and passed on business risks. This means that for new programmes suppliers need to take on significant levels of risk, investing in non-recurring costs such as design, development and tooling etc. (risk-sharing by system integrator) (PwC, 2006). It is unclear what effect this passing on of risk to smaller suppliers has on the long-run innovation performance of the sector.



Experts see public money in the form of subsidies and grants as the only way to stimulate innovation in the sector (Cleff, et al., 2008 p.28), as fiscal incentives, tax credits and R&D allowances are of minor importance (Cleff et al., 2008, p.65). This is also reflected in the way how innovation is financed in the commercial and military segments. The military often pays firms up front to develop a new product compared to the commercial sector where R&D investments have to be earned back on the product. This passing of risk to the customer in the military segment allows much more risky / innovative projects. But while institutions can take this risk, commercial actors are unlikely to do so, posing a barrier to innovation in the commercial segment. One way of overcoming that barrier could be to better support R&D in the commercial segment through public institutions. However, while in the past governments have supported their national aerospace industry quite openly, this becomes more difficult with EU single market rules and WTO rules.

Environmental standards dealt with in international committee

Environmental standards are currently mostly set at international level, e.g. aircraft noise, engine emissions (ASD, 2007a, p.11). While this is positive as it leads to industry wide standards, it also means that it is challenging to introduce ambitious standards as many actors have to agree.

Centralising research funds in Europe to increase efficiency?

Research activities are fragmented between European member states (Hollanders et al., 2008). The European Research Area (ERA) initiative is one way to address this, ESA in the case of space another. However, to further increase research efficiency national resources should be further combined and tasks clustered by national specialisations instead of national interests.

Pooling public demand to create scale for lead market?

The US market has a structural advantage being 4 times the size compared to the EU (Hollanders et al., 2008). Public procurement of European institutions therefore is a tool to counter this structural disadvantage in the sector. In the US, especially the military segment that is much more open and experimental with new technologies is much stronger developed and often restricted to US firms for security reasons. In addition strict export rules make co-operations with US firms unattractive to foreign firms.

Carbon tax to drive adoption for more efficient technologies?

The most effective driver for technology adoption and innovation is commercial interests. Fuel and noise reductions need to be commercially attractive. The carbon price could be one way to make technology development and investments in environmental technology attractive. Alternatively, tax incentives could be used to stimulate investments. However, what should be assured is a level playing field within the industry at least at European level to prevent national initiatives that in the end lead to market distortions.



Safety regulation to foster the adoption of new technologies?

While standards and regulation are very important in guiding the sector towards new technologies based on roadmapping, (safety) regulation at the same time also acts as inhibitor for technology adoption as proven technologies are preferred by conservative customers and authorities who’s prime goal is passenger safety. Safety regulation and environmental goals requiring radical innovation are hence in clear tension. How can this tension be relaxed without lowering the industry safety record but stimulating the adoption of new technologies?

5.1.2 Space

The USA represents 81% of total OECD space budget, while European countries represent around 15% (OECD, 2007). This comparatively small and fragmented public budget for European space activities makes focus and efficiency important to compete. It also indicates that most new technological developments will originate in the US as most resources are spent here. As a result the European space sector is at jeopardy compared to large, protected home markets in US, Russia, Japan, China and India (Hollanders et al., 2008). A further active clustering of activities is therefore necessary.

The European space sector requires efficient public procurement (pooling national interests; aligning civil and military needs) to acquire scale to compete and develop desired innovations.

Key for commercialization of space segment is to bring down costs and establish a legal framework that provides the necessary legal security:

• Launchers – is the only space segment where costs have so far not fallen over time (Poliakov et al., 2008). But launchers are the key to reduce costs to access space. Several smaller launchers expected to come online over the coming years are expected to reduce these costs and lead to many more smaller launches.

• Space infrastructure represents a natural monopoly with duplication of infrastructure expensive and inefficient. Instead competition could be increased by granting third parties access to space infrastructure and data to provide related services (EO & GNSS).

o Duplication of infrastructure is driven by military control and use of it posing a possible security threat. This for example has led to 5 different GNSS systems being built or about to be built. The actors in control of and access to space infrastructure hence play a key role for commercialisation of space as they are a source of uncertainty and risk.

• Uncertainty and risk however are a key barrier to economic and entrepreneurial activity. If commercialisation of space is to be seriously pursued a globally accepted judicial system needs to be developed. This needs to go beyond the current rudimentary system in place and especially establish rules on ownership and liability to be able to resolve cases such as the recent satellite crash (Iridium / Russia) in an independent court system. This would drastically reduce investment risk of commercial actors.

• In many countries public authorities work with a small number of established (large) space actors. This closed system was useful in the past with the sector very much science focused. However, to make the step from a science activity to a commercial sector, public authorities should open their networks and funding to support entrepreneurs and innovative SMEs. These have the potential to introduce radical innovation in the sector, which established players often lack driven by established commercial interests.



• Projects in the sector are often managed by senior engineers. This was a natural choice as most projects were small scale directly exploiting research projects and results. However, this also meant that often every project developed its own technological solution. One way to reduce costs in the sector is to exploit existing technologies and modules and recombine and adapt these for new projects. A professionalization of management with focus on costs is hence a further stepping stone towards commercialisation of the sector that needs to be made.

Another future barrier for commercialisation of space is related to space waste potentially damaging equipment and the unresolved legal issues that are important to create a commercially viable environment. Most space waste orbits in 800, 1000 and 1,500km. A recent example of a commercial satellite being damaged by an old Russian satellite without warning is Iridium. Similarly, the ISS frequently has to change its position to evade orbiting space waste. To manage this issue Nasa wants to set up a control centre to monitor all satellites orbiting earth. As every collision creates new waste, the worst case scenario, the Kessler syndrome, highlights the possible snowball effect that could lead to all satellites being hit. This would then also make manned missions too dangerous (Spiegel, 2009c).

5.2 Structural change

Expected structural changes are summarised in a hypothesis or question to be explored in the workshop with additional information in the succeeding paragraph.

Military losing role of feasible lead-user for civil applications? Instead public authorities with aligned interests of reducing environmental impact required as lead user?

The military is still the most experimental customer in the sector also running large, often secret R&D projects to push technological boundaries. However, with increasingly diverging technology goals between military and civil applications (performance vs efficiency) the lead user role of the military for the civil segment can be at least questioned. On the other hand radical innovations require a strong lead user – this poses a potential role for public authorities to drive environmentally friendly designs.

Increasing importance of micro-electronics and IT (avionics) & composite materials: impact on aerospace clusters?

The aerospace sector is clustered and knowledge accumulation is a key factor for innovation. With new technologies becoming of increasing importance (avionics, composites) the question is to what extent this affects the geographic clustering of the industry (within Europe, and globally). Where are key clusters for electronics (avionics) and composites? Do they co-locate with aerospace clusters? What is the likely future impact (E.g. Japan strong in composites)?

New downstream actors for space applications?

With the increasing commercialisation in space applications (services) new downstream actors emerge. They combine and exploit close links between space, IT (software) and telecommunications technologies for satellite navigation and earth observation based services. For this to be increasingly commercially successful networks and linkages between infrastructure operators and service providers should be supported.



Will production and eventually innovation follow demand?

Demand for air travel shifts to Asia with largest growth rates and potential markets located here. At the same time new competitors emerge in China, India and Brazil, while Russia is re-establishing its aerospace sector. What does this mean for production location and innovation location in the long term?14

How will the global production network be affected by this and what role is Europe likely to play in the future? Focus on fuel and noise efficient, small regional market segments and leave military other segments to competitors?

5.3 Skills requirements and the knowledge base

Skill requirements - The previous Innova report assessed the human capital base as satisfactorily but with challenges in future (Hollanders et al, 2008). In general there has been a shortage in engineers in some countries, not only relevant to the Aerospace sector, but across industries. This shortage was especially voiced in the UK (ibid). One special characteristic of the aeronautics sector is the cyclical nature caused by large scale projects. This cyclicality of demand can hence lead to a temporary shortage or surplus of engineering capacity. In addition to a shortage of engineers in some countries the education is also perceived as insufficient in quality and content. The question is to what extent this claim is valid and to what extent there are differences in national differences.

Several other questions related to skills should be addressed:

• Off-shoring of low-cost manufacturing work is observed (Hollanders et al, 2008).Is this true? Which parts of production are sensitive to offshoring? What does this mean for low and medium skilled manufacturing workers in sector?

• What does shift to IT / electronics and new materials mean for skills in production (assembly) and maintenance?

Knowledge base - The aerospace sector is characterized by high levels of knowledge accumulation resulting in highly concentrated activity in few regions (clusters). Knowledge is of key importance to the sector with 57 percent of employees working in production and 20 percent in R&D. 35 percent of employees are graduates / engineers / managers; 33 percent manual workers and 32 percent others (ASD, 2007). At firm level, the aerospace sector comprises 54 percent innovators (Hollanders et al., 2008). Patents are not important to sector as firms opt for secrecy instead. Trademarks and designs are also hardly used (ibid). Knowledge accumulation in clusters hence acts as a barrier to relocation and makes building up new competing clusters difficult. On the other hand with new technologies (avionics, materials) playing a larger role, the question arises how this affects cluster structure. Furthermore, the following questions should be addressed:

• Integrator activities are increasingly passed on from top-tier integrator to 1st and 2nd tier suppliers. What impact does this have on skill requirements 1) in the sector, and 2) for SME’s?

14 also see related point on currency risk and organisational innovation p.25.



• The knowledge base varies considerably between countries and regions, with current clusters benefiting from agglomeration advantages. But the trend towards lightweight aircrafts and space applications creates opportunities for new / smaller players with sufficient knowledge base. What skills and knowledge base are required for emerging segments? Which regions could benefit?

• What does technology convergence require in terms of future workforce composition?

6 First elements of scenarios

Scenarios are plausible future paths rather than predictions or forecasts. Scenarios are constructed by superposing a selection of key drivers that can potentially have a major impact on the sector and that can evolve in several different directions. To note is that the key drivers play out differently for the segments of aeronautics and space. E.g. Less economic growth, high fuel prices and more security concerns could play out positively for space, and negatively for aeronautics. The key drivers selected here include:

• Further global economic integration. A further globalising world is contrasted to a regionalising world. With the financial and economic crisis, there is currently substantial uncertainty whether the world is integrating further economically, or whether a trend towards regionalisation and protectionism prevails. This has potentially large consequences for the demand for global air travel and the use of communications technology.

o A less economically integrated world is at the same time less stable as armed conflicts relatively fewer economic repercussions. In that respect a regionalising world has direct impact on public resource allocation for the military and security on the one hand or civil institutions on the other hand.

• Science and scientists are traditionally internationally oriented. However, institutional relations are determined by funding schemes and relations between governments. With large societal challenges looming above nations there is considerable need for global cooperation in research. On the other hand, economic interests of nations drive them to protect and exploit scientific advances for their own benefit. Hence, while there is strong need for global cooperation in research there is also key uncertainty whether this will be put in practice. This has considerable impact on innovation in aerospace, particularly for needed technology breakthroughs and radical innovations.

The scenario sketches below highlight how the different scenarios could look like as input for workshop discussion and to be further developed. They are open for discussion and should not be seen as already fixed!

Scenario 1: Global Aero-Space

This scenario is characterised by further global economic integration. Countries are so intertwined that armed conflicts around the world are at a minimum. This ‘safe world’ means that public resources are concentrated on civil institutions rather than the military representing a new lead user. Air travel demand grows further, with developing countries reaching new levels of welfare. Furthermore, countries cooperate not only economically but also tackle pressing societal issues such as climate change and environmental degradation together, bundling resources leading to breakthroughs in innovation. This not only means that new aircraft designs are



commercialised with drastically lower fuel consumption and noise levels, but that air travel also becomes much more distributed with increasingly smaller aircraft. Renewable energy also makes its way into air travel. Commercialisation of space applications is further stimulated by cooperation in research and an increasingly smaller role of the military in space infrastructure, reducing commercial risks of operating in space.

Scenario 2: Regional co-opetition

This scenario in contrasted to Scenario 1 by a world increasingly fragmenting into regions oriented around a number of regional powers. This leads to a multi-polar, more unstable world with countries committing substantial resources to military and security institutions posing a key lead user. Global demand for air travel is limited focusing on intra-regional travel. Despite strong economic competition between regions, power blocks cooperate in research to tackle key scientific challenges and leverage resources. While this improves effectiveness of research and leads to breakthroughs these are focused on military and space applications. As a result commercialisation of space applications is limited focusing on already developed segments.

Scenario 3: Regional zero sum games

This scenario is similarly characterised by a regionally fragmented world as Scenario 2, with limited global air travel and focus on military and security applications particularly in space. However, power blocks also compete scientifically allowing for little cooperation in research. This leads to inefficient research outputs and duplication of efforts yielding little breakthroughs and radical innovation. Overall, this is the least favourable scenario with regions competing on a zero sum basis leading to little progress.

Scenario 4: Global economy, regional science

This scenario is again characterised by an economically integrating world, where integration prevents countries from armed conflict. Again this leads to growing global demand for air travel and allows focusing public resources on civil institutions tackling societal challenges. However, economic competition in contrast to Scenario 1 leads to limited scientific cooperation as countries aim to gain competitive advantages through innovation. This means that effectiveness of global research is much lower with duplicate efforts around the world. This leads to fewer breakthroughs and radical innovation meaning that radical aircraft designs are not commercialised and renewable energy solutions in air travel take much longer to be developed.

• With fuel representing a major share of operating costs for airlines, the price for hydrocarbons / fuels (possibly but not necessarily driven by climate change legislation e.g. Bali roadmap) could also be used as an additional dimension for the scenarios. Fuel prices in the last years have fluctuated considerably posing high uncertainty for air travel demand in the future and potentially affect demand for other substitute communication services.



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