Artificial Intelligence in Aerospace and Defense: Slow Path to Disruption

With mounting pressure to boost profitability and efficiency, the aerospace and defense (A&D) industry faces a need to embrace and implement technological innovations. One particular tool predicted to play a promising role in A&D is artificial intelligence (AI), with innovators developing solutions from the manufacturing facility to the battlefield.

Already, AI has gained significant traction within aerospace and defense: Mordor Intelligence values the A&D AI market to be about $29.7 billion, and forecasts a valuation of more than $42 billion by 2028.

Despite this growth, artificial intelligence today is only beginning to penetrate the realm of aerospace and defense, experts say. Jim Cantrell, CEO at developer of space transportation technology Phantom Space, tells Middle Market Growth there is a lag in AI investment because the A&D sector is “several years behind the curve in adopting new technologies, primarily due to the high-risk nature of the industry,” adding that AI remains in its early stages to make meaningful disruptions in A&D businesses today.

Still, there are several niches within aerospace and defense already investing in AI. For middle-market dealmakers, finding the pockets of A&D embracing digital disruption from the technology could uncover some promising investment targets.

Barriers for AI implementation

Sources point to a lack of AI maturity as one of the key barriers for adoption within A&D. A slow pace of understanding of the technology, and a lack of sufficient trust in AI systems, adds to fear that these tools could be unpredictable. Engineers can be skeptical about implementing AI tools, particularly in those areas of the A&D that are deemed critical, such as aviation, they note. This is compounded by significant regulatory and safety constraints, as the A&D sector operates in a highly regulated environment across many jurisdictions.

Companies in A&D are also facing budget constraints, leading them to prioritize  financing other initiatives over investing in R&D as related to advanced robotics, AI and machine learning. In commercial aerospace, the pandemic forced companies to cut back on production and capacity, and the sector still faces margin pressures, according to a report by KPMG. For defense contractors implementing AI, there are concerns about cuts to discretionary spending in future budget battles and focus on affordability by the Department of Defense.

Yet one more barrier has to do with talent, says Macy Blyskal, an analyst at Fairmont Consulting Group. “AI was developed primarily for commercial applications, and most of the talent works in a commercial space, and there is a huge cultural difference with the defense sector,” he says.

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Blyskal pointed to the Department of Defense’s Project Maven, a military program implemented in 2018 in which the national geo-intelligence agency sought a partnership with Google in order to use the company’s AI technology to analyze drone intelligence footage and provide a computer vision on drones to detect objects from above. This partnership hit some snags as Google employees protested the usage of the company’s technology in warfare as it was designed for civilian purposes.

A&D Domains with Growing AI Use Cases

Despite these barriers, several areas within the A&D industry show early signs of disruption by AI and robotics. One such niche is satellite constellation maintenance and management, a fast-growing field, according to Phantom Space’s Cantrell. “It is costing hundreds of millions of dollars to operate task-driven satellite constellations, and due to AI the costs could go down to $10 or $15 million dollars,” he says.

AI could enable such constellations to react quickly in changing conditions in the external environment. In addition, AI algorithms can detect anomalies in the environment, and respond rapidly to help maintain satellites’ optimal performance, reducing operating costs and boosting satellite efficiency. Further, AI can also provide data intelligence in case a satellite gets attacked. “This area could be a major AI disruption,” Cantrell notes.

Other area of A&D in which AI will likely be instrumental is in the testing and evaluation of aircraft, including aircraft drones, according to Cantrell. He points to the ability for AI to find anomalies in sets of data pertaining to the performance of any flying objects, which is of great potential in the A&D space as it helps monitor and detect obstacles in real-time and avoid them.

In the aerospace industry, airlines and airports are among subsegments that most actively adopt AI and robotics, according to a report by Boston Consulting Group. Examples of use cases in this sector include AI-driven airborne and ground-based collision avoidance system developed by Iris Automation; AI-driven methods of detecting issues in the aerospace supply chain developed by Neewee and applied by Airbus; and improved engine availability provided by Uptake.

Another example of the application of AI in the aerospace industry includes the partnership between Airbus and Autodesk to design and build stronger cabin parts that are just half the weight. Added to that, Boeing introduced a machine learning algorithm to increase the productivity of four skin-fastening machines in the production of the 787 aircraft, which creates cost savings in the process.

Investment Opportunities in the Middle Market

AI innovations across aerospace and defense are opening new doors for middle-market acquirers and other investors.

Historically, funding for AI-centric A&D businesses has come in the form of venture capital primarily provided by corporate VC funds established by the largest payers in the A&D space. One example of a larger funding round in the recent years in the defense space is that of Shield AI, the defense and aerospace startup creating AI pilots, that raised a $200 million earlier this year. Last year, U.S.-based defense tech startups saw $2.1 billion invested in 58 total deals, with Anduril’s $1.5 billion funding round as the largest, according to a Crunchbase data.

Other frequent means of financing is in the form of partnerships between such players and AI-focused firms. For example Boeing has partnered with an industrial AI firm SparkCognition in 2021 to equip drones with AI-powered cybersecurity.

As far as M&A activity in this field, it has been muted so far, but is expected to pick up as more A&D companies seek to acquire new platforms, with revenue ranging between USD 10m and USD 50m, with AI capabilities, says Jay Wynn, senior managing director at Fairmont Consulting Group.

Particularly “fantastic” investment opportunities exist for those companies that use AI as a tool and can demonstrate to investors that their business has improved as a result of using AI, says Wynn.

Strategic acquirers are beginning to step into the space. Examples of recent M&A deals include AeroVironment’s acquisition of AI-enabled robotic control systems provider Tomahawk Robotics, which the company bought in August for $120 million earlier this year. Another transaction was completed by A&D company Saab that took over CrowdAI, a Silicon Valley-based AI company that relies on AI to automate visual information, also this year.

AI has become a required enabler for government contractors, like cybersecurity capabilities were around ten years ago. It is a differentiator without which you might run the risk of losing to those who have it.

Matthew Brom

Clearsight Advisors

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Promising as it is for midmarket players, the full-scale investment into AI in many areas of aerospace and defense “is not yet there,” Cantwell says, adding that it is expected to arrive in around a year’s time as the application of AI in the sector becomes more widespread, beyond the initial use cases. Going forward, those companies that are able to obtain funding will be the ones that can clearly demonstrate their plan with regards to implementing AI, he noted.

Federal Government Financing as a Key Driver

For AI applications in A&D, federal government financing remains an important driver of adoption and investment.

In 2021, the Pentagon announced its plans to spend $874 million on AI and machine learning technologies under the 2022 budget of the U.S. Department of Defense—a 50% year-on-year increase in budget allocation towards AI-based technologies. In 2023, the Pentagon requested $1.8 billion for AI tech.

The main forms of U.S. government support for AI are direct financing of AI-related contractors or financing advanced AI research. With federal funding for AI on the rise, A&D companies find that the presence of AI is key to securing federal contracts, according to Matthew Brom, managing director at Clearsight Advisors. “AI has become a required enabler for government contractors, like cybersecurity capabilities were around ten years ago. It is a differentiator without which you might run the risk of losing to those who have it,” he says.

While federal funding for AI innovations has increased in the recent years, what remains crucial for helping finance AI applications in A&D is that Department of Defense and related agencies act as reliable and flexible customers for innovative firms in the sector.

Anastasia Gnezditskaia is a reporter at Mergermarket covering M&A and private equity investment in the tech sector. She has over ten years of experience in financial journalism.