April 14, 2010      

AAI Corp., an operating unit of Textron Systems, a Textron Inc. (NYSE: TXT) company, announced in February that it was expanding its unmanned aircraft systems fee-for-service efforts to included civil, commercial, and scientific entities, as well as military customers. This announcement acknowledges a growing worldwide trend in the unmanned aerial systems (UAS) market-the leasing of drones and operators by governments for military use. What differentiates AAI’s particular announcement is the inclusion of, and emphasis on, civil, commercial, and scientific groups. This is also an acknowledgment of sorts; namely, the use of unmanned aerial systems for nonmilitary applications is expected to increase, and the unmanned aerial systems fee-for-service business model can be applied.

Boeing Shows the Way
Boeing was one of the earliest, and currently the foremost, unmanned aerial systems fee-for-service providers. Boeing’s (NYSE: BA) fee-for-service UAS business began with the company’s partnership with Insitu, the developer of the popular ScanEagle platform. Boeing’s Advanced Boeing Military Aircraft unit and Insitu had been partners in the development of the ScanEagle since 2002. In 2008, Boeing purchased Insitu, picking up ScanEagle and other technologies, along with a good deal of intellectual property in the form of personnel and a large number of UAS-related patents. Insitu continues to function as a wholly owned subsidiary of Boeing.

Even before the Boeing/Insitu purchase closed, and as early as 2004, Boeing’s Global Services & Support (GS&S) organization won a number of fee-for-service contracts for intelligence, surveillance, and reconnaissance (ISR) services using the ScanEagle. During 2007 and 2008 alone, the company won contracts for more than $312 million from the U.S. Navy and Marine Corps for ISR services. This was followed in May 2009 with a contract potentially valued at $250 million from the U.S. Special Operations Command (SOCOM) for ScanEagle ISR services.

Even for a company the size of Boeing, the UAS market is seen as a major area for growth. According to its 2010 UAS market study, industry analyst firm the Teal Group expects worldwide UAS expenditures to increase from $4.9 billion annually to $11.5 billion over the next 10 years, for a total of $80 billion. Boeing expects the unmanned aerial service market to make up a significant portion of the overall UAS market, and to approach $10 billion in 10 years. In response to the scale of the opportunity, in June 2009 Boeing formed a new Unmanned Systems Division, in which a fee-for-service business is expected to play a major role. Boeing’s head of military aircraft, Chris Chadwick, has been quoted as saying “pixels-by-the-hour is a new business model that we want to expand.”

What Others Companies Are Doing
Boeing and AAI are not the only companies providing fee-for-service UAS. Governments throughout the world are leasing unmanned aerial systems, largely for ISR operations in Afghanistan. For example, defense contractor Thales has provided Elbit Systems’ (NASDAQ: ESLT) Hermes 450 UAVs for British and French forces. Australia has leased Israel Aerospace Industries’ Heron unmanned systems under a new lease agreement through MacDonald, Dettwiler, and Associates Ltd. (TSX: MDA). Canadian, German, and French armed forces are also employing leased Heron systems for operations in Afghanistan. And the Netherlands and Canada have contracted for leasing Aeronautics Defense Systems’ Aerostar UAVs.

Not all aeronautics and defense contractors are considering fee-for-service unmanned aerial systems operations, including some major defense contractors. Companies with limited (university leases) or nonexistent leasing initiatives include Northrop Grumman (NYSE: NOC), Lockheed Martin (NYSE: LMT), and General Dynamics (NYSE: GD).

Nonmilitary Uses
The analyst group Frost & Sullivan expects the worldwide civil and commercial UAV market to be worth approximately $2 billion between 2010 and 2014. According to Frost & Sullivan, the most common civilian and commercial UAS applications include boarder security, maritime patrol, highway and traffic management, emergency response, and forest fire control. The consultancy expects Europe and the United States to account for the bulk of the market.

Moire Inc., a consulting firm specializing in unmanned aerial systems, provides similar figures, estimating that the civil UAS market will be worth $2.6 billion between 2008 and 2017. While the Frost & Sullivan and Moire civil and commercial UAS figures are dwarfed by the total worldwide revenue for the unmanned aerial systems market, they are still substantial.

The leasing model would appeal to civil, commercial, and scientific groups for many of the same reasons the world’s militaries have embraced the concept: risk reduction, application flexibility, and rapid implementation. Unlike the military, however, the other groups lack the finances and manpower to acquire, maintain, and operate their own systems. This further increases the appeal of the leasing model.

One major gating factor for the operations of leased UAS over civilian airspace in Europe and the United States is the development and approval of standards for operation. At this time, research and other efforts are under way, but the international UAS community decries the efforts as too little and too slow.

The Bottom Line
The use of unmanned aerial systems for military ISR operations is expanding rapidly. Boeing, AAI Corp., and a number of other UAS providers are supporting a UAS fee-for-service business model, which militaries worldwide have embraced. Civil, commercial, and scientific use of UAS is expected to increase, as is UAS leasing for such applications. The primary reasons for the rise in leasing of UAS for military use—namely, risk reduction, operations flexibility, and rapid implementation—also apply for commercial, civil, and scientific applications. The military also has a strong requirement for expanding UAS units without increasing manpower requirements, while civilian entities lack the finances and technical expertise to purchase UAS and perform the operations themselves.