The global aerospace and defense (A&D) sector is booming. The return of air travel to prepandemic levels is one factor behind soaring demand. Another is greater geopolitical instability, which has led to growing national defense spending (in Europe, for example) and rising demand for ammunition. Order volumes across products have increased significantly, and a burst of talent recruiting is under way in the sector.
However, headwinds persist. Matching the growing demand for talent with the right labor supply has been an enduring challenge. This talent gap continues to cause substantial strain on employers, affecting their ability to compete with other sectors for top talent, hire at the pace required, reduce the time to proficiency, and retain key employees—all of which have an impact on performance.
As a result, the value at stake for A&D organizations has never been higher. Companies that treat the need for talent as a top priority see higher total shareholder returns (TSR) than their competitors. Below, we share highlights from our new research and analysis, which show that for a median-size A&D company, closing the gap between talent supply and demand could be worth more than $300 million in potential cost avoidance and bottom-line impact.
The research represents a clear call to action for employers: evolve quickly to obtain and retain talent. In this article, we look at the challenges that A&D companies face because of this talent gap, examine why the stakes are so high, and recommend five areas where employers can focus their attention to address this gap: figuring out what kind of talent is missing, streamlining hiring processes, reskilling existing talent where needed, reforming talent and culture to propel performance and experience, and transforming HR to lead the return on talent.
What the A&D talent gap looks like
Across all work areas—including skilled labor, supply chain, and cutting-edge tech roles—the A&D talent supply is not meeting demand. This is due to a number of factors, ranging from the macroeconomic environment to cultural specificities of the A&D sector.
To start, unemployment rates in the United States and across Europe remain relatively low, and as the A&D workforce continues to get younger, employers are left without the critical skills and knowledge needed for production. Attrition in management also plays into the challenge of transferring knowledge from tenured “gray” employees to newer “green” employees. Our research shows that A&D frontline managers and middle managers say they intend to leave their current employer at a rate nearly two times higher than individual contributors. In the United States, one A&D employer had to rehire retirees last year to restart production of a legacy weapon systems line that the current workforce was unfamiliar with. In Europe, the aging workforce was highlighted as a critical issue in the newly released European Defence Industrial Strategy.
In our observation, the A&D sector also hasn’t reaped many benefits from changes in the tech sector leading to more available talent. Laid-off tech employees haven’t been flocking to A&D, and the emergence of generative AI (gen AI) may exacerbate the competition for labor, especially in STEM areas, which are expected to experience the biggest potential simultaneous increase in automation adoption and labor demand.
Further complicating the supply of talent is a mismatch between what employers and employees value regarding the skills they deem most important (Exhibit 1). We updated McKinsey research on core workplace skills categories with a deep dive into A&D, and found a divergence in priorities between employers and employees. Half of employers say that basic cognitive skills are among the top two skills most important to their organization, while only 32 percent of employees say the same. When it comes to more specialized technological skills, the prioritization is flipped, with 44 percent of employees saying those skills are critical right now, and only 24 percent of employers agreeing. Interestingly, employers’ future skills outlook is similar to employees’ skills prioritization today. In other words, A&D employees are adapting to future needs more quickly than employers are evolving their own business models.
There are also geographical differences regarding A&D employee value propositions that matter (Exhibit 2). In Europe, employees often have stronger ties to their employers, while those in the United States tend to be more attached to the sector itself. Last year, a McKinsey talent survey revealed that in Europe, employees join and leave companies due to the importance they place on factors such as compensation, career development, and meaningful work, while employees in the United States join and leave their companies due to factors such as workplace flexibility and their relationships with coworkers. Employers with a global presence may need to deploy regional or country-specific strategies in their efforts to close the talent gap, since solutions are not geographically universal.
Gaps in perception of culture and performance management also contribute to the talent gap. McKinsey research has found that the healthiest companies deliver three times the TSR of unhealthy organizations, regardless of industry. But when we looked at data for advanced industries in the McKinsey Organizational Health Index, we found that 70 percent of A&D companies have lower organizational health scores than the global median. The healthiest A&D companies prioritize a culture of strong performance goals, yet according to a 2024 McKinsey Performance Management Survey, one out of five A&D employees feel that their employers’ approach to performance management doesn’t motivate them to perform.
To combat this perception, one A&D organization in Europe approached the redesign of its performance management process by first looking to understand the concerns of their employees (for example, too much time spent by managers on paperwork, limited differentiation, and no consequence management), and then designing to resolve pain points. The new process is expected to drastically reduce time spent on rote activities and increase overall performance and productivity.
The price of the A&D talent gap
Our new analysis identifies and quantifies the value of lost productivity and underlying drivers due to the A&D talent gap. This distinct analysis is based on previous McKinsey research on the return on talent across all industries, which finds that there are three clear and measurable reasons for a lack of productivity among individual employees:
- The skill gap: They don’t have the skills needed to be successful in a role.
- The will gap: They aren’t engaged or energized by the work.
- The time gap: They spend time in ways that don’t increase value, such as poor prioritization and low-value meetings.
Companies need to understand how various levers might be holding them back and how they might vary by employee group. If left unaddressed, these gaps can reduce the output an organization gets from its workforce, leading to costly attrition and vacancy rates.
Specific to A&D, we utilized input data from the profile of a median-size A&D company that has 20,000 to 30,000 full-time employees, annual revenues of $5 billion to $8 billion, takes an average of 70 to 90 days to fill a vacant position, and has roughly a 15 percent attrition rate.
Combined, the skill gap, will gap, and time gap factors are substantial and could cost the median A&D company approximately $300 million to $330 million per year in lost productivity (Exhibit 3). While productivity is a broad term, it is important to have a clear view on what this could mean for different areas within a company, such as HR, supply chain, or engineering.
Charting a new path forward
Some organizations are using changing labor dynamics and evolving workforce preferences to create an advantage. To help close the talent gap, A&D leaders should identify their companies’ needs, and the people to fill those needs, by focusing on five key dimensions of talent management (Exhibit 4).
- Figuring out who you need to win. A&D companies are no strangers to long-range planning. But in many organizations, the teams responsible for navigating the talent gap (including business development, HR, and those charged with estimating and contracting) are simply too disconnected from one another to be able to do so in a coordinated and strategic way. In a labor planning process led by finance and business development, involving HR strategically is often an afterthought. This did not surface as an issue when there was a steady and reliable supply of talent that was easy for A&D employers to capture, but that is no longer the case. The value at risk of incorrectly forecasting labor needs to meet program demand is significant. Those that capture that value have taken the time to understand how different skills pools are evolving, what that means for program demands, and how that translates into a strong hiring plan for the next three to five years. They have learned that each job family calls for different talent (for example, direct labor and skilled trades, as compared with supply chain) and isn’t one size fits all. They also have made HR a strategic partner in finding and keeping talent.
- Establishing a hiring engine to compete for critical talent. Gone are the days of relying on volume-based hiring and the overwhelming likelihood that an employee would stay at a single employer for their entire career. With job hopping more common (especially among lower-tenured employees) and the prospect of many people leaving the A&D sector altogether, the case for change is clear. The modern A&D talent acquisition capability can be structured quite differently from the way it has typically been set up in the past: it should function more like a sales organization, driven by daily stand-ups focused on a single source of truth—with universal clarity on reliable talent pools, alignment on new white space talent pools, a test-and-learn mindset, and a relentless focus on ROI. Focusing on the quality of hires requires strong relationships among talent and acquisition, HR business partners (HRBP), talent management, and people analytics. One tactic that is picking up traction in A&D is to build a “talent win room” that brings together resources from across the organization—including professional development programs, human resources, data science, analytics, and IT—to create a faster, more agile, and more streamlined employee value proposition and hiring process.
- Reskilling where possible. As the battle for experience and skill intensifies, more A&D employers will have to hire entry-level frontline talent and invest in upskilling them to basic proficiency levels. That comes with a cost. Companies can instead refocus their learning and development (L&D) opportunities for existing employees on skills with the highest ROI. However, this must center on outcomes, rather than activity. A strong L&D capability starts with a strategic plan aligned with company strategy, as well as a solid understanding of how each individual L&D program contributes to business outcomes. As gen AI capabilities continue to grow, we anticipate that they will become a substantial aid to L&D in improving onboarding and time to productivity. In the meantime, L&D can play a role in creating more agility and flexibility in the organization by helping employees gain comfort with new skills and prepare for a future that continues to evolve.
- Managing talent and culture to propel performance and experience. As previously stated, the global A&D sector has a way to go to improve culture and perceptions of performance management. The A&D sector also lags behind its highly competitive tech and automotive peers on many of the touchstone perceptions of employee value propositions. Shifting this dynamic to affect employees’ day-to-day mindsets is no small undertaking, especially for traditional A&D companies that are steeped in history and legacy. Those that are making progress in improving their culture and performance management perceptions follow a clear recipe: setting a behavioral aspiration for how the company needs to be run, understanding the current behaviors within the company, and designing targeted interventions to shift behaviors toward the aspiration, often by addressing underlying mindsets. One US A&D player has taken this process to a new level by upskilling all employees in the company on the aspired behaviors. Employees spent an entire day, away from distractions, learning about the new behaviors that were critical to performance, identifying what gets in the way of adopting those behaviors, and practicing the new behaviors together in different scenarios. All leaders are expected to facilitate this training for the next layer of employees.
- Transforming HR into leaders of the return on talent. HR has been slow to evolve in the A&D sector. One reason for this may be that the composition of the sector’s workforce (for example, a large population of early-tenure frontline employees) and the pace of the A&D build cycle requires HR to continually perform routine tactical tasks, such as manually responding to inquires that could likely be handled through an automated process. HR leaders in A&D should ensure that their annual talent plan is not created in a vacuum from the company’s enterprise strategy, that each HRBP is equipped with the data and skills to partner deeply with their programs and functions, and that HR constantly articulates the value and ROI of their actions. To help create the space to meet these goals, HR can automate many administrative tasks using gen AI—it’s an area ripe with opportunity. Of those organizations that say they are currently using gen AI in at least one function, only 3 percent of them report using gen AI in HR.
Leading A&D companies understand how critical it is to shift the narrative from being at the whim of the sector’s current tight labor market to being in control of one’s fate and creating a talent advantage. They also understand the degree of change management that is required to shift an industry that has long benefited from a stable approach to talent management. Those that are making moves in this area are doing so quickly and boldly.
As talent supply and workforce dynamics continue to evolve, the aerospace and defense sector must match that pace of evolution. Aging employees will take years of experience and know-how with them when they retire, while new employees will usher in a wave of change—but that change brings opportunity. The stakes are far too high not to meet the challenge, and as they do so, A&D employers will need to be mindful of the gap.
