Flying under the radar: Orbital’s quiet rise in engines powering drones

Orbital CEO Stephen Pearce and CFO Mark Wege explain how a company that only builds the engines behind long-range military drones is repositioning for commercial markets, and why almost nobody knows what it does.

Meet the Team Behind the Transformation

This was the first Vantage Point appearance for both executives. Stephen Pearce, the CEO, has spent about 30 years designing aircraft for large manufacturers including British Aerospace, Lockheed Martin, Boeing and Bombardier Aerospace. For the last ten years he has worked in the start-up space running small drone companies, and he joined Orbital 12 months ago.

Mark Wege, the CFO, comes from automotive and transport systems, with a career in R&D-based mechanical technology covering air conditioning, steering columns and cabin control units, and a lot of contract negotiation with names like Siemens, Bombardier, General Motors and Ford. He notes a full-circle moment. As a junior auditor in the late 1980s, one of his first clients was the Sarich Technology Trust, which became Orbital, and he is now working in the same buildings.

What Orbital Actually Does

Orbital designs, manufactures and tests engines for long-range, high-lift UAVs, with the manufacturing done in Balcatta, Perth. Everything it produces there is exported.

Stephen explains the technical problem that makes this hard. At 20,000 feet there is very little oxygen, and heavy fuel is low octane, so it is difficult to burn.

Our dual fuel injection system allows us to get a clean burn at 20,000 feet, which our competitors really struggle to do.

— Stephen Pearce

Orbital designs engines for the likes of Boeing Insitu, Textron Systems and other large tier-one manufacturers. It is platform agnostic, which lets it go after the whole market and get its engine onto as many platforms as possible.

Why Nobody Knows Orbital

Simon Hinsley noted that several defence-related stocks have rocketed as modern warfare changes, and asked why Orbital has been left behind. Stephen says there is a real misunderstanding of what the company does. The drones people see on television are small first-person-view Group 1 aircraft. Orbital plays in Groups 2 and 3, which run from about 9 kilograms up to 600 kilograms of maximum takeoff weight.

Those aircraft are on the surveillance, reconnaissance and intelligence side, which Stephen jokes is all secret squirrel. They are not heavily advertised. There is also a legacy problem: analysts who used to cover the stock know it as an automotive consultancy, which it stopped being about ten years ago. Mark adds that the Orbital UAV name doesn’t help, because the first thing people assume is that it makes drones.

From One Customer to Thirteen

Mark says that five years ago Orbital was a single-customer, single-contract, single-product business, and when something went wrong upstream of it, Orbital felt the consequences. The response has been diversification across product range, market sector and geography. Previously the focus was the US. Now it includes Asia, India and Europe.

Stephen says the biggest change is the go-to-market strategy. Orbital was known for tier-one military applications, and with few players in the market it did not need business development because customers called. Now it has products suited to tier-two military clients such as India, Vietnam and the Middle East, along with the emerging commercial market, and it has invested heavily in business development.

When we joined the business, we had 3 customers. We’re up to 13 now. We’re gonna sign some more next week.

— Stephen Pearce

Three Ways to Go to Market

• The partnership program: the historical model, with bespoke application engineering on top of the standard core engine for one discrete customer. The interfaces, validation and testing are customer-specific, and this is the tier-one military business.
• The hybrid model: for tier-two military and commercial customers in places like the Middle East and India, which do not have the same validation and testing expectations as the US or Singapore.
• Power by the hour: a wet lease of the engine to the drone operator, which Stephen calls an emerging market that Orbital is creating.

Power by the Hour: Set and Forget

For the customer, Mark says, power by the hour is simple. They do not have to worry about the engine. It is fitted as a line replaceable unit, so it can be swapped in and out within five minutes if there is a problem or the unit needs maintenance. Operators focus on the airframe and, above all, the surveillance payload.

It also removes the up-front engine purchase. One customer Orbital is talking to wants to fly 65 platforms over five years, which would need about 300 engines. Because the operator is paid by the hour by its own clients, the contracts are back-to-back, and the engine lease is a small part of the operator’s revenue. From Orbital’s side, the revenue is recurring and smooth.

The Engine Advantage: 750 Hours and 1.2 Million Flown

The key performance metric is time between overhauls. Orbital’s engines run up to 750 hours, which Stephen says is market leading against about 250 to 300 for the standard. That translates directly into a lower cost of ownership.

The difference matters more for commercial operators than for the military. A military drone may sit in a shed until needed, whereas commercial aircraft must fly continuously. Stephen puts it in plain terms: 750 hours might be four or five months of actual flying, while at 250 hours an operator would be replacing the engine every six weeks.

It’s our military pedigree and the technology that we apply that means we’re the only people in the market who can achieve those numbers.

— Stephen Pearce

The engine control unit is also designed in-house, with proprietary software that optimises fuel burn for each customer’s mission and monitors the engine’s health for predictive maintenance. A competitor could copy the mechanical parts, Mark says, but without the software running the engine it would be useless.

On track record, Orbital has just passed 1.2 million hours with the US Navy, in marine operations that are among the harshest environments a UAV can face because of the salt spray. The engines can cold start from -20 up to 50 degrees ambient. One customer in final trials with an air defence force takes off at almost 5,000 metres on a border security operation.

Shedding the “Platinum-Plated” Reputation

The company’s history has been a double-edged sword. Orbital has been known as platinum-plated, not just gold-plated, which put off enquiries from people who assumed a great engine meant a prohibitive one.

We’re no longer having major discussions with any customer about price.

— Stephen Pearce

The engineering team has worked on reducing cost and tuning the products for the commercial environment. The harder part now is overcoming the perception. Orbital is doing more trade shows internationally to explain that it is a different company, with products at price points that make commercial sense, and Stephen says costs will fall further as volumes grow and parts orders get larger.

Commercial Markets: Pipelines, Logistics and Crops

The US military’s propulsion spend is a large opportunity, but Stephen says the commercial market is harder to read. The main barrier for commercial operators is regulatory approval to fly in commercial airspace. The power-by-the-hour customer Orbital is talking to already has those approvals in the US. Orbital has about four or five commercial customers, and once its engine is embedded in an airframe it is very sticky, because the customer has done all the integration and flight testing.

Stephen expects commercial take-up in this order:

• Pipeline and infrastructure surveying: first, because the controlled airspace corridors make approvals easier. Oil and gas pipelines and electricity transmission lines are currently inspected by helicopters taking photographs. A drone can fly the mission predictably, build a 3D digital twin with LIDAR, and use AI to compare each new flight against the last to spot land movement, vegetation or a missing bolt on a pole. Mark notes that New South Wales alone has 11,000 kilometres of poles and wires that must be surveyed every year.
• Logistics: second, and not last-mile delivery. Stephen describes middle-mile, business-to-business, point-to-point freight, with one customer capable of lifting 100 kilograms and flying 1,500 kilometres.
• Agriculture: third. Battery-powered crop-spraying drones lack the range and duration for broad-acre farming, so Orbital is looking at a hybrid engine to take multirotor flight times from about 40 minutes to about five hours.

As Mark puts it, the commercial case in all of these is reducing cost and increasing uptime, without helicopters, pilots, airports or incidents.

Lumpy Defence Contracts and Recurring Revenue

Mark is candid that the last couple of years have been about fixing the business so it can take advantage of what is coming. He says defence contracts are lumpy. One development program wrapped up in January, another contract is expected soon, and in the meantime there is a gap of about 12 months. Power by the hour and in-service support will smooth that out, because they create recurring revenue. Mark says Orbital has been poor at capturing value after the engine is sold, and wants to wrap its tier-one capability in recurring revenue streams that de-risk it from being a pure defence play.

The core engine technology is the same across defence and commercial variants, and the engineering work on the range is now complete. Remaining R&D is mostly on the electronics side:

• A 350cc engine: being finished, after kicking off about 12 months ago.
• Power management systems: a second-generation unit is due in November, with remote start from the ground control station, which matters when launching from a ship in a rolling sea. Orbital sees it as a product it could sell standalone.
• Stator rotors: bought in from the US today, with plans to bring production in-house.

Not Chasing the Tender, Waiting for the Win

Asked what changes the perception over the next 12 months, Stephen gives two streams: awareness, and delivery of the opportunities in the pipeline. He points to an unusual dynamic. Orbital is not chasing competitive tenders to become the engine supplier. It already is the supplier, and is waiting for its customers to win the business.

An Indian customer took almost two years from “Hello, we’re Orbital” to an award of business, with the contract still to come through. Mark acknowledges the risk of picking the wrong partner. A past program with a US prime was cancelled, which is why Orbital stays multi-platform.

By being multi-platform, we’re not having to pick a winner. We can be in every space.

— Mark Wege

Stephen says the commercial market also runs at a different speed. Military customers plan far ahead, asking for engines six months out with a year and a half to deliver. Commercial customers want three or four engines yesterday, and Orbital is still reconfiguring the business to react at that pace.

The Scoreboard: 50/50 and the Rise of Attributable Drones

Looking two to three years ahead, Stephen wants an even split between commercial and defence. He sees the commercial piece growing from a very small part of the business to half of it, with power by the hour sitting across both, since a private operator working on a defence contract blurs the line.

It doesn’t matter as long as we got paid.

— Stephen Pearce

He also sees the military market changing, from persistent ISR on tier-one programs towards what is called attributable ISR: lower-cost, high-volume drones that still operate in harsh environments and still come back. Mark explains why. Militaries do not want to lock into a 10-year program of record while the technology changes so quickly, so they prefer a nimble next-tier supplier. Orbital wants to be ahead of that shift.