SummaryThis paper presents a real‐time nonlinear moving horizon observer (MHO) with pre‐estimation and its application to aircraft sensor fault detection and estimation. An MHO determines the state estimates by minimizing the output estimation errors online, considering a finite sequence of current and past measured data and the available system model. To achieve the real‐time implementability of such an online optimization–based observer, 2 particular strategies are adopted. First, a pre‐estimating observer is embedded to compensate for model uncertainties so that the calculation of disturbance estimates in a standard MHO can be avoided without losing much estimation performance. This strategy significantly reduces the online computational complexity. Second, a real‐time iteration scheme is proposed by performing only 1 iteration of sequential quadratic programming with local Gauss‐Newton approximation to the nonlinear optimization problem. Since existing stability analyses of real‐time moving horizon observers cannot address the incorporation of the pre‐estimating observer, a new stability analysis is performed in the presence of bounded disturbances and noises. Using a nonlinear passenger aircraft benchmark simulator, the simulation results show that the proposed approach achieves a good compromise between estimation performance and computational complexity compared with the extended Kalman filtering and 2 other moving horizon observers.