From FSDeveloper Wiki
FSX implements a new method to reduce the -
 Pre FSX
Every aircraft repaint required a full complement of the model's textures to be present in every texture livery folder.
 In FSX
FSX utilises an enhanced Texture Fallback Scheme.
Each livery's repaint folder then need only contain those textures different from the default.
The texture config file contains references to the relative paths of the various fallback folders.
The standard texture.cfg files have 3 fall back paths,
A copy of the texture.cfg is placed in every livery's texture folder.
A small image of that aircraft livery for display in the select aircraft dialog.
The required format is a 256x128 pixel jpg.
There are a couple of minor issues -
Inclusion of an appropriate texture.cfg will correct these.
 Fix - Overview
The solution for all models is to -
i.e. This default texture fallback folder must not be called directly from any [fltsim.N] texture= entry.
 Fix - For Existing Models
To fix this issue for pre-existing 3rd party, or FSX default aircraft.
 Folder Structure
The aircraft folder structure should be -
..\texture all common textures, (including those for the 'default livery') texture.cfg ..\texture.0 contains no textures, (default livery is held in ..\texture) texture.cfg thumbnail.jpg ..\texture.1 livery 1 unique textures only texture.cfg thumbnail.jpg ..\texture.2 livery 2 unique textures only texture.cfg thumbnail.jpg
The additional folder ..\texture.0 acts as the unique livery reference for that livery previously referenced by ..\texture
Generally, in the aircraft.cfg this was accessed by -
Which would now become -
I said generally, as some default FSX aircraft have non-rational numbering applied.
Example below corrects the reference for FSX default aircraft's fallback.3 path.
fallback.1=..\texture fallback.2=..\..\..\..\Scenery\Global\texture fallback.3=..\..\..\..\Texture
 Fix - For New models
Proposed methodology for new models -
..\texture.common all common textures.dds ..\texture.Livery1 all unique textures for Livery1.dds thumbnail.jpg texture.cfg ..\texture.Livery2 all unique textures for Livery2.dds thumbnail.jpg texture.cfg
[fltsim] fallback.1=..\texture.common fallback.2=..\..\..\..\Scenery\Global\texture fallback.3=..\..\..\..\Texture
The last row is the path to FSX's root Texture folder,
In this example, fallback.Z provides a valid path to the following common textures -
Fresnel_Ramp.dds FresnelTest.bmp FresnelWater.bmp GENFresnel.dds GlobalEnv_AC_Chrome.dds GlobalEnv_AC_Chrome_32.dds GlobalEnv_AC_Chrome_64.dds GlobalEnv_AC_Chrome_128.dds GlobalEnvTest.dds