Memorandum submitted by the Department
of Trade and Industry
1.1 This memorandum provides information
on the UK civil aerospace industry and the Government's policy
towards the sector. In particular it addresses key policy areas
identified by the Trade and Industry Committee namely; launch
investment, the A3XX, the SBAC Competitiveness Challenge and the
administration of the CARAD programme. The memorandum considers
the defence aspects of the aerospace industry only where this
impacts on the civil aerospace sector.
1.2 Government policy for the aerospace
sector is managed by the Engineering Industries Directorate (EID)
which is part of the Department of Trade and Industry's Business
Competitiveness Group. The Directorate maintains and develops
close relationships with leading firms in the industry and with
the relevant trade associations, primarily the Society of British
Aerospace Companies (SBAC). These relationships are supplemented
by economic analysis aimed at identifying the industry's strengths
and weaknesses. This knowledge informs the development of Government
policy towards the sector and to the development of specific programmes,
to promote the industry's competitiveness. The general aim of
these programmes is to encourage enterprise, innovation and increased
2.1 The UK aerospace industry is the largest
in Europe, employing almost 155,000 people in 1999 and generating
sales of £17.6 billion. By contrast the French industry employs
around 100,000; the Germany industry 72,000 and the largest aerospace
industry in the Worldthe USapproximately 580,000.
Around 55 per cent of the UK industry's turnover is accounted
for by civil products, a significant increase from the 35 per
cent recorded in 1980 (the first year for which reliable figures
are available). Over £16.5 billion worth of new orders were
generated in 1999 (split equally between civil and military products).
The UK aerospace industry is also a significant exporter (in 1999,
60 per cent of sales were exported) and has a consistently positive
trade balance which reached £2.1 billion in 1999.
2.2 The UK has two of the largest aerospace
companies in the World in BAE Systems and Rolls-Royce. British
Aerospace had a turnover of £8.9 billion in 1999 (the vast
majority of which was from aerospace) and employed almost 83,000
in a number of sites throughout the UK. However, in future aerospace
will be a less dominant part of the business due to the merger
of British Aerospace and Marconi Electronic Systems in November
1999 to create BAE Systems, Rolls-Royce, one of only three major
aero-engine suppliers in the World, generated sales of £4.7
billion (£2.7 billion from civil aerospace) and had 41,000
employees. On the civil side these companies contribute significantly
to the UK's export performance through the production of wing
sets for Airbus (from BAES) destined for France and Germany and
of Rolls-Royce aero-engines for Airbus and Boeing.
2.3 The sector comprises a small number
of world-class systems integrators or primes, major first tier
suppliers and a large pool of small and medium sized enterprises.
Many of these are world leaders in their particular areas of expertise.
The greatest challenge which has impacted on the sector in recent
years, has been the globalisation of the sector. This has led
to the consolidation of the civil aerospace industry through the
formation of a relatively small number of global players. Recent
international consolidations include the creation of BAE Systems,
of Thomson-Racal (now Thales), Westland-Agusta, and Rolls-Royce
acquisition of Allison in the US as well as TRW's recent acquisition
of Lucas Aerospace in the UK. In Europe, the French, German and
Spanish partners of Airbus have merged to form EADS (European
Aeronautic, Defence and Space Company). A unified Airbus company
known as the Airbus Integrated Company is to be formally established
with EADS holding 80 per cent and BAE Systems holding 20 per cent
of the share capital.
2.4 The supply chain has also witnessed
the effect of globalisation with the number of enterprises reducing
due to the changing relationship with the primes. The supply chain
has been forced to reduce costs, increase efficiency and be more
competitive as a result. As the primes have been forced to become
more efficient and leaner, research and development activity is
increasingly being out sourced to the supply chain providing greater
added value activity. The challenge for companies is to be able
to respond to this evolving pattern of activity and to do so on
a global basis. DTI policy is aimed at helping companies to operate
in this challenging environment.
3. DEMAND FOR
3.1 Scheduled airline passenger traffic
has grown at annual rates of 5-6 per cent over the past few years
with freight traffic continuing to grow in excess of these rates.
Despite a small reduction in these growth rates caused by the
Asian economic difficulties of 1998, growth has recovered well.
Driven by this growth in demand, airline earnings have been at
record levels over the past few years, with aircraft orders also
being stimulated to record levels.
3.2 However, the air transport industry
is typically cyclical in its growth patterns, which have historically
been closely correlated to the general economic cycle. Many air
transport analysts are now therefore predicting a period of reduced
growth rates, although long-term growth is still expected to be
at an average 5 per cent per annum over the next 20 years. This
period of reduced growth is expected to coincide with reduced
airline earnings, in particular driven by increased costs as a
result of higher fuel prices and increased staff costs. This in
turn will lead to a period of reduced demand for new aircraft
to meet both traffic growth and also to replace older aircraft
presently being operated.
3.3 To meet the present record order and
backlog levels, aircraft manufacturers have been increasing production
rates from the lower levels that prevailed in the mid-1990s, as
illustrated in Annex 1. In 1999, Airbus and Boeing, the world's
only two remaining suppliers of large jet aircraft, delivered
over 900 aircraft in total whilst the regional jet manufacturers,
including BAE Systems, delivered a further 215 aircraft.
3.4 Although production rates declined slightly
in 2000, annual deliveries of large aircraft are expected to stabilise
at around 800 units over the next couple of years. This is consistent
with long term estimates for aircraft demandDTI's own independent
analysis predicts a requirement for nearly 15,000 new passenger
aircraft in the next 20 years worth an estimated $940 billion
in 2000 economic conditions. Beyond that, some further decline
is expected although rates are not expected to fall as low as
the levels experienced during the past two downturns. Whilst this
will have some impact on UK suppliers, many of these companies
have introduced cost disciplines and flexible work processes as
a result of experience gained during the mid-1990s, such that
the impact of the next down cycle is expected to be significantly
less damaging than the last.
4. UK GOVERNMENT
The Competitiveness Challenge
4.1 Recognising the need for the UK aerospace
industry to increase its competitiveness in order to improve its
position in the world market, the DTI has for several years been
supporting a series of competitiveness improvement programmes
managed by the SBAC.
4.2 The aim of the Competitive Challenge
is to help aerospace companies understand factors that affect
their competitiveness; promote open and competitive markets; promulgate
and encourage best practice. The general and long-term objective
is to "enhance the performance and effectiveness of the UK
aerospace companies through the promotion of proven quality techniques
that improve business results". The Competitiveness Challenge
strategy was designed to achieve the following overall objectives:
increase value added in the supply
chain by 10 per cent;
improve the average European Foundation
for Quality Management (EFQM) Business Excellence Model (BEM)
score by 200 points; and
improve market share by 1 per cent,
equivalent to £1 billion.
4.3 The Competitiveness Challenge, supported
by DTI from April 1997 to March 2000, was probably the most comprehensive
and ambitious programme of its kind attempted in any industry.
It comprised five elements: Supply Chain Relationships in Aerospace
(SCRIA); Lean Aerospace Initiative (UK LAI); People Management;
Business Winning; and Knowledge Management. Over the three-year
period DTI grant totalled £1.5 million, which was matched
by contributions from the SBAC and the aerospace industry valued
at £5.17 million.
4.4 There have been a number of measurable
improvements in the UK aerospace industry which may be attributed,
directly or indirectly, to the Competitiveness Challenge programme.
For example, the UK industry has overtaken that of France to become
second in the world in terms of turnover. The average BEM score
for UK aerospace companies has increased from 242 to 296, or by
22 per cent. There have been remarkable efficiency gains in supply
chains, such as cost savings of 60 per cent, lead time reductions
of 60 per cent, and 30 per cent improvements in schedule adherence.
In the Lean Aerospace area there have also been very significant
improvements, such as 200 per cent improvement in stock turns,
250 per cent in delivery schedule achievement, 70 per cent in
set up/change over times, and 33 per cent increase in output.
4.5 Over 4,500 aerospace industry managers
have been trained in SCRIA principles and techniques. (SCRIA is
now continuing as a wholly self-funded industry activity and has
also been adopted by other industries, such as non-aerospace defence,
machine tools and the rail industry.) An Internet-based marketing
information facility has been established and is widely used.
An aerospace careers video has been produced and distributed widely
to schools and universities. A national survey of human resource
management in aerospace has established the benefits for competitiveness
of high performance HR practices, such as team working, appraisal,
job rotation, broad grading structures and problem-solving groups,
and the findings have been widely distributed.
4.6 In October 1999 DTI announced £2.45
million funding, over two and a half years, from the Industry
Forum replication programme for a major extension of the Lean
Aerospace Initiative. The "MasterClass" technique has
been well proven in the automotive sector and is designed to achieve
sustainable real improvements in quality, cost and delivery. It
involves a specially trained engineer visiting a company's premises
and showing management and staff how to reorganise their plant
and practices to achieve the benefits of lean manufacturing. Nine
lean manufacturing engineers have been trained by the Society
of Motor Manufacturers and Traders (SMMT) and introduced into
the programme so that the aerospace industry has its own lean
practice experts. The DTI grant enables smaller companies (SMEs)
to participate in the programme and obtain the services of the
lean practice experts at a discounted rate.
4.7 In October 2000 DTI agreed to provide
a further £950,000, over two and a half years, to enable
the SBAC to continue to attract at least an equal amount of industry
funding for the continuation and development of the Competitiveness
Challenge programme. Targets have been set for increased UK market
share in key projects, improved value-added per employee and further
improvements in the BEM scores. The new programme includes elements
addressed to e-business, where a DTI-funded study by PA Consulting
found that UK aerospace companies were not keeping pace with their
US customers and competitors.
4.8 The Civil Aviation Act of 1949 (re-enacted
in 1982) placed a general duty on the Secretary of State of "
. . . organising, carrying out and encouraging measures for the
designing, development and production of civil aircraft . . .
". Over the past 50 years, Secretaries of State have discharged
the duty with separate measures to provide grants for pre-competitive
research (through the Civil Aircraft Research and Demonstration
(CARAD) programme and its forerunner budgets) and risk-sharing
investment funding (known as Launch Investment. In April 1990,
following a major review of aeronautics support, CARAD replaced
an earlier similar programme (known as the Aircraft and Aero-Engine
budget). The Department is currently preparing for a fourth phase
of the CARAD.
4.9 Launch investment remedies a market
deficiency in the availability of development funds for aerospace
companies to undertake large development projects. These projects
typically have high costs and pose a high level of risk, and generate
a return only in the very long term. Although financial institutions
understand the long-term nature of the industry they are reluctant
to risk investment in these projects because of the payback period
and as a result Launch Investment bridges this gap in funding.
Launch Investment is a risk-sharing investment by Government in
the design and development of specific civil aerospace projects
in the UK. It has been used to support developments of airframes
(or parts of airframes, such as wings), helicopters and aero engines.
The investment is repayable to the Government at a real rate of
return, usually via levies on sales. By this means, the Government
shares in the risk of the project but at the same time also benefits
through a successful launch.
4.10 The provision of Launch Investment
is discretionary. There is no formal scheme, promotion or budget
for launch investment. Each launch investment application is considered
on its merits against a range of established criteria and also,
by the Treasury, against public expenditure constraints. An applicant
must demonstrate that the project is technically and commercially
viable; that Government investment is essential for the project
to proceed on the scale and in the timescale specified in the
application; and that the Government will recoup its investment
and share in the success of the project at a real rate of return.
4.11 The Government undertakes a detailed
assessment of the viability of the project and the company's additionality
case (ie the company has to demonstrate that a project could not
proceed in the UK without Government support). In addition, the
Government assesses the technical viability of the project and
the market for the project. Finally, an assessment is made of
the wider benefits of the project to the economy beyond the company
itself. These can include the spin-off of new technologies or
production methods with wider applications in other sectors, or
transferable improvements to the skill base as well as job creation
or safeguarding. If it is decided to support an application, the
Government will provide the minimum support required for the project
to go ahead.
4.12 In view of the significant amounts
of public expenditure involved, DTI closely monitors the progress
of a supported programme. Payments are linked to actual expenditure
by the company and to the achievement of specific technical milestones.
Information is also required from the company on the delivery
programme, the commercial position of the project and the financial
position of the company.
4.13 The provision of launch investment
is also subject to European and international rules. All support
is required to be approved by the European Commission and support
for airframe research and development is required to be compatible
with the 1992 Agreement on Trade in Large Civil Aircraft which
is discussed later in this paper. All applications for launch
investment are carefully scrutinised by the DTI for compatibility
with these requirements.
4.14 Significant projects supported through
Launch investment in the past include the Airbus A320 and A330/340
programmes. The A320 investment has already been repaid to the
Government, and continues to provide a return. The A330/340 is
contributing a steady stream of funds to the Exchequer, and is
expected to pay for itself in the medium term. A list of the major
launch investment contracts is detailed in Annex 2.
4.15 Most Western countries with aerospace
industries have some form of launch investment (including France,
Germany, the Netherlands and Italy). The US supports its industry
by indirect measures, in particular through large R&D programmes
run by NASA and the Department of Defense. Overall government
support to the US aerospace industry is proportionally higher
than that of the EU. US gives funds around three times that of
the EU, whilst US aerospace industry turnover is about twice the
A380 (A3XX) Launch Investment
4.16 On 13 March, the Secretary of State
for Trade and Industry announced agreement to provide launch investment
of up to £530 million to BAE SYSTEMS to design and develop
the wings for the A3XX, now known as the A380. The A380, a 480-650
seater, double-decked super-jumbo airliner, will compete at the
top end of the market, where Boeing have had a monopoly to date
with the 747 jumbo-jet.
4.17 This is an important project for the
UK which will underpin Airbus's centre of excellence in wing development
at plants in Filton and Broughton. Up to 22,000 new jobs will
be created and 62,000 existing jobs safeguarded in the UK as a
result of the A380, including in the supply chain and indirect
employment. Airbus Industrie have subsequently formally launched
the A380 programme on 19 December 2000 after reaching 50 orders
and 42 options from six customers; Air France, Emirates, International
Lease Finance Corporation, Qantas, Singapore Airlines and Virgin
4.18 This is also an important project for
other European countries. The German government has recently announced
agreement to provide support of approximately DM2 billion to DASA
and the French and Spanish governments have also agreed in principle
to provide similar repayable investments.
The 1992 EC-US Agreement on Trade in Large Civil
4.19 The 1992 LCA Agreement applies to aircraft
over 100 seats (not engines) produced by Airbus and manufacturers
in the US (at the time Boeing and McDonnell Douglas, now only
the former). For the US this means Government is permitted to
provide indirect (mainly R&D) support up to 3 per cent of
the annual commercial turnover of the civil aircraft industry.
For Airbus it means European governments can provide up to 33
per cent of the development costs of a new large civil aircraft
programme, subject to the following conditions:
there has been a critical project
reasonable expectation of repayment
of the support within 17 years; and
interest payable at no less than
the government cost of borrowing plus a small margin.
4.20 The 1992 Agreement provides for both
sides to have regular consultations to avoid disputes.
4.21 The US has recently instigated discussions
under the 1992 EC/US Agreement over the support being provided
by EU Member States for the A380 project. The first of these discussions
took place in Washington on 11 January. The EU position is that
it will ensure that any support is compatible with the Agreement
and details will be provided to the US as required under the Agreement
once Member States' commitments are finalised.
4.22 The capability of the UK aerospace
industry depends on a number of factors of which technology is
crucial. The Civil Aircraft Research and Technology Demonstration
(CARAD) Programme supports pre-competitive research and technology
demonstration (R&TD) to enhance the competitiveness and environmental
sustainability of the UK's civil aeronautics industry. The UK
has a particular strength in that, apart from the USA and possibly
France, it is the only other nation that has a presence across
the range of aeronautics technologies. CARAD has been established
for many years and is a well-focused programme aimed at promoting
and anchoring a long-term UK capability in aeronautics.
4.23 Nature of Support. CARAD seeks
to encourage basic and applied research effort of industrial relevance
for the longer term to help the UK aerospace industry to compete
successfully in world markets. The aerospace industry works to
very long timescales and we work in partnership with the industry,
research organisations and academia to secure the long-term availability
of essential aeronautical technologies and preserve national capability.
It helps to maintain a strong UK technology base from which UK
companies are able to enter into successful European and international
collaborations. The programme also supports (at around £500,000
per annum) the operation of the European Transonic Windtunnel
4.24 Funding. The annual budget for
CARAD in 2000-01 is £20 million. Before the Comprehensive
Spending Review in 1997 it was £22.7 million and historically
the budget had been three times as large in real terms. Following
last year's Spending Review, future funding levels for CARAD will,
as with all DTI budgets, be announced in March when the Department
publishes its Expenditure Plans Report.
4.25 Balance of expenditure. CARAD
supports research in the following technology areas which reflect
the key centres of expertise of the UK industry:
|aerodynamics||15 per cent for airframes;
|propulsion||30 per cent for engines and engine equipment;
|materials and structures||35 per cent for airframes, engines and equipment;
|advanced systems||20 per cent for avionics, systems and equipment.
4.26 Impact of globalisation. There are many factors
affecting the decisions on where to locate industrial activity.
In the aeronautics sector where there are long product and development
timescales and a heavy reliance on technology for the competitiveness
of the product, it is often natural to locate manufacture where
there is a centre of technical expertise. In supporting long-term
technology acquisition, CARAD has played a significant role in
establishing these centres of excellence in the UK. These are
a basis for launch of future projects providing benefit to the
UK in terms of employment and balance of payments.
4.27 Harnessing military spend on aeronautics research
for civil benefit. MoD has traditionally spent significant
sums on aerospace research mainly at its Defence Research and
Evaluation Agency (DERA). Where research is generic in nature
and has potential for dual use (civil/military application) CARAD
has traditionally supported such work and hence the civil sector
can access much larger defence programmes. Much of the work is
collaborative with industrial and academic partners. MoD is currently
developing proposals for DERA to become a Public Private Partnership.
DTI is maintaining a close dialogue with MoD and DERA to ensure
that industry and DERA continue to work in partnership to achieve
benefits for the civil industry.
4.28 Aims and Targets. Consistent with the way
DTI seeks to identify clear outputs from its programmes, the measurable
targets set for CARAD are reductions in the:
cost of air travel: target 2 per cent a year until
noise generated by civil air transport aircraft:
target 1 decibel every two years until 2010;
emissions of carbon dioxide from aero-engines:
target 1 per cent per year per passenger mile until 2010;
emissions of nitrogen oxide from aero-engines:
target 5 per cent average per year until 2010;
aircraft accident rate: target is a sufficient
reduction to offset traffic growth which is predicted to grow
at 5 per cent per annum until 2010.
4.29 By way of illustration, in 2000-01 there were two
important initiatives supported by CARAD which will result in
projects which in turn will contribute to the above targets. The
More Electric Engine and Wing Systems Programme will research
and demonstrate "more electric" technologies that will
eventually replace hydraulic and pneumatic systems and deliver
significant cost savings to manufacturers and operators. The Flight
Deck Technologies for Enhanced Safety programme will address technologies
specifically aimed at minimising pilot error thus contributing
to the reduction in the aircraft accident rate.
4.30 Objectives. These may be summarised as follows:
competitivenesshelping the industry to
improve its competitiveness and to develop the technology necessary
to launch successful ventures in world civil aircraft markets;
collaborationencouraging UK participation
in European and international collaboration by equipping the UK
civil aircraft industry with the necessary underpinning technology;
long-term perspectiveencouraging industry
to maintain a long-term perspective with investment in innovative
work which has no immediate prospect of commercial return;
dual-usehelping to maximise the spin-off
to civil aircraft from military research and demonstration support;
partneringencouraging industry to work
on collaborative projects with higher education institutes so
as to "pull-through" academic research.
4.31 Reporting. CARAD activity is reported to the Aerospace
Committee (an advisory non-departmental public body advising Ministers
on aerospace matters), the Defence Aerospace Systems Foresight
Panel and a suite of national research advisory committees under
the auspices of the panel. Progress on the programme is collated
into a CARAD Annual Report which is placed on a CARAD "page"
on the DTI's internet website and issued in hard copy to industry,
research organisations, academia and Government. Copies are placed
in the libraries of both Houses of Parliament.
4.32 Following on from their work under CARAD, DTI staff
are also able to undertake a number of related technology partnership
activities in support of the aeronautics industry. These are in
the areas of:
Foresight. DTI has contributed strongly to the
work of the re-constituted Defence, Aerospace and Systems Panel
Engineering and Physical Sciences Research Council
(EPSRC). DTI keep in close touch with EPSRC which supports aerospace
relevant research at universities (further information in annex
European Commission Framework Programmes. Overall
the UK won a significant share of the funding under the aeronautics
budget in Framework 5. DTI has been involved in ensuring full
awareness of the opportunities in the programme for UK industry
and we have been consulting the industry and aeronautics research
community over its initial views on Framework 6;
Group for Aeronautical Research and Technology
in Europe (GARTEUR). DTI Director is one of the UK representatives
on the Council of GARTEUR which is a unique body created to promote
collaboration between member countries in civil and military aeronautics