Examination of Witnesses (Questions 1-19)|
MONDAY 4 FEBRUARY 2002
1. Mr Maciver, I think we have met you before
but I do not know if we have met all of your colleagues so perhaps
you can introduce them to us and then we will begin.
(Mr Maciver) I will say who I am and
then perhaps they can introduce themselves, if that is acceptable.
I am Ken Maciver, President and Chief Executive Officer of TRW
Aeronautical Systems, and I am here as Deputy President and Treasurer
of the Society of British Aerospace Companies.
(Mr Wood) I am Jonathan Wood. I am Chairman of St
Bernard Composites in Farnborough and I am also Chairman of the
Associate Members Group that represents the smaller companies
within the SBAC.
(Mr Marshall) David Marshall, the Director-General
of the SBAC.
(Mr Budd) Peter Budd, Director of Arup, and Chairman
of the Airport Sectoral Group within SBAC.
2. Thank you very much. I am not sure if you
have been before us before, Mr Wood, but the other suspects we
know of old, if I can put it that way. Today we are engaged in
a slightly different exercise. We are looking at the state of
play as far as British industry and British manufacturing is concerned.
We will be talking to people from across the spectrum. We are
concerned, issues relating to the euro notwithstanding, that there
are other competitiveness questions which arise, maybe related
to skill, maybe related to lack of funding, although I think that
since we last met there have been moves to make some assistance
available at least to your industry. Having said that, it is fair
to say that the events of 11 September have perhaps served to
accelerate some of the aspects of the climate of disadvantage
which have been experienced. Could you give us an impression,
Mr Maciver, or some of your colleagues, of how you see the industry
12 months after you were last here? At that time there were perhaps
grounds for cautious optimism given that there is some support
in the pipeline and some assistance from Government, but the world
market situation has changed, so how does your part of British
industry stand up to that challenge?
(Mr Maciver) I think we do have a good industry in
the sense that it is an industry which has invested in technology
and it is an industry which has worked quite hard on productivity
so that we compare, on first sight, reasonably well, but it is
a fact that the present economic circumstances (very much accentuated
by the terrorist activity) have had a major impact upon the industry.
It has impacted on our customers. In very broad terms, it will
vary by company, but demand for new civil aircraft, and that affects
all of us who supply that, will be down in individual companies
by not less than 20 per cent and possibly in some cases the impact
could be up to 40 per cent. Very, very important for the economics
of the industry is the fact that spare parts and maintenance will
be down directly in relation to airline activities, and that means
down about 25 per cent, which is a very heavy blow to any industry.
The major concern to us (it was a concern already but it is accentuated
by that) and the critical thing for this industry is that we maintain
long-term technology investment and that, given the nature of
the industry, is not just a matter for us, we invest quite heavily,
it is also a matter for government through its various channels,
the science base and the Ministry of Defence. The fact is that
already we are spending significantly less than other comparable
industries in France, Germany and, above all, the United States.
That was a concern a year ago, it is much more of a concern today,
when the industry is under financial pressure.
3. Is it a totally black, gloomy prospect or
is there anything that you might say which has been significant
in a positive sense over the last 12 months?
(Mr Maciver) There are certain points, and David may
wish to comment in a moment, things like increased security in
the airline industry in particular, and that affects airports,
but I would say the development since 12 months ago is negative.
The market is down and there has been no real compensation in
military spending that comes through to us in that timescale,
so, yes, the pressures on the industry have been worse, but I
must be clear we can weather the storm but for the long term it
cannot be done by the industry in isolation; it has to be in partnership
4. Have you any kind of balance that you could
strike between what is attributable to 11 September and its aftermath
and what was happening anyway with the structural changes taking
(Mr Maciver) You may wish to elaborate, David, but,
very broadly, the industry is cyclical. We would expect at some
time some downturn but the collapse in air travel in the United
States has had a huge impact, above and beyond anything that you
would expect to see from the general cyclical movement. We expect
it eventually to come back but we have to get through the intervening
period. David may wish to comment on this one.
(Mr Marshall) As Mr Maciver said, this impact of suddenly
stopping air travel, taking up to 20 or even 30 per cent capacity
out of the airline operating system, so aircraft not flying that
are already in service and not being delivered that were about
to be delivered, its impact really on the supply industry is,
above everything else I think, a matter of cash because what the
airlines do not have is cash. They are not pushing it into the
manufacturing industry and that flows down the supply chain. Mr
Wood might like to comment since he is, amongst us, furthest down
the supply chain on the way that really impacts when you are looking
up, if you like, above you at that coming towards you.
(Mr Wood) Within the associate membership we have
been conducting an on-going survey process trying to measure the
effects as they come literally week-by-week, and cash is most
definitely the call coming from the supply chain of the industry.
The opinions are that we have not seen half of it yet.
5. One last point, the tragedy of 11 September
has had military repercussions. Thankfully, there have been very
few casualties and very few planes taken out, but what is the
position regarding the defence business? Most of what you have
been talking about has been centred on the civil experience. What
about the area of defence expenditure? Is that showing any healthier
signs or are the governmental financial constraints such that
governments of all countries are not spending as much? What is
the position there?
(Mr Marshall) I think on the UK side that does not
look at the moment to be the case. There is no change yet announced
that we are aware of in defence expenditure from the UK's point
of view. One country, of course, which is notably different from
that, and I guess from the rest of Europe, is the United States
where there seems to be every indication of that. The President
has certainly asked for a significantly increased defence budget.
I suppose one might also say that decisions that have been taken
since 11 Septemberand one of those was the next stage of
confirmation of the programme on the Joint Strike Fighter which
is an illustration of a mainly American programme with our participationare
a positive indication from that point of view, but I do not think
I have seen anything in either the UK or in Continental Europe.
As Mr Maciver mentioned, one area which has got a lot of attention,
and which we are interested in because of our airport members,
is the increased need for airport security. There are increased
opportunities in that. Mr Budd might like to tell you about that.
(Mr Budd) The UK has an extremely high skill base
in airport security. The Israelis and South Africans are quite
good as well but they do not deal with the volume that we tend
to in this country. It is a sad reflection of history but at this
point in time it is a strategic benefit. You may know, Chairman,
that the Chairman of the Congress Committee who drafted the recent
FAA legislation to tighten American security was over here to
look at British airports and how we handle these matters. He went
back to the States extremely impressed and has made a number of
very serious introductions for British businesses into the American
market as a result. The rules are at this point unfolding so we
have time to see how it is going to turn into positive contracts.
But we do have to get over the "Buy America" policy
which, strictly speaking, applies despite the good words which
have been expressed by politicians. We are hoping for some support
from you and the Government in that area.
6. Buy America would be of relevance in relation
to defence materials, but in relation to the defence of civil
airports it would be WTO rules that would apply, would it not?
(Mr Budd) No, they are procuring at the moment under
FAA rules because those are the only rules they have in existence
and they do refer back to a Buy America policy.
7. Whether or not that is internationally acceptable
in the context of world trade?
(Mr Budd) That appears to be the way it works. Our
Embassy is pursuing it, Mr Chairman.
Chairman: We wait with interest. Mr Hoyle?
8. Just returning to defence contracts, I do
not know whether you have been lobbying the Government to see
if there are any contracts that can be brought forward to try
and help sustain some of the jobs shedding that we are seeing
at the moment within the manufacturing base and the components
base. Are you also lobbying our European counterparts about the
future of Air 400M which would have massive job consequences in
this country if that does not go ahead?
(Mr Maciver) I think we have expressed our concern.
I would say in the United States, before coming directly on to
that, that it will take time before the vast expenditures that
we are talking about actually impact on industry, so there will
be a lean period whatever we do. In terms of bringing forward
business across Europe on the military side, we would very much
like to see that where it is possible, but there is no visibility
of that either in the acquisition of replacement parts or indeed
accelerating other programmes, although it is difficult on major
programmes like Eurofighter. I think also the industry is very
well aware that it affects individual companies to varying degrees
of importance. The A400M, particularly the wing technology, developed
in this country and is now part of Airbus. So that is important
but the odd thing about these programmes is they, to some extent,
increase the burden in the short-term although they bring major
benefits in the longer term as they come into production.
9. Could I pursue the effects of 11 September
a little longer. You made the point that the industry is subject
to cyclical characteristics and that a downturn was expected before
11 September. I think in the submission you made you think that
the upturn in civil aerospace production should start in 2003.
How does that compare with the recovery you would have expected
without 11 September?
(Mr Maciver) At the moment it is very difficult to
know what assumption to make on the timing of a recession and
when it will happen. I think the assumption now is that it will
be certainly a two-year dip in production. It could be longer,
it is unlikely to be less. I cannot quantify the severity of the
downturn precisely from memory but it is worse in terms of the
total impact on the industry than the Gulf War. We have compared
what happened at that time with what is happening now. I think
the general figures I gave you, down not less than 20 per cent,
between 20 and 40 per cent over a two-year period, is the likely
outcome. The whole thing has moved back by at least that period.
So will we be seeing higher production in 2003? I do not think
we will. I think it will be beyond that.
10. As someone who has had some difficulty booking
air flights in Junewhich is a fair time from now, I realise
there is a collapse in air travel and I know we have had a collapse
in air travel, so I am not denying the factsbut I do raise
questions about the speed of the recovery. In the past recovery
has taken place reasonably quickly, within a couple of years after
the Gulf War, and so on, are your current feelings that recovery
will not occur pretty quickly? Will there not be significant recovery
this year in plane travel?
(Mr Marshall) What you observe as a customer is the
availability of capacity. What the airlines have done is rapidly
remove capacity, either not take it on at all or park it in order
to get their load factor higher. I think the other point is that
this is not universal round the globe. The biggest impact has
been travel across the Atlantic, followed then by travel within
the United States. The next worst affected one is probably intra-European
travel. There has been growth in United Kingdom air travel, that
might have something to do with alternatives. It is not an equal
picture. For it to have an effect on the manufacturing industry,
it does not matter whether the aircraft is out of service in North
America or in Europe, it is lost production to us.
11. I appreciate that. Do you think there is
any danger of being too pessimistic about the speed of the recovery?
As I understand it, in all previous crises of this kind people
tended to be far more pessimistic about the time it would take
before the upturn took place?
(Mr Maciver) The two year period we suggested
here, we simply do not know, a lot of people would regard that
as an optimistic scenario.
Mr Berry: Thank you.
Sir Robert Smith
12. Where do the headlines from the low costs
airlines and their orders fit in? I am trying to get a sense of
perspective on the overall slope of the graph.
(Mr Marshall) Firstly, the low costs airlines are
ordering one part of the aircraft manufacturer's output, that
is the relatively smaller aircraft, and that is obviously over
a period of time, and if you add up all of the capacity that is
available worldwide there is still a relatively small amount of
it. One has to take that into account but, of course, it is good
news that they can be successful and they can order. What they
do is drive the cost pressure immensely hard on the industry so
there is no relenting that. If anything, I would say it has been
made more acute by that.
13. Does the British side benefit from any of
(Mr Marshall) No more than the fact that if they have
components or equipment in those aircraft ordered then they benefit,
to the extent of that they benefit, but not otherwise. The ones
ordered were Boeing not Airbus.
(Mr Maciver) I think it would be true to say that
on balance the industry would, perhaps, gain more from Airbus,
but it depends on the company, it depends on which products you
have on individual aircraft.
14. Obviously EADS and Finmeccania of Italy,
I am just wondering with their cancellation of the joint venture
what will the prospects be on the aircraft industry and, in particular,
in the United Kingdom?
(Mr Maciver) This is one we have thought about. We
cannot see a direct impact on us in the United Kingdom today.
(Mr Marshall) I guess it depends, does it not, on
is it a new opportunity for parts of the United Kingdom industry
that they might not otherwise have had had this gone through.
I do not know. Standing back and representing the industry it
is up to individual companies to see whether that is the case.
I am not sure it is a huge issue, I have to say, in the structure
of the whole European industry.
15. Do you think it could be advantageous to
let us get back into Europe, as we seem to have been alienated
through EADS and the growth of EADS without being in that partnership?
(Mr Marshall) Yes, although some people would say
we have not been pushed out because we are associated with almost
all of the programmes EADS has, as a partner of those. We may
not be in a shared ownership linkage with them but that does not
mean we are excluded from the programme. You mentioned the A 400M,
that does not leave us out of it because we are not part of EADS.
16. If you are not a lead contractor then you
lose optional supply chain activity, do you not? You may not be
in for the big stuff but you are not really determining policy.
Our experience in other industriesperhaps you can confirm
whether this is the case or nothas been where a British
company is not one of the lead players then the subcontracting
chain goes to the countries which are the lead players and so
we lose out twice round, one, we do not get a major bit of the
action and we do not have a determining say in where some of the
additional sourcing will come from.
(Mr Maciver) The first point is a very
relevant question because a lot of the value created in the industry
is created below the level of the aircraft and the engine. The
economic benefits of participating at that level go right through
the economy so it is a very, very important issue. On civil aircraft
I think the industry has become markedly less nationalistic. I
think purchases are based on technology and on cost and for the
long term the business will go to the companies that can demonstrate
technology, which is why I stressed that point in the first answer
I gave. It is different in the case of military aircraft if you
are not in military aircraft it is unlikely that the supply chain
will participate. We are on Eurofighter and, all going well, we
are on the A400M. It is very relevant there if we do not have
a role, however that need not be ownership of the company producing
the final aircraft, it is probably more to do with the British
participation in the programme. I would not entirely dismiss the
question of the importance of the prime contractor.
17. Maybe this would be another opportunity
for our industry to amalgamate with those who are outside EADS,
I do not know whether you see that as a possibility?
(Mr Marshall) I suspect the advantage seen by a potential
company joining them will not be that they are an alternative
to EADS, it is that they bring something else, it may be the Italian
market and things like that, that would be the issue.
(Mr Maciver) It is not a good idea to be any more
isolated than we have to be, whether the Italian option offers
an opportunity it would be difficult to say based on what we know.
Mr Hoyle: It is a chance to come out of isolation,
that is maybe the way to look at it.
18. Mr Maciver, in your submission to this Committee
you say, and I quote from your memorandum, "The United Kingdom
government has backed the national aerospace industry extensively
since 1945. Without this support the industry would not be in
the strong position that it currently enjoys". You then go
on at great length to complain about the lack of national strategy
to support the aerospace technology. What would you like the United
Kingdom government to do, having acknowledged that it is doing
all it can at this moment in time?
(Mr Maciver) Starting with the reason why we made
that statement. The fact is that all governments of countries
who are in aerospace participate heavily in technology. To some
degree that is through the defence budgets, which is overwhelmingly
the case in the United States, but they also make sure that a
significant proportion of government expenditure and technology
is devoted to aerospace. The British industry is much worse off
in that regard. Individual companies are spending. The level of
government support for civil technology runs at less than half
the level for France and much, much less than that in Germany,
never mind the United States, added to which that the amount of
defence research spending has also declined. In the long term
the industry will go to where the technology exists. The stark
choice facing companies like my own is, do you invest in long
term technology in the United Kingdom and pay one hundred per
cent yourself or do you invest in Canada where you might have
50 per cent shared with a government research body or with a university
who is receiving research funding. What can we do? We are very
much aware of the constraints on the public purse but we do believe
some increase in expenditure on civil research is very desirable.
19. What level?
(Mr Maciver) I cannot say how much it should be, all
I can do is give an indication of what other people are spending,
it is a value judgment. There is more than that, the government
has spent a lot of money on science and technology and we would
very much like to see a closer partnership in that area with,
for example, funding going to joint demonstrations of the future
technology where academic research, for example, or direct government
research comes together with industry in such a way that we can
demonstrate new technology and potential new products to customers.
The importance of that is that in today's industry you are not
even invited to bid for a programme unless you can demonstrate
the technology. If do you not bid you obviously do not get the
business and if we do not have the business you do not have the
job. It is a fairly clear chain that the programme follows the
technology and the industrial benefit and the economic benefit
follows the programme. The fact is today we are disadvantaged
and we certainly have no belief that we can match the United States
but we believe we can do more and we believe we can spend much
of the money that is spent much more intelligently. In our submission
we have made very specific recommendations, they are examples
of the sort of thing we can do.