Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 1-19)




  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 with government.

  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 place?
  (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 September—and 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 participation—are 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?

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.

Mr Berry

  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 June—which 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 facts—but 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 those orders?
  (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.

Mr Hoyle

  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 industries—perhaps you can confirm whether this is the case or not—has 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.

Mr Hoyle

  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.

Dr Kumar

  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.

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