House of Commons - Trade and Industry

Select Committee on Trade and Industry Ninth Report

2 Airbus's restructuring & the A350 XWB

13. In order to meet the competitiveness challenge it faces, at the end of last year Airbus announced its intention to implement a fundamental restructuring programme aimed at reducing costs across all aspects of the company's operations.[40] Known as 'Power8', the initiative aims to generate cash savings of around €5 billion by 2010, and sustainable annual cost savings of at least €2 billion thereafter. Airbus will also re-engineer its development process to reduce the time taken to design and build new aircraft from seven and a half years to less than six.[41] In February 2007, Airbus announced further details of the Power8 programme, alongside information on the initial allocation between countries of work packages for the A350 XWB.[42] The details of the final outcome had attracted the involvement of politicians from all four parent countries, each seeking to protect their national interests. Indeed, last minute wrangles over the allocation of job losses led to a two-week delay of the final announcement.[43] This Chapter looks at the implications for the UK of both the proposed allocation of work for the A350 XWB, and the reforms to take place under Power8.

A350 XWB work allocation

14. The potential distribution of work across countries for the A350 XWB was of particular concern to the UK for both political and technological reasons.[44] Traditionally, the allocation of work packages for Airbus planes has roughly reflected the shareholding of the original partners—that is, 35% each for France and Germany, 20% for the UK, and 10% for Spain. Following the sale of BAE Systems' 20% stake in the company to EADS, however, the UK was left with no share in the company, consequently reducing its negotiating position with EADS.

15. An additional concern was that Germany and Spain in particular were in a position to make a case for some of the work usually undertaken by the UK, because of their growing competence in composite materials, some of it relevant to wing manufacture.[45] The use of composite technologies in aerospace has steadily increased in recent years because of their stiffness and low weight in comparison to conventional metals. Although initially used for military applications, increases in fuel prices, as well as demands to reduce emissions and improve overall aircraft efficiency, are leading to the wider deployment of composite technology in civil aircraft.[46] As noted above, Airbus expects a large proportion of the A350 XWB to be made from these materials. The UK is investing in composite technology, for example through its National Composites Network. This is a jointly-funded initiative, involving industry and academia, based in four regional centres, including a 4,500m² facility at Filton—the Airbus Composite Structures Development Centre. Despite this, the UK is still seen as playing 'catch-up' with the other Airbus partners in the development of composites, and this was considered a significant risk factor when it came to the allocation of work for the A350 XWB.[47]

16. The UK Government maintained a continuous dialogue with Airbus and its parent, EADS, up to the final announcement in February 2007. The outcome for Airbus UK was a positive one: a 20% share of the workload for the A350 XWB, in line with that which it had achieved for previous aircraft. Overall wing assembly will take place at Broughton. Design and manufacture of the trailing edge will happen at Filton. Airbus will also look for risk-sharing partners for the design and manufacture of the composite-based front and rear spars in the UK.[48] These are large work packages which, the DTI tells us, should "result in the transition from metallic to composite design and manufacture, and thus present good opportunities for both Airbus UK and major suppliers based in the UK".[49]

17. Prior to the announcement, there had been some speculation as to which individual work packages would go to Airbus UK.[50] For example, EADS had considered consolidating all 'wing equipping' at the Broughton plant. This work involves the insertion into the wings of cables and pipes for the electrical and hydraulic systems, as well as the installation of moving surfaces. Currently, for Airbus's long-range A330/340 aircraft, some wing equipping is undertaken at the Bremen plant in Germany, with equipping for the other Airbus models taking place in the UK. As the A350 XWB is seen as a successor to the A330/340 in the long term, in the end the decision was made to give the work package to Bremen.[51] The DTI told us that: "in the context of the whole package we were content with that".[52] Airbus UK's submission also notes that the front and rear spar work, to be done in the UK, is of "stronger value in technology terms".[53]

18. Overall, both Airbus UK and the Government said they were pleased with the work packages allocated to the UK. The company's Managing Director, Iain Gray, told us that securing wing leadership for the A350 XWB was "a massive success".[54] The DTI said this "represents a good outcome for the UK, and is the result of sustained action by the UK Government to achieve a position on the A350 XWB that provides the most positive platform for the future".[55] It noted also that it should leave the UK well-placed to win future work on the anticipated replacement for the A320.[56] Only the Confederation of Shipbuilding and Engineering Unions stated disappointment with the work share outcome.[57] Indeed, it is worth noting that, while certain work packages have been promised to the UK within the overall 20% work share, many of the finer details of who will do what, and how much will be outsourced, are yet to be finalised. We consider some of these issues in the following sections.

19. Against a backdrop of BAE Systems' sale of its stake in Airbus, and technological competition in composite materials from other countries, we commend Airbus UK and the Government for securing a 20% work share for the A350 XWB programme. Leadership on design and assembly, as well as manufacture of the wing trailing edge, and front and rear spars, should secure the future role of Airbus UK for the foreseeable future.

The future of the Filton plant

20. Part of Airbus's Power8 programme involves the restructuring of the company's industrial base. Some of its sites will become 'core' sites. These are where strategically significant activities such as aircraft design or assembly take place, of which Broughton is one example.[58] Three non-core sites are to be sold altogether. For some sites Airbus is seeking risk-sharing partners to take partial or full control, and to assist in their development from metallic to carbon fibre composite design and manufacturing. This is the case for that part of the Filton site where manufacturing takes place, in addition to Airbus's sites at Nordenham in Germany, and Méaulte in France.[59] Airbus UK told us the rationale for this approach is that it could not afford on its own to develop the facilities to transform Filton into a composite manufacturing facility.[60] Instead, following "strong representation from government and from employee representatives" it committed to finding a risk-sharing partner as the best solution.[61] Airbus UK's intention now is to strengthen the overall capability of the plant, in the hope this will help it to win work in the medium and longer term.[62] However, its Managing Director, Iain Gray, warned that the future of wing part manufacture at Filton is dependent on it finding an appropriate partner.[63]

21. Since the Power8 announcement, Airbus has established a project team to search for a risk-sharing partner for Filton. The evidence we received from both industry and the Government was optimistic that an appropriate partner would be found. The Society of British Aerospace Companies (SBAC) noted that the UK is a world leader in risk-sharing partnership agreements, and that Filton represented "a huge opportunity".[64] Iain Gray of Airbus UK told us: "Filton offers very, very significant strategic advantages", while the DTI Minister said: "I do not think we have to look very far to find the sort of people who are likely to be … potential partners".[65] Indeed, recent reports suggest a number of firms have made offers to Airbus for the plants it plans either to seek partners for or to sell.[66] In practice, the major players based in the UK which are likely to be interested in the Filton plant include, among others, GKN, Bombardier, Spirit and General Electric, which has recently acquired the aerospace division of Smiths Group. All of these companies have important UK capabilities in the design and manufacture of composites.[67]

22. The future of wing part manufacturing at the Filton plant is dependent on Airbus finding a risk-sharing partner for the site. This will assist its transition from metallic to carbon fibre composite design and manufacturing technology. Airbus UK is still in negotiations with interested companies, although a conclusion is expected very soon. Both the industry and the Government are confident that a suitable partner will be found which will help ensure the future of wing part manufacturing at the site. We are encouraged by these developments and share the participants' optimism.

Job losses

23. That part of the Power8 restructuring that received most media attention earlier this year was the announcement that 10,000 jobs were to be shed across the company over the next three years. These will be shared across the four partner countries— roughly 3,700 in Germany, 4,800 in France (including 1,100 from the Headquarters in Toulouse), 400 in Spain, and 1,600 in the UK.[68] More recent information suggests the precise number of job losses for Airbus UK will be 1,509, of which 1,095 are to go at the Filton site, and 414 from Broughton.[69] Airbus expects to draw around 50% of the job cuts from its permanent workforce, with the other half coming from temporary staff and sub-contractors. Although the precise split for the UK is yet to be determined, Iain Gray told us he envisaged the same kind of ratios. He also emphasised that most job losses will be from support functions and overheads, rather than affecting blue-collar workers.[70] At this stage, there will be no compulsory redundancies, as Airbus hopes to achieve the cuts through negotiated severance over the next two years. The company intends to monitor this approach over the coming months, and will consider other measures if it does not believe itself to be on track to achieve the workforce reductions it desires.[71]

24. In its evidence to us, the DTI was fairly relaxed about the size of the job losses for the UK, noting that the gradual process should preclude the need for the same type of intervention it provided for Rover employees at Longbridge in 2005.[72] The industry was also cautiously optimistic. The SBAC pointed to a recent survey of the sector, which shows the number of jobs across the aerospace industry is increasing. So while there is a reduction in one area, it is within the context of a growing sector.[73] This situation contrasts sharply with the reaction of governments and employees to the job losses announced in France and Germany. Since the Power8 announcement, there has been industrial action at many of Airbus's sites on the Continent. This issue featured prominently in the recent French presidential campaign, as the two main candidates spoke out against the cuts, and promised to intervene in the company's restructuring.[74] This is a worrying development for our country as there is a risk that any forced re-opening of negotiations on the plans for Power8 could result in a worse outcome for the UK.

25. Whilst job losses are regrettable, we accept that the 1,509 that Airbus plans to shed in the UK represent a fair allocation of redundancies from the 10,000 jobs, which will be lost across the company. We hope Airbus UK will work with the unions to agree appropriate measures to implement these cuts gradually. We are concerned, however, that the recent change in the French Presidency risks leading to a re-opening of negotiations among the parent countries on the implementation of Power8. We encourage the UK Government to work towards avoiding this possibility, and, in the event of any suggestion of new arrangements that may be less advantageous to the UK, to show the same commendable dedication and determination it showed in arriving at the current agreement.

Outsourcing

26. Alongside Airbus's plan to cut jobs across the company is the intention to outsource a larger proportion of its work. It will continue carrying out high technology, high added value work, but a range of activities, which the company believes can be done more cheaply elsewhere, will be contracted out.[75] The decision to seek risk-sharing partners for several of its sites, as well as the sale of others, is a key part of this process. Airbus's intention is to outsource around 50% of the aerostructure work for the A350 XWB—up from its current rate of 25%. This is still less than the levels for Boeing and Embraer, which respectively outsource 80% and 70% of the work on their current programmes.[76]

27. At this stage, it is difficult to see what the impact of greater outsourcing for the A350 XWB will be on the UK. As large potential customers for the aircraft, and as sources of cheap and skilled labour, China and Russia will receive some of this work. On the other hand, UK companies have a good track record of winning contracted work from Airbus. Indeed, during the 1990s, greater outsourcing of work packages enabled UK companies to increase their share of particular programmes to a point which exceeded BAE Systems' formal shareholding.[77] Moreover, the UK arm of Airbus already outsources some 50-60% of its work to domestic companies, and to firms in China and the US. For example, in the UK there are some 400 suppliers involved in the A380 programme.[78] So the changes resulting from Power8 should not be as significant for Airbus UK as they are likely to be for other parts of the company. In addition, projects such as the SBAC-led 'Supply Chains for the 21^st Century' are helping UK sub-contractors to raise skill levels and improve processes, which should increase their ability to win further work.[79] Overall, the DTI told us that greater levels of outsourcing for the A350 XWB represent both an opportunity and a threat to the UK.[80] It is a challenge to which we believe supply chain firms here will be able to rise—a view shared by the Society of British Aerospace Companies.[81]

Centres of excellence

28. Finally, a key element of the Power8 restructuring will be the creation of four transnational 'centres of excellence', which will replace the current structure of eight nationally structured centres of excellence. The previous model had been seen as overly bureaucratic and as often duplicating resources and effort.[82] Each centre will be fully responsible for managing the production of major sections of the aircraft. The UK has been named 'Airbus Centre of Excellence for Wing and Pylon' (pylons are the mountings which affix the engine to the wing). Airbus UK told us that, in practice, this means that it will have "supervisory responsibility for any part of the wing built wherever in the world".[83] For example, the work done in Saint Eloi in Toulouse in producing the pylons will come under the aegis of the UK centre of excellence. The same will be true of the wing equipping work in Bremen.

29. Airbus UK told us the transnational centres of excellence will lead to the creation of a more integrated business, and that the commitment to keep the wing centre of excellence in the UK was "really good news".[84] The DTI Minister also described the result for the UK as "absolutely brilliant".[85] We congratulate Airbus UK and the Government on securing the role of Centre of Excellence for Wing and Pylon. Overall leadership of wing development, manufacture and assembly for future programmes will give the UK a major involvement in composite technology and help ensure the company's presence in the UK in the longer term.

40 Appendix 1 (Airbus UK) Back

41 Ibid. Back

42 Airbus press notice: 'Power8 prepares way for "New Airbus"', February 2007 Back

43 See for example, 'Airbus stalled over Power8 restructuring', Financial Times, 20 February 2007 Back

44 Appendix 13 (Royal Aeronautical Society) Back

45 Appendix 7 (DTI) Back

46 Ibid. Back

47 Appendices 12 (Prof MA Leschziner) and 13 (Royal Aeronautical Society) Back

48 Q 15 (Airbus UK) Back

49 Appendix 8 (DTI) Back

50 Appendix 2 (Airbus UK) Back

51 Q 11 (Airbus UK) and Appendix 8 (DTI) Back