Examination of Witnesses (Question Numbers
1-19)
AIRBUS, BAE SYSTEMS,
ROYAL AERONAUTICAL
SOCIETY AND
A½D½S
3 NOVEMBER 2009
Q1 Chairman: Gentlemen, welcome to
this first oral evidence session of the Committee's inquiry into
the aerospace and motorsport industries in particular, looking
at the protection and development of high-end engineering skills
in the UK, two hugely successful industries. I get really frustrated
when people tell me that manufacturing is dead in the UK when
my brief reminds me that we have the world's largest aerospace
industry outside of the USA dealing with a phenomenally successful
sector generating a large number of high end value manufacturing
jobs and we set up this inquiry in the spirit of optimism about
the prospects for your sector as one of the genuinely world-leading
sectors in the UK economy. So, congratulations to you all and
all you represent and it is in that spirit that we try everything
we can do to try to make sure that we can keep there and even
improve our very large share of many of these markets. We had
a very good visit last week to Bristol to GKN and to Airbus to
see the work being done particularly on composite technology and
then on to Bristol University to see the academic work supporting
that and other developments in the aerospace industries, and that
was a very revealing and important niche visit and we are grateful
to all our hosts last week for that. We are grateful now today
for you coming before us and may I, as I always do, begin by asking
you to introduce yourselves for the record from the left.
Dr Williams: Good
morning. My name is Gareth Williams; I am the Head of Business
Development for Research and Technology at Airbus. I am currently
based in Toulouse and moved to that role in June of this year.
For the preceding 12 years, I was based at Broughton in a variety
of operational roles.
Q2 Chairman: Will we meet you next
week in Toulouse?
Dr Williams: I believe that you
will in the evening.
Q3 Chairman: We look forward to that.
Mr Keen: I am Bob Keen and I am
the Head of Government Relations for BAE Systems.
Mr Mans: My name is Keith Mans
and I am the retiring Chief Executive of the Royal Aeronautical
Society.
Q4 Chairman: When you say you are
the retiring Chief Executive, you have never been particularly
retiring! Keith, you are known to all of us in the room and these
are your last few days in post I believe.
Mr Mans: That is right.
Q5 Chairman: Your successor is somewhere
in the room, I think.
Mr Mans: He is just behind me.
Q6 Chairman: No doubt we will meet
him in due course as well, but thank you for your work for this
sector over the last few years.
Mr Godden: I am Ian Godden, Chairman
of A½D½S, the trade organisation that represents aerospace
defence and security for 850 companies that I represent.
Q7 Chairman: The brand new A½D½S.
Mr Godden: The brand new A½D½S,
a merger between the old SBAC, Society of British Aerospace Companies,
and the DMA, the Defence Manufacturers Association.
Q8 Chairman: Not to be confused with
EADS.
Mr Godden: Not to be confused
with EADS.
Q9 Chairman: A very important distinction!
We are going to ask quite a lot of questions about varying subjects
today and I want to start with some of the economic background
questions and paint a picture of not the underlying fundamental
strengths of the sector but the challenges that are being faced
at present in the current recession. I wonder whether one of you
would like to paint a picture for me of how the recession has
actually impacted on the aerospace sector over the last year or
so.
Mr Godden: I think it is a cyclical
industry and we have experienced a cycle effectively peaking in
order book terms in 2007 and in production terms in 2008, and
an expectation, albeit uncertain, of a couple of years of continued
decline, the period of 2010 definitely being a difficult year
for the industry, and 2011 an expected trough beyond which the
normal growth, which is quite substantial, two times GDP around
the world, so 5-6% long-term growth, would be expected to return
to the industry. The net effect has been particularly bad in business
jets which the UK is thankfully not quite so heavily dependent
on, but nonetheless has some dependency on. In the larger commercial
aircraft industry, the order book has held up better than most
anticipated. So, it has not been as bad as some people were thinking
perhaps a year ago, but nonetheless it is still going to be a
tough 18 months to two years.
Q10 Chairman: To what extent do the
long lead times for commercial airliners in particular make it
easier for the industry to plan its way through a recession? Is
that a factor?
Dr Williams: I guess one of the
contributing elements that that brings is that it tends to dampen
out the immediacy of any economic changes. The implication therefore
is that there tends to be adjustment in the current order book
whilst there is a backlog of orders, which fortunately Airbus
is in the happy position to have at the moment. As a consequence,
whilst there are some cancellations, typically there will be deferrals
or movements of orders and there is, through prudent management
of that order book, an ability to bring some orders forward and
dampen the immediate effect on short-term production. Nevertheless,
as Ian indicated, in the longer term, we see the economic impact
on the airlines affecting their profitability, as a consequence
their ability to invest in the future, and there will be some
longer term impact within the commercial sector.
Q11 Chairman: I am just looking at
Airbus for a second. We were tantalised with the dates when we
were down in Bristol last week. When do you expect the A400M to
fly, its first test flight?
Dr Williams: Before the end of
the year.
Q12 Chairman: Still the same answer!
We will ask you again next week! More specifically, looking at
Airbus, and this is relevant to another inquiry we are doing on
exporting out of recession as to this inquiry, I want to ask you
a few questions about credit arrangements and ECGD in particular
and I think you are prepared for this. You suggested in your very
powerful evidence, for which I am very grateful, that ECGD is
not working closely enough with its European counterparts and
that makes it more difficult for your customers to secure credit
to place orders with you. What are the current arrangements for
co-operation and what changes would you like to see?
Dr Williams: Whilst it is not
an area of expertise for me, the briefing that I have and would
convey to you is that it is not so much that the arrangements
are not working effectively, it is intrinsically that there are
three agencies through which an arrangement must be made—the
Export Credit Agency in the UK, France and Germany—and the
contrast or the comparison that is being made is with the US case
where there is a single agency to deal with. We certainly recognise
that in the recent months and probably the latter half of this
year there has been close co-operation between the export credit
agencies in France, the UK and Germany and I have seen some simplification
of the process that a customer would engage in to ensure the appropriate
financing of their acquisition. Some fundamentals, rather than
there being an issue with the detailed transactions between the
different agencies, it is the very fact that there are three rather
than one to deal with and insofar as it can be made to operate
as if it were one that would be beneficial.
Mr Godden: Can I just add that
I think it is the complication and therefore the delay or the
pace at which decisions are made rather than the extant of the
decisions and I noticed certainly in the last year when the industry
did make the appeal to both governments, the EU and the various
banks, it took a bit longer than the Americans to respond to that
but they did respond.
Mr Keen: I wonder if I can make
a couple of points from the defence aerospace point of view. First,
in relation to the impact of the recession, the general picture
is the same. The long-term nature of the business means that the
impact in the short term has been less than it has in other industries
but clearly, against the background of the public deficit which
the UK is facing, there is bound to be increasing pressure on
the defence budget which will in turn affect MoD procurements
and indeed investment in research and technology in the long term.
So, whilst the short-term effects have been relatively small,
the longer term impact could be more significant. As far as ECGD
is concerned, I think that our perspective is slightly different
in that our principal preoccupation with ECGD is making sure that
the UK is operating on a level footing with its European and other
competitors and therefore, from our perspective, we are concerned
to ensure that the sort of offerings that are available to our
European competitors are also available to UK exporters, particularly
at a time when I think exports will become more important—your
inquiry into exporting out of recession is a very important one—both
from our point of view because of the additional pressures that
I have spoken about on the UK domestic market but also because,
in exporting, being able to offer competitive and attractive financing
packages to our overseas customers is going to be increasingly
important.
Mr Mans: May I add one very quick
comment and that is that I think it is important for all governments
in the UK to appreciate that this sector is a global sector which
affects not just businesses but governments as well. So, you have
to look at what everybody else is doing across the world. I also
believe that you need what I would term a life-cycle partnership,
so that at every stage in the development of a new aircraft right
through to ECGD you look closely at what other people are doing
to ensure that the industry remains competitive in the UK.
Roger Berry: Is the logic of what you
are saying about export credit agencies that there should be a
single EU export credit agency?
Q13 Chairman: Certainly for the aerospace
sector.
Mr Godden: It is an interesting
question. I think it is the pace. If the answer to that is that
that increases the pace at which things are done, then the answer,
from an industry point of view, would be "yes", I guess,
but there is a fear that that does not necessarily follow what
you have just said.
Roger Berry: I appreciate that it is
a controversial question. I am not highly surprised that there
was a long silence afterwards as you looked around the room and
wondered what kind of response you would get from various people,
but the logic of what you are saying requires me to ask that question.
Chairman: We will not tell The Daily
Telegraph what you say, I promise.
Q14 Roger Berry: Yes, we will!
Mr Mans: Let me try to offer a
suggestion. I would argue probably there is a stronger case in
terms of commercial aerospace particularly when this country is
so linked up with other countries in Europe. However, when it
comes to defence, probably Bob will have a different view because
clearly we compete with other countries in Europe and therefore
our offer in terms of ECGD should be at least as competitive as
those that we are competing with.
Mr Keen: I absolutely agree with
that. The logic of my argument, which is for a level playing field
across European competitors, is that there is a levelling out
of the offerings which each of the export credit agencies make
and indeed the OECD consensus rules, which do not apply in defence
actually but which apply more generally to export credit offerings,
do have the aspiration of making sure that those offerings are
the same. I am not directly answering your question—
Roger Berry: I have noticed!
Q15 Chairman: I have a more technical
question that I was going to ask about one aspect of the way the
system works but I am not going to ask that question and my suggestion
is that perhaps our clerks could talk to all four of you and you
might like to give a little written note—and Airbus has
already done quite a lot already on this—as to how you see
this issue for our other inquiry rather than being bogged down
today when we are looking at the future rather more. I think that
would be helpful. So, we will park that for the time being and
would like you to give considered responses to the quite important
issues for that inquiry. I think that would be sensible. Actually,
looking at Dr Williams and the rest of you as well, is there a
difference in the cost of trade credit between the US and Europe?
Is there a price difference or is it a bureaucracy question?
Dr Williams: I am afraid that
I do not have sufficient knowledge to answer that question. Perhaps
I could offer to provide some additional information.
Mr Keen: A final word on defence.
As far as the US is concerned, the EXIM organisation is actually
precluded from offering credit for defence programmes. The whole
approach to defence exporting in the US is different and based
on foreign military sales and a foreign military funding process.
So, it is comparing apples with pears.
Q16 Lembit Öpik: My question
is to Airbus: to what extent are we being insulated against the
recession because the A-380 and we can predict the A-350 are actually
technologically superior to the main competitors, the outstanding
but now venerable 747 which is probably close to its final version
and the problems that we all know that Boeing is having with the
Dreamliner?
Dr Williams: I think certainly
there is a large insulation effect and a benefit from technology
in the A320 because that, as a family of aircraft, has been highly
successful. You will be aware that it has paid back its repayable
launch loan many times over now and in fact it is the mainstay
of Airbus in terms of production rates. The current production
rate for that aircraft is at rate 34, as it is called, which,
although it does not sound a lot, is actually large volumes in
aerospace terms and we are pleased to hear today that Air New
Zealand, I think, have placed an order for another 14 aircraft,
so that is another two weeks' solid production added to the order
book and is very good news. The linkage between technology and
the security of the future order book I think is there, but I
would choose to focus more on the A320 as providing the bulk of
that security today. I think we would anticipate providing the
A380, which is recognised as a superb product, in the next economic
cycle, should we reach that point.
Q17 Lembit Öpik: A½D½S
is obviously a very exciting development because it seems to be
trying to create a single narrative for civil aviation, space,
defence and security. To what extent do you think it will be possible
to create a cohesive strategic narrative? The reason why I ask
the question is because I think that the biggest single weakness
of the entire sector is that it operates in silos and sometimes
it fights itself, whereas, if it worked together, then that would
be an enormous force multiple both in terms of its political impact
but also its commercial opportunities.
Mr Godden: I think that it is
very positive for two reasons. One is the historical reason that,
in the defence alone, the land, air and sea defence has been differentiated
and siloed in the past. The industry itself has consolidated that,
so many of the major players do not differentiate between land,
air and sea anymore, and that was part of the history, let us
say, that we had to deal with. The second is that there are obviously
strong links between civil aircraft and military aircraft and
that is something we would encourage and we see it on things like
the A400M and the importance of composite wings for the future
and the UK technology on composite wings versus the very ambitious
Spanish and German and equivalent companies keen to establish
a position there. So, it is important to keep the link between
the civil and the military as well. Thirdly, the area of defence
and security. There is clearly a blurring both in people's minds
and in technology terms between those two sectors. Some say that
defence is playing away from home and that security is playing
at home. That distinction in British terms I think has been unhelpful.
For all those reasons, it has been logical to put together but
I think that there is a second reason which is perhaps more important
in the long run in that there is a recognition, as the Chairman
mentioned at the beginning, that manufacturing high value service
and the nature of engineering and design and innovation is very
similar in those four sectors—civil aviation, space, security
and defence—and that, as a major contributor to government
policy currently and, as far as I can see, the whole of society
wanting Britain to be an innovative nation. So, those four logically
fit together. My last point is that supply chain sometimes does
not recognise the difference. I think that the major platform
and systems integrators and equivalents see the differences there
but, when you look at the supply chain, there are 9,000 companies
or thereabouts in the UK. If you do it narrowly, you get to 3,000
and if you do it widely, you get to 9,000 companies.
Chairman: I am going to cut off there
rather rudely because Mark Oaten is going to look at supply chains
and I think it is a nice introduction to Mark's questions.
Q18 Mr Oaten: Let us pick up on those
9,000 companies. Ian particularly but all of you guys will be
in a pretty good position to get an assessment of what impact
the recession has had on those who are working in the supply chain.
Are there some particularly difficult horror stories that some
of those suppliers are going through at the moment?
Mr Godden: There have been isolated
incidents of significant problems particularly on the civil side
over the last year or so and there is an expectation that some
aspect of the supply chain will be affected by the downturn in
the civil side. If I look at it in holistic terms, a small minority
of companies have struggled and I contrast that with the automotive
sector, where obviously suppliers have been really badly hit and
I contrast that with certain sectors like the business jet market
which has been significantly bad. Overall, because of the comments
earlier about the lagged effects and the smoothing effects of
long-term programmes, the supply chain, although squeezed, has
not been damaged in the same way, but my belief, on the civil
side next year and on defence probably two or three years from
now, is going to be squeezed quite significantly.
Q19 Mr Oaten: We have not seen the
pain yet.
Mr Godden: I do not think that
we have seen the full pain yet; I think that is coming next year
or the year after.
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