Memorandum submitted by Society of British
Aerospace Companies
1.1 SBAC is the UK's national trade association
representing companies supplying civil air transport, aerospace
defence, security and space markets. Together with its regional
partners, SBAC represents over 3,000 companies across the
UK supply chain.
1.2 The UK has a 17% global share of the
aerospace market, 10% of the defence market and is well placed
to provide the equipment and necessary expertise to take a lead
in the increasingly more important security sector. In 2007, 62%
of the UK aerospace and defence industry's turnover came from
export.
1.3 Aerospace, defence, security and space
are vibrant, innovative industries, well equipped to contribute
to the economic recovery. However this success should not be taken
for granted and there are some short-term liquidity issues which
threaten to cause problems for the sector. Continuing investment
is required in skills and R&D if UK industry is to maintain
and build on its current global position for the future. As these
sectors are closely inter-related and in some cases overlap, a
number of recommendations mentioned in one section below can also
be applicable to other sectors.
1.4 SBAC members recognise the support and
backing they receive from Government and in particular UKTI, however
SBAC has identified opportunities where Government support could
help encourage and strengthen export potential within our sectors
and we therefore welcome the opportunity to contribute to this
inquiry.
2. CURRENT OPERATING
OUTLOOK IN
THE AEROSPACE
SECTOR.
2.1 The low availability of commercial credit
is having a growing negative impact on airlines, affecting the
potential purchases of commercial and corporate aircraft. The
numbers of used aircraft on sale has increased significantly in
recent months with the number of new orders coming through substantially
decreasing. Civil aerospace "backlogs" are being found
to be fragile as more and more purchasers seek to defer or cancel
orders. The situation is being exacerbated by aircraft finance
which is virtually non-existent on the markets. ECGD's support
for the civil aerospace sector has therefore become even more
important over recent months.
2.2 The Export Credit Guarantee Department
(ECGD) has implemented new processes and reviewed resources to
enable it to meet increased demand in the current market from
aircraft and engine customers for funding provided under ECGD's
guarantee. At present financial institutions have limited capability
or appetite to provide loans covered by ECGD or other sovereign
ECA guarantee as most are in the process of deleveraging their
balance sheets and the major European lenders find it difficult
and costly to commit US dollar based lending over the 12 year
ECA loan term.
2.3 SBAC members have expressed concern
that the UK Government has yet to reassure customers and the supply
chain, including many SMEs, that the UK will support its average
25% share, by country content, of the financing requirement generated
by the European ECAs issuance in 2009 which is expected to
be c.$12 billion worth of guarantees. The French Government
has conditioned its recapitalization of some French financial
institutions to a commitment by those institutions to provide
backstop funding for up to EUR5 billion of the French share
of Airbus aircraft exports (that have a considerable British content).
However it is anticipated that this amount will not be sufficient
to fund the number of deliveries that require funding this year,
especially as the UK and German ECA shares are not, as of today,
supported by a similar funding backstop in the UK and Germany.
US EXIM has twice demonstrated recently its capability to fund
customers directly, without reliance on commercial banks for provision
of the underlying loan. This is a significant competitive threat
to UK companies in an important export market.
3. LONGER TERM
SECTOR OUTLOOK
IN CIVIL
AEROSPACE WHERE
DEMAND FOR
GREATER EFFICIENCY
IS DRIVING
GROWTH
3.1 The aerospace industry is forecast to
grow at 5% per annum for the next 20 years, with the Middle
East, India and Asia Pacific expected to show particularly strong
growth. This forecast is expected to prove valid for the long
term, though it is anticipated that this growth will temporarily
slow over the next three years. Deliveries of new aircraft show
significant cyclicality, but the overall trend is for strong growth,
with forecasts predicting a requirement for between 29,538 new
fixed wing aircraft worth $2.6 trillion up to 2026 (Airbus,
Demand for Passenger Aircraft 2007-26) and 29,400 aircraft
worth $3.2 trillion up to 2027 (Boeing summary outlook,
2008-27) and 30,000 rotorcraft worth around $300 billion
up to 2027 (AgustaWestland figures). It has to be noted that
part of this strong growth is forecast to meet forthcoming environmental
regulations and considerations that will come into play during
the same time scale as well as meet demand for ever more fuel-efficient
aircraft from customers.
3.2 The UK currently holds strong positions
in the market on propulsion, airframe and aircraft power and control
systems resulting in the UK's current 17% share of the aerospace
market. The UK's prominence in the aerospace export market stems
from prudent identification of key sectors and investment opportunities
in the past, sometimes up to and over 20 years ago. Typical
aerospace programmes involve extremely long timescales, which
allow for a steady engineering effort over the product's lifetime,
with the peak being during the initial production and remaining
steady during the lengthy support "tail". Consequently
if the industry is to maintain and secure the skills and employment
levels developed during a product's life cycle in the long term,
a "pipeline" for new programmes is required.
4. COMPETITIVE
CLIMATE CHARACTERISED
BY LARGE
SCALE INVESTMENTS
IN RESEARCH
FUNDING
4.1 Civil aerospace is characterised by
heavy up front investment and exceptionally long programme lives,
which during its evolvement, has seen aerospace primes and tier
1 and 2 organisations increasingly sharing development
and programme risk within their supply chains. The result has
been that the risk sharing load has been spread across a wider
selection of companies, meaning that while a greater number of
companies have the potential to share in an industry's success,
the reverse is also true should the UK lose its leading position.
This trend has significantly increased the exposure of UK SME's
to investments in major long term programmes.
4.2 For the UK industry to maintain and
increase its presence in the global civil aviation markets, the
solution inevitably starts before export and must reside in the
stabilisation and support of the industry. It is important to
preserve the skills base and to increase the level of financial
support, in particular for research and development activities.
Market driven R&D is vital for the industry to be able to
prepare the next generation of aircraft and deliver the amount
of support necessary for the UK to maximise the benefits of this
immensely valuable future market as outlined above. R&D investment
will help in two areas: first, by making new products more fuel
efficient and therefore more environmentally friendly; and second,
many of the skills & capabilities in the aerospace industry
can readily be applied to clean technologies (eg wind farms, civil
nuclear etc).
4.3 Aerospace is one of the few industries
in the UK that has taken the initiative to develop a national
strategy for Research & Technology with help from DIUS, in
particular in supporting the Aerospace and Defence Knowledge Transfer
Network (KTN). SBAC has developed a technology route-map that
identifies where investments need to be made, in particular for
the low carbon technologies required for future aircraft, rotorcraft
investment and investment in Unmanned aerial systems. This ensures
that the maximum output can be delivered from any additional government
investment in technology.
4.4 SBAC is concerned that due to constraints
on its budget funding from the Technology Strategy Board (TSB)
will not adequately sustain the pace of investment needed. With
such stringent targets to meet against an international and competitive
timetable. SBAC recommends that the pace of technology development
needs to be increased further. This will ensure that technology
is well advanced and that the greatest carbon reduction can be
achieved. To be ready for future programmes industry forecasts
that Government needs to substantially increase the budget for
the TSB to increase the pace of investment in collaborative research
and development funding.
5. MAINTAINING
UK SUCCESS IN
DEFENCE EXPORTS
5.1 The UK defence sector was the top global
defence exporter in 2007 with a record £10 billion
(US$19 billion) of new business and a 33% market share. Support
for defence manufacturing therefore aligns well with the national
economic recovery strategy which places strong emphasis on export-led
growth. A key factor in the success of UK defence exports has
been the MOD defence R&D programme which underpins the innovative
capability of the equipment. There is a direct correlation between
the quality of military capability of a nation and the levels
of investment it has made in Research and Technology (Defence
Industrial Strategy (2005). SBAC is therefore extremely concerned
that investment in defence R&D will be cut further after several
years of continual decline. SBAC understands that this year's
Research & Technology budget is expected to be cut by 7%.
Should such a reduction be implemented it will have a major impact
on industry's ability to develop capability and quality systems,
and subsequently damaging its prospects for exports in the next
20 years. SBAC recommends that defence R&T and R&D
investment should not be cut any further than current levels,
and where possible it should be increased.
5.2 SBAC recognises the excellent work which
UKTI DSO does towards promoting the UK defence industry however
it is believed that a stronger senior ministerial presence in
promoting the defence sector would greatly enhance prospects for
UK exports. Competitor nations regularly benefit from the direct
intervention and support of heads of Government and senior ministers.
The UK Government needs to do more in trade promotion in this
regard if the UK is to retain its global leadership role in exports.
5.3 Maintaining UK defence industry's excellent
export record will also depend on avoiding a reversion to protectionist
measure owing to the current recession. SBAC supports efforts
by governments, legislatures and industries, especially in the
EU and US to facilitate cross border trade in defence. In particular
UK industry would like to see early ratification by Congress of
the UK US Defence Trade Co-operation Treaty.
6. SECURITY
6.1 UK industry is well placed to provide
the technology and equipment that will give the best support in
the fight against international terrorism. With the right approach,
UK industry could supply equipment to other nations and develop
exports for a market that is growing significantly and which has
great potential for the acquisition of niche technologies.
6.2 SBAC noted the establishment in 2008 of
the UKTI Defence and Security Organisation's (DSO) "Security
Directorate" which provides specialist support to companies
within the security sector. UKTI DSO has also established a Business
Development Directorate which deals with events, exhibitions,
provides market analysis and specific support for SME companies.
This support is essential for industry in the UK in the context
of the current economic downturn and the potential for new opportunities
within emerging international security markets.
6.3 SBAC has welcomed UKTI DSO's proactive
engagement of the security industry through the UK Security and
Resilience Industry Suppliers' Community (RISC) International
Group and DSO's bespoke Security Sector Advisory Group (SSAG).
6.4 UKTI DSO's decision to develop analysis
on how to access overseas markets and assess the strength of competition
within them has been warmly received by industry. SBAC considers
it essential that RISC is provided with the findings of UKTI DSO's
analysis at the earliest possible opportunity.
6.5 SBAC members benefited from the UKTI
DSO's presentation to the RISC International Group in March 2009 on
its initial research identifying seven target security markets,
and we would recommend that there be continued engagement of this
sort.
6.6 Industry would wish to make the point
that regular engagement of industry will be vital to helping ensure
that the UK makes the most of the new opportunities that are arising
in the global security market.
6.7 SBAC recommends that UKTI DSO develops
a shared strategy with industry to enable the UK security sector
to access new markets. DSO should ensure that this strategy is
linked to priorities arising from within the domestic security
agenda. It should for example take a lead in promoting the need
for export considerations in security procurement decisions across
government departments, recognising that industry develops capability
according to the needs of the customer. Exportable technology
reduces long-term costs on government and thus derives greater
value.
6.8 SBAC recommends that Government and
industry should develop a joint approach to take full advantage
of the EU's €1.4 billion budget (2007-13) available
to Government agencies, academia and industry for research and
development investment in the security field.
7. SPACE
7.1 The UK is a global leader in space-related
commerce, industry and research, and is host to some of the most
profitable and technologically advanced enterprises in the world.
Its capabilities support investment across a range of activities
that rely on space technology including, the world's most profitable
global mobile communications provider, the world's leading capital
market for satellite and application financing, the world's first
public/private partnership for secure military satellite communications
and Europe's most successful satellite-based TV broadcaster. All
the current evidence is that the world's dependence on satellite
systems is growing rapidly. The UK is already estimated to have
7.3% share of the global market which should reach $3 trillion
by 2020 (Case4Space report, October 2006), and there is potential
for this to grow significantly if the UK continues to be innovative
and competitive.
7.2 To ensure that the UK industry is well
positioned to develop innovations and exportable products for
this investment SBAC supports the need for the development of
a UK space strategy developed by cross government stakeholders
and representatives of industry and academia. The Aerospace Innovation
and Growth Team was crucial in identifying the key markets for
the UK aerospace industry to focus on, and it is firmly believed
that a similar process is necessary to enable UK space to achieve
its full potential.
29 April 2009
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