At face value, the UK’s aerospace and defense industries might feel entitled to breathe a quiet sigh of relief and gently pat themselves on the back coming into this year’s Farnborough airshow. When the 2008 event closed its doors it was obvious to all but the most optimistic analysts that these markets were on the cusp of a major downturn that threatened to drastically clip the wings of these industry sectors.
The dip in demand undoubtedly did materialize as the full ramifications of the global financial crisis were felt, but, according to the UK’s new Aerospace, Defence and Security (ADS) industry association, its members have generally proved to be more resilient than might have been anticipated. That said, in a pre-show interview with AIN, ADS chairman Ian Godden warned against complacency, arguing that more needs to be done to make the supply chain more robust and efficient, and that the defense sector now faces its own period of retrenchment.
With the exception of the business aviation sector, which took an especially hard hit from the financial crisis, the civil aviation sector has been able to maintain fairly healthy rates of production over the past two years because the vast order backlogs built up during the boom years just prior to 2008 have proved to be more robust than some in the industry had reckoned. Godden said there are tangible signs of a recovery in new demand, which is more apparent in the single-aisle market segment than in that of long-haul, widebody transports.
“There is still an expectation that the rest of 2010 could see continued pressure in terms of pricing margins, but there is certainly an air of optimism beginning to re-emerge [in the civil sector],” Godden told AIN.
Defense Could Be Vulnerable
By contrast, ADS is concerned that the European defense sector may be heading in the opposite direction, having enjoyed robust market conditions during the civil aviation slump. “There is certainly a belief that we have come to the end of an era,” said Godden. “There is an air of realism that says that the next two years in defense will be tough.”
Defense budgets cannot expect to be untouched by the actions of European governments having to cut public spending to reduce national debts that have accumulated at an unsustainable rate during the financial crisis. Godden maintained that while many programs are still active with plenty more work to be done, growth will be curtailed due to a lack of new business. In his view, companies will be able to grow only through diversification and this will inevitably mean “eating each other’s growth.”
By contrast with the shrinking markets of Europe and the U.S., there is still buoyant demand for defense products to the east. “But there is a belief that if companies are not already very active outside Europe and the U.S. then they are now very late in doing so. Most have recognized this,” commented Godden, referring to markets such as Asia and the Middle East, which ADS has been urging its members to pursue for several years.
Here in the UK, ADS and its members must come to terms with a new government committed to tackling Britain’s public sector debt very aggressively. Following the general election in early May, one of the Conservative/Liberal Democrat coalition’s first actions was to commit to a new strategic defense review that could overturn some long-standing commitments on military spending.
ADS has been urgently trying to get the ear of cabinet ministers to convince them that they need to be very judicious in how defense budgets are trimmed because the damaging consequences could be long-lasting. The highest profile bone-of-contention in this respect is Europe’s late-running and over-spending A400M military transport development for which there is new concern about the ongoing commitment from new European governments, such as that in the UK.
“The complication with the A400M is that it is more than just a defense contract,” argued Godden. “It is crucial to the future of aerodynamics in our industry because [the UK contribution to A400M] is part of a long line of civil aircraft capability that could be a key factor in the next generation of civil aircraft. If we decide this is not important, then the UK will essentially be giving up [its leadership position] in civil wing manufacturing.”
Godden also suggested that early contact with members of the new UK government has shown that they are not unappreciative of this point. ADS hopes to enjoy further high-level contact with government ministers here at the Farnborough show this week and it will take the chance to show them the opportunities that could be squandered if the UK does not hold its own in the A400M and other key defense programs.
Despite the apparent resilience of the UK’s civil aerospace sector, it has not been unscathed by the downturn. ADS estimates that employment levels have been reduced by between 10 and 15 percent over the past two or three years, partly due to the fallout from the steep decline in the business and general aviation sectors. “We have to be prepared for another difficult period to come,” said Godden, indicating that he could not rule out further downsizing in parts of the industry.
Assessing the health of the UK aerospace and defense supply chain, ADS reckons that the latest recession resulted in fewer bankruptcies than it had anticipated among the 3,000 or so small- and medium-sized enterprises. The organization believes this is because the large backlogs built up before the downturn gave the industry plenty of work to sustain it through the new-order famine, but also because the UK industry was more competitive than it had been going into earlier recessions.
“Britain has not been found to be uncompetitive and the supply chain has done a good job so that the number of failures has been in the tens rather than in the hundreds,” said Godden. “The devaluation of the pound has helped, but credit has been tight and this has damaged the potential for small companies to grow or invest in their future, partly thanks to the negative attitude of banks, which have a lot to answer for.”
In Godden’s view, the recession has identified where the weaknesses still lie in the UK industry and he still sees significant flaws in the way the supply chain manages itself and gaps in terms of investment in skills and technology. While much of the remaining corrective work will have to be done by the industry itself, he believes that the government also needs to play is part. Either way, if the weaknesses are not addressed, the ADS chairman cautioned that further harm could be done in any subsequent downturn, especially given the added element of new competition from countries such as China and Russia where the emerging industries enjoy overt government support.
“The UK has reawoken to the fact that after a period of industrial success the government must invest to maintain our global position and that is certainly a challenge for our new government,” said Godden. Mindful of the continuing transatlantic clash over allegedly illegal state subsidies for aerospace firms, he insisted that to maintain a level playing field some forms of government support would have to continue if any of the competing countries resorted to this approach–which, one way or another, they all do.
ADS Replaces SBAC
The UK’s new Aerospace, Defence and Security (ADS) industry group was formed in October last year following the merger of the Society of British Aerospace Companies with the Defence Manufacturers Association and the Association of Police and Public Security Suppliers. ADS member companies employ more than 500,000 people and generate over $90 billion per year to the UK economy.
According to ADS, the UK remains the largest aerospace and defense industry in Europe, second only to the U.S. globally. It claims a 17-percent share of the worldwide market in these sectors.
ADS chairman Ian Godden acknowledged that with the growing prominence of the nascent aerospace industries in countries like China and India, the UK’s market share (along with that of other Western countries) will inevitably shrink over the next 40 years or so. However, he said that the UK will be more than holding its own if it can achieve a long-term market share amounting to three times the 3-percent share of the global market accounted for by UK domestic demand–that is, 9 percent in total.
In the defense sector, ADS claims that the UK has more small- and medium-sized enterprises than France, Italy, Spain, Germany and Norway combined. ADS counts 800 SMEs in its membership and stages some 140 events each year, mainly aimed at boosting SMEs.
ADS is the parent company of Farnborough International, which organizes the biennial Farnborough airshow.
ADS Opens New Northern Ireland Office
Here at the Farnborough airshow this week, the UK’s Aerospace, Defence and Security (ADS) industry association is to announce the opening of a new regional office in Belfast, Northern Ireland. The office is being established in partnership with the Invest Northern Ireland agency and will be hosted by the Belfast facility of Bombardier Aerospace. ADS has other regional UK offices at Leeds in the north of England and in Scotland.
In June, the association also opened new offices at Dubai in the United Arab Emirates and in Jeddah, Saudi Arabia. ADS wants to open two more offices–in Bahrain and Qatar–over the next 12 months and has just signed a cooperation agreement with the Middle East Aerospace Consortium and the Farnborough Aerospace Consortium.
ADS has international offices in Toulouse, France, and in the Indian cities of Dehli and Bangalore. It is now making plans to establish representation in China and Brazil.