UK Aerospace Could be a 'Sitting Duck' For Better-funded Rivals

 - July 21, 2020, 7:14 AM
Bombardier UK makes Airbus A220 wing assemblies at its plant in Belfast, Northern Ireland. (Photo: Bombardier)

The UK aerospace industry risks losing significant market share as rivals with more support from their governments aggressively pursue recovery from the Covid-19 pandemic through growth. The blunt warning came on Tuesday from former Airbus chief operating officer Tom Williams, speaking at an Aerospace Growth Partnership webinar on Tuesday as part of the FIA Connect event.

Williams, who has come out of retirement to be seconded from Airbus to the UK Aerospace Supply Chain Taskforce established by industry group ADS, said that urgent, sustained, and targeted support is needed from the UK government to deal with a crisis that will prove to be “more dramatic and of longer duration” than crises such as the 9/11 terrorist attacks, SARS, the Gulf War, and the financial crisis of 2008. He warned that the UK’s Brexit departure from the European Union has added to the strain that the country’s industry will feel as it pursues recovery from the steep dip in demand on the civil aviation side of its business.

In the same webinar, UK business, energy, and industrial strategy minister Nadhim Zahawi hailed financial support that his government has provided to the sector, mainly through the short-term assistance provided to all companies to endure the immediate impact of Covid. He pointed to some £2.6 billion ($3.3 billion) in joint government-industry investment in research and development committed since 2013, which includes £400 million (of which £200 million came from the government) of funds committed since 2019 for the country’s Aerospace Technology Institute to advance the development of carbon-neutral aircraft. But none of those funds have been specifically committed to addressing the unprecedented Covid crisis, prompting the unfavorable comparisons with the response of other countries.

In June, the French government committed a €15 billion ($17 billion) aid package for the country’s aviation industry, and around €1.2 billion of it provides short-term help for the damaged supply chain. Williams said that he expects to have a similar scheme in place before the end of 2020 and claimed that industries in those countries are under less pressure after their governments extended furlough-support assistance for two years. The UK government is now winding down funding for furloughed workers.

“We [the UK] are going to have to find a solution that fits the [country’s] different social and political model,” Williams commented. “In France, the industry has a higher strategic priority and the danger is that [French companies] have an ambition to grow their business through the current cycle and that means they will have to gain [market share] from elsewhere. In the post-Brexit environment, the UK could be seen as a sitting duck to be picked off and so that has given us an added challenge on top of this crisis.”

Mandy Ridyard, finance director with UK flight controls and components manufacturer Produmax, told the webinar that its business dropped by 30 percent in the immediate wake of Covid and that it had quickly redirected efforts to produce ventilators for the National Health Service. She expressed appreciation for government job retention assistance but called for a more “nuanced” and longer-term approach to supporting investment in SMEs, while at the same time boosting demand by encouraging travelers to start flying again and through government procurement.

The UK Aerospace Supply Chain Taskforce has engaged with around 187 aerospace suppliers and is currently focusing on 20 or 30 companies that it feels need the most immediate help available through existing ADS programs like SC21 (set up a few years ago to modernize the country’s supply chain) and Sharing in Growth. According to Williams, consolidation is a necessary step to make the industry leaner and better able to weather the rapid contraction in demand. “It is clear that we are now talking about an industry that could be 30 to 40 percent smaller in the next few years so we will need to reshape the supply chain to improve its liquidity and solvency so that it is ready for a return to decent business at the end of this cycle,” he said. “We are encouraging mergers and combinations of suppliers to make sure [the UK] has the right group of suppliers to emerge in a strong supply chain.”

Williams pointed out that before Covid hit, many aerospace companies had been making big investments to support rapidly growing production rates for airliner programs like the Airbus A320neo and the Boeing 737 Max. He said that the high levels of investments made in the past couple of years make it hard for firms to now take on more debt to get through the current crisis.

The industry veteran called for a patient and a long-term perspective on sourcing capital for the sector and said the government could play a role in shaping an industrial policy to support that approach. At the same time, he cautioned against the prospect of opportunistic interventions from private equity investors who he said could “pick the carcass like vultures.”

Giles Wilkes, a senior research fellow with the Institute for Government, said that the next phase of the UK government’s involvement in helping the aerospace industry could prove more challenging than its immediate Covid relief efforts. “It’s easier to act fast when you don’t have to discriminate [over] which companies to help,” he said in describing how the UK’s Conservative government had temporarily abandoned its free-market instincts in the immediate fallout from Covid. He called on those calling for larger, longer-term financial support to be more patient, warning that it will not be easy to stimulate a short-term recovery in demand for an industry that has always had to work with long investment cycles.

Zahawi said that for the government “nothing is off the table” in terms of further assistance now being considered for the UK aerospace sector. He pointed to Airbus’s decision to keep wing manufacturing for the new A321XLR narrowbody in the UK (despite Brexit) and Rolls-Royce’s continued investment in new Ultrafan engine technology as reasons for optimism. “This industry doesn’t just lie down and say ‘Covid has beaten us’ because it hasn’t and it never will,” he proclaimed.