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SECTOR BULLETIN:

In association with: ROUND UP SECTOR BULLETIN: AEROSPACE

MANUFACTURING ROUND UP

Welcome to our second Sector Bulletin report in with Santander. This time we take a deep dive into the UK’s aerospace , looking at its structure, global presence, recent performance, risks, opportunities and long-term trends. But before we turn our attention to everything aerospace, we take stock of how the overall manufacturing industry has fared over the past year and the key trends affecting the outlook of different sectors.

The manufacturing industry recorded solid growth in Since the end of 2016 we’re seeing a reversal of these 2016, with output expanding by 0.7%. However, once trends. The combination of improving export demand again, growth was underpinned by significant variation from key overseas markets and the hefty depreciation in the performance of manufacturing sectors. Soft global in Sterling is providing supportive conditions for export- demand, weak manufacturing investment and the slump intensive sectors. Conversely, the mix of rising global in global prices saw the capital and commodity prices and Sterling depreciation is pushing up metals industries take a significant hit. On the other hand, inflation, spelling bad news for consumer-facing sectors. In global deflationary pressures provided a significant boost to this section we look at how these trends are likely to affect consumer-facing manufacturing sectors, as UK households manufacturing sectors in 2017. moved to spend the extra cash on the UK .

Manufacturing round up

% yearly change, GVA output

9 n 2016 n 2017 n 2018

3

0

-3

-9

-15 Textiles Electrical Chemicals Electronics Mechanical Basic Metals Motor Manufacturing Metal Products Metal Food and Drink Food Other Pharmaceuticals Paper and Paper Rubber and Plastics Non-Metallic Non-Metallic

Source: EEF & Oxford Economics (2017) www.makeuk.org 2 MANUFACTURING ROUND UP SECTOR BULLETIN: AEROSPACE

GLOBAL MANUFACTURING ACTIVITY ON THE UP

Global manufacturing activity has depreciation has positioned UK Sterling could help them win some picked up considerably since mid-2016. manufacturers to take advantage of orders at the margin. After a soft patch that stretched to improved global demand conditions. almost two years, manufacturing PMIs Export-intensive manufacturers in Conversely, sectors predominantly in the US, and the Eurozone are commoditised industries, such as catering to the domestic market, like all firmly rooted in positive territory at basic metals and chemicals, are likely food and drink and textiles, are unlikely the start of 2017. to see the most of this twin benefit. to benefit much from this trend. High value-add manufacturers with Nevertheless, the increase in import As a result, manufacturing investment an exposure to overseas markets, prices could prompt some consumers has come back online and orders have such as mechanical equipment and and manufacturers to switch to been flowing through the international motor vehicles, should also benefit UK suppliers if and where domestic . What’s more, the Sterling from stronger demand, while the low production capacity is in place.

Global manufacturing activity on the up across the UK’s key export markets

Purchasing Managers’ Index, 50 = no change in output

60 US UK 50 = no change China Eurozone 58 56 54 52 50 48 46 44 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Jan-12 Oct-12 Jan-13 Oct-13 Jan-14 Oct-14 Jan-15 Oct-15 Jan-16 Oct-16 Jan-17

Source: Markit, ISM, Caixin

INFLATIONARY PRESSURES UP

The key trend shaping the fortunes of the industry, with input prices rising by a of all their inputs into production, are UK economy in 2017 is the build-up of staggering 20.5% in the year to January particularly vulnerable to this trend. inflationary pressures. This is mainly down 2017, their fastest rate of annual growth to two significant price movements: since September 2008. This contrasts to But it’s the sectors which are both 1. The real effective exchange rate has growth in output prices of just 3.5% in dependent on imported materials and sell depreciated by 13.1% since January the same period, signalling considerable to UK consumers, such as food and drink 2016, pushing up the price of imported pressure on manufacturer’s profit margins. and textiles, that are likely to bear the brunt. materials and components. First, their low export-intensity means 2. The oil price has increased by 77.8% since While manufacturers across all sectors they’re less able to hedge against lower January 2016, propping up CPI inflation via will see their input surge, it’s the profit margins in their domestic an upward pressure on energy prices. most import-intensive that through higher export volumes. Second, will suffer the most. Manufacturers in the the increase in CPI inflation is expected to The impact of these price pressures has electronics and electrical equipment weigh on household consumption and already been felt in the manufacturing industries, which import 48% and 43% in turn on demand for consumer goods. www.makeuk.org 3 UNDERSTANDING AEROSPACE SECTOR BULLETIN: AEROSPACE

UNDERSTANDING AEROSPACE

The aerospace industry is one of the most dynamic manufacturing sectors in the UK and one of the most successful globally. It manufactures everything from aeroplanes and helicopters to , and , , balloons and gliders.

However, the sector is dominated by the manufacture of According to ADS, the split between civil and defence parts for civil and military , such as turbojets, turbo- aerospace revenue was 50/50 in 20111, while a report propellers, rotors and other engine parts and sub-assemblies. by the UK Space Agency in 2016 valued the space Likewise, the major assembly parts include wings, fuselages manufacturing industry (spacecraft, rockets and and undercarriages, as well as smaller components ranging satellites) at £1.2 billion for 2014/15, or approximately from de-icing equipment, safety belts and brakes. 4% of total UK aerospace revenue2.

Sector make up

n Aeroplanes and aircraft n Spacecraft including satellites and launch n Engines, turbojets, turbo propellers and vehicles motors n Airships, balloons and non powered aircraft n Parts for engines turbojets, turbo propellers and n Major assembly parts including fuselages, motors undercarriages, wings etc n Helicopters n Other parts and accessories for aeroplanes and aircraft

Source: ONS (2015)

What makes the sector tick? While the UK has some presence of aircraft components for Original The UK’s aerospace industry companies that manufacture aircraft, Equipment Manufacturers (OEMs) has thrived on the back of its such as BAE Systems (combat jets) both in the UK and overseas, and competitive advantage in the and Leonardo (civil and military their supply chains. production of high-value - helicopters), the aerospace sector is intensive products. The ability of dominated by parts manufacturing. Production volumes for the UK aerospace manufacturers to The industry specialises in the aerospace supply chain are driven stay at the forefront of cutting- production of high-quality parts by demand from a few select OEMs edge has ensured the for civil and , such manufacturing distinct products. continued competitiveness of the as wings, engines, aero structures In civil aerospace, main customers industry internationally and the and advanced systems. The sector’s include Group and to a retention of a high share of global structure is defined by clusters of lesser extent in the US and aerospace sales. manufacturers that produce complex Bombardier in . For example,

1 The ADS Group, “UK Aerospace Survey”, 2012 2 UK Space Agency, “The size and health of the UK ”, Dec 2016 www.makeuk.org 4 UNDERSTANDING AEROSPACE SECTOR BULLETIN: AEROSPACE

the Airbus plant in Broughton are also exported to overseas their competitive advantage in R&D- manufactures the wings for all its civil markets. intensive production. aircraft, which together with other critical components and systems The aerospace sector is characterised The Aerospace Growth Partnership (such as Rolls Royce or General by long lead times and order . (AGP) has played a key role in Electric engines), are funnelled to A key difference between aerospace ensuring the continued growth ’ final assembly plants in and other manufacturing sectors is and competitiveness of the Europe and China. a clear visibility of the order pipeline UK aerospace supply chain. A underpinned by consistent demand collaborative partnership between For defence aerospace, BAE and for new aircraft. government and industry, it was Leonardo are the major OEMs, set up in 2010 to tackle barriers to which also support the presence – the end-customers – will growth, boost exports and grow the of an extended supply chain order new fleets in bulk, tying-in number of high value jobs in the underneath, comprised largely of OEMs and in turn their key suppliers UK aerospace industry. The AGP the same companies that serve the into long-term contracts. This also supports the Sharing in Growth civil aerospace market. Their main provides companies across the supply Programme which has helped SMEs end-customer is the UK Ministry of chain with the certainty to invest and secure contracts worth over Defence but significant volumes of innovate for the long-term, maintain £1 billion and create around 1600 assembled aircraft and components high quality standards and nurture UK jobs.

MEP LTD CONTINUE TO MOULD THEIR FUTURE IN THE AEROSPACE AND DEFENCE SECTORS

Based in Kent, MEP Ltd are an award winning moulding and machining that manufacture complex metal and plastic components. The supplies into various markets from motor sport to rail, however 80% of the company’s turnover goes into the aerospace and defence sectors, where MEP operate at various levels of the supply chain from tier 1 downwards. to deliver on their customers’ aircraft plus the growing demand requirements. for air travel in the Middle East The company’s major customers and Asia has ensured MEP have are based in the UK and include a MEP faces price pressures from seen growing demand from the number of the largest aerospace both sides of the supply chain. aerospace and defence sectors. and defence OEMs. MEP also They in an industry that The company plans to capitalise sources the majority of its materials expects continuous improvement, on their strengths in , domestically from a large number yet they must manage this quality and delivery to expand of suppliers, but experiences alongside requirements to lower their customer base in the UK and challenges further down their supply their prices, at the same time that overseas. They are also looking chain from surface treatment suppliers are pushing them up. to address the challenges in their houses who are not able to meet supply chain by reviewing internal their demands. This has a knock- Moves by aircraft manufacturers solutions to mitigate the risks on effect on the company’s ability to build new more economical they currently face.

www.makeuk.org 5 SUPPLY CHAIN STRUCTURE SECTOR BULLETIN: AEROSPACE

SUPPLY CHAIN STRUCTURE

At the top of the UK Aerospace supply chain are the OEMs, who make and aircraft, spacecraft and satellites. They are supplied major critical parts by Tier 1 manufacturers, who in turn source complex components from Tier 2 suppliers. At the base of the supply chain are Tier 3 companies which provide raw materials and sub-components to the tiers above.

Through the pressures of globalisation and the requirement up the OEMs and Tier 1 suppliers, with smaller companies for suppliers to meet stringent requirements on quality, tending to make up the other two tiers. While there are few reliability and safety, to gain access to major clients, the OEMs with assembly plants in the UK, the cluster of Tier 1 UK Aerospace supply chain has become increasingly suppliers is one of the largest and most dynamic globally, consolidated. A small number of large companies make supplying OEMs across the world.

Domestic supply chain

£ value of products going into aerospace and % total

£3.9 bn £2.9 bn £2.1 bn £0.9 bn £0.8 bn £0.6 bn £0.4 bn £0.4 bn £0.4 bn 24.0% 18.0% 12.7% 5.6% 5.0% 3.5% 2.7% 2.5% 2.3%

Products used as inputs into aerospace production as a % of total supply into the aerospace sector n Parts of air and spacecraft and related n Architectural and services; n Other basic metals and casting machinery technical testing and analysis services n Installation n n Fabricated metal products Computer programming and consultancy n Machinery and equipment n services Repair and of aircraft and n Computer, electronic and optical products spacecraft Source: ONS (2014) OEM’s, also known as prime contractors, to the OEMs, such as engines, wings, These include components such as parts for are the designers, manufacturers and landing gear or fuselages. Key Tier 1 engines, aerostructures and interiors. They assemblers of aircraft. Some of the key manufacturers are companies such may also supply products into other sectors. players in the UK include BAE Systems, as Airbus (commercial aircraft), Rolls- Airbus Space and Defence, Leonardo, Royce, Bombardier, GKN Aerospace, and Tier 3 manufacturers will supply sub and . Marshall Aerospace and Defence. components and raw materials to the tier above, such as collectors and Tier 1 companies manufacture and Tier 2 manufacturers supply sub-assemblies cylinders. Most Tier 3 companies supply supply final parts and large assemblies and complex parts to Tier 1 companies. their products across multiple sectors.

Type: Sub Type: Sub Type: Final parts Type: Aircraft components Tier 3 assembly Tier 2 eg; engines, wings, Tier 1 manufacturer OEM & parts parts landing gear

www.makeuk.org 6 REGIONAL EMPLOYMENT SECTOR BULLETIN: AEROSPACE

REGIONAL EMPLOYMENT

The aerospace industry provides employment across the UK’s regions. The sector is relatively evenly distributed, with no one region dominating. The South West is the largest cluster in terms of aerospace employment, where a number of key Tier 1 suppliers, like Rolls Royce, and GKN, as well as OEMs, such as BAE and Leonardo, have extensive manufacturing facilities.

The aerospace industry also provides significant The aerospace industry also has a substantial presence in the employment in Wales and Northern Ireland. South East. This is predominantly down to the concentration of spacecraft manufacturers, with the of Surrey In Wales, the Airbus plant in Broughton is responsible for Space Centre leading the research and commercialisation assembling the wings for all Airbus civil aircraft and employs of technologies over the past few decades. Airbus more than 6,000 people. Similarly, Northern Ireland’s Space and Defence, a division of Airbus Group, is the aerospace sector is built around major Tier 1 aircraft supplier major employer in the region, after it acquired SSTL – the Bombardier. University of Surrey spin-off – in 2009 and the merger of Airbus-owned companies and Cassidian in 2014.

Employment in aerospace across UK regions

% of aerospace employment

= employees

4,250 4.0%

1,800 1.7% 5,850 5.5%

1,700 & 14,900 1.6% 13.9% 15,600 14.6%

6,800 6.4%

9,250 12,500 8.6% 11.7% 1,100 21,250 1.0% 19.9% 12,000 11.2%

Source: ONS (2015) www.makeuk.org 7 A GLOBALLY FOCUSED SECTOR SECTOR BULLETIN: AEROSPACE

A GLOBALLY FOCUSED SECTOR

International aerospace supply chains are truly global in their nature, with major component parts being manufactured across the world, before being funnelled into a single OEM plant where final assembly takes place. The extent of their global presence can be seen in the wide spectrum of Tier 1 suppliers used to produce Boeing’s 747 four engine jet liner. No fewer than eight different countries are involved – ranging from , to the UK and Australia. These Tier 1 suppliers are themselves sourced by hundreds of Tier 2 and 3 suppliers, resulting in a truly globally inter-connected system.

This however is the source of one of the aerospace Whitney left Airbus’s new aircraft the A320 neo stranded industry’s greatest challenges. The length of the supply engine-less in , delaying flight trials and its release. chain exposes production processes to disruptive kinks or OEMs have as a result begun to look at evolving their bottlenecks. This was illustrated last year when technical supply chain to prevent future disruptions and improve issues with engines from American manufacturer Pratt & responsiveness.

Top imported products by value

£ value and % share of total aerospace imports

Aircraft: Parts for turbojets or turbo-propellers: Turbojets: 37.5% 25.6% 19.2% £9.4 bn £6.4 bn £4.8 bn

Wings, fuselages, doors, control Undercarriages & parts: Helicopters: surfaces, landing gear, fuel tanks etc: 2.5% 2.5% 11.2% £0.6 bn £0.6 bn £2.8 bn Source: uktradeinfo (2016)

THE EVOLVING GLOBAL SUPPLY CHAIN

The growing demand for air travel, as opposed to piece parts, that they suppliers” – suppliers who are being and the subsequent pressure this used to handle internally. As a result, entrusted with complete modules puts on supply chains has resulted the number of suppliers has been and systems by OEMs. An example in OEMs looking to employ lean reduced, helping to improve supply includes the principles to improve efficiency in the chain efficiency. Stelia, formerly Aerolia, who was production process. Central to this formed when Airbus outsourced the are OEM’s decisions to outsource the The of entire systems has production of its nose fuselage parts development of entire sub systems, seen the emergence of “Super Tier 1 in 2009. It now manages entire parts www.makeuk.org 8 A GLOBALLY FOCUSED SECTOR SECTOR BULLETIN: AEROSPACE

such as fuselage sections and wings, suppliers does in itself have hurdles, new suppliers and recruit employees and has its own value chain. as companies are forced to change capable of producing whole systems. their focus, extend their engineering Support is therefore often needed The emergence of Super Tier 1 capacities, build relationships with from the OEMs.

Key import markets

United States: 44.3% : 5.4% UAE: 5.4% : 5.3% : 3.4% £11.2 bn £1.4 bn £1.4 bn £1.3 bn £0.9 bn

Canada: 3.4% Japan: 3.2% : 2.8% : 2.4% : 2.0% £0.9 bn £0.8 bn £0.7 bn £0.6 bn £0.5 bn

Source: uktradeinfo (2016)

47% OF TOTAL SUPPLY INTO PRODUCTION IS IMPORTED Source: ONS (2014)

www.makeuk.org 9 GLOBAL PRESENCE SECTOR BULLETIN: AEROSPACE

GLOBAL PRESENCE

The UK is a global powerhouse in the production of aircraft, spacecraft and related parts. It’s the 2nd largest manufacturer, only behind the US, and 4th largest aerospace exporter in the world. The sector is highly export- intensive with 59% of GVA travelling to overseas markets, the highest of any manufacturing sector.

The UK’s specialisation in engines and parts of aircraft is Eight out of ten of the UK’s top export markets are reflected in its overseas sales, accounting for 79% of all located outside of the EU, albeit Germany and France are UK aerospace exports. Of that, 35% are exports of wings, in 2nd and 3rd place respectively. The US is the UK’s top fuselages, doors, control surfaces, landing gear and fuel export market, while the rest of the list is dominated by tanks. A further 23% is accounted for by turbojet engines the Middle East and Asia, with three countries each. and 20% by engine parts. Exports of aircraft make up 13% of all aerospace overseas sales.

Top exported products by value

£ value and % share of total aerospace exports

Wings, fuselages, doors, control Turbojets: Parts for turbojets or turbo-propellers: surfaces, landing gear, fuel tanks etc: 23.2% 20.4% 35.2% £6.6 bn £5.8 bn £10.0 bn

Aircraft: Undercarriages & parts: Seats for aircraft: 13.3% 2.8% 1.9% £3.8 bn £0.8 bn £0.5 bn

Source: uktradeinfo (2016) Global market share

UK is 2nd in Output the world

Source: ADS

UK is 4th in Exports the world

Source: International Trade Centre www.makeuk.org 10 GLOBAL PRESENCE SECTOR BULLETIN: AEROSPACE

Key export markets

United States: 20.4% Germany: 15.4% France: 11.1% UAE: 7.5% Singapore: 6.5% £5.8 bn £4.4 bn £3.1 bn £2.1 bn £1.8 bn

Saudi Arabia: 5.8% : 4.0% Qatar: 2.8% Canada: 2.7% Japan: 2.0% £1.6 bn £1.1 bn £0.8 bn £0.8 bn £0.6 bn

Source: uktradeinfo (2015)

Top 10 high growth markets Country % Growth in exports (2010-2016)* Morocco 6403% Iceland 4491% South Korea 589% Netherlands 262% Qatar 243% Spain 174% UAE 144% Germany 127% 126% Singapore 79%

*>0.5% of total UK aerospace exports Source: uktradeinfo (2016) www.makeuk.org 11 ARE EXPORTS FLYING? SECTOR BULLETIN: AEROSPACE

ARE EXPORTS FLYING?

UK aerospace exports have taken off over the past 15 years. Since 2002, the UK aerospace industry has more than doubled its overseas sales from £13.2 billion to £28.3 billion in 2016, an increase of 114%. Growth has been solid across all continents, although demand has been growing the fastest in emerging markets.

Exports to the Middle East have seen the heftiest growth represent a significant piece of the pie, accounting for at 540% between 2002 and 2016, while Asia & Oceania 20% of all exports each, up from 7% for the Middle East has also been a consistent source of demand for UK & Africa and 12% for Asia in 2002. However, Europe aerospace manufacturers with exports growing by 260% remains the top export market at 35%, followed by the in the same period. What’s more, these markets now Americas at 25%.

Aerospace export growth by continent

% growth, £ value of exports (2002-2016)

£28.4 Total bn

£5.6 Middle East & Africa bn

£5.6 Asia & Oceania bn

Europe £9.8 bn £ value of exports in 2016 £6.9 Americas bn

0 100 200 300 400 500 600

Source: uktradeinfo (2016)

CAV ICE PROTECTION’S PRODUCTS TAKE GLOBAL FLIGHT

CAV Ice Protection, who have their Protection’s business, in fact 98% and across Asia. main manufacturing operation and of their turnover is accounted for by headquarters located in Consett, in exports, as there is insufficient domestic A key concern when exporting is the North , are experts demand. Since the US is the main protection of their intellectual property in the design and manufacture of ice source of their overseas business – rights. Occasionally they have to secure protection systems for civil and military making up 80% of exports – they have export licences, depending on the aircraft. As a Tier 1 supplier into the a sister company in the States that acts country or intended application of their global aerospace industry they are able as their aftermarket distributor, and products. However these are merely to deal directly with the OEMs, allowing ensures efficient availability of their details to be overcome rather than them to build relationships and create product in the marketplace. A global deterrents for the company, their main long term business for the company. supplier, CAV Ice Protection export to consideration is generating business another eight countries outside of the with the right customers wherever they Overseas trade is the key to CAV Ice US, including several countries in the may be located in the world.

www.makeuk.org 12 ARE EXPORTS FLYING? SECTOR BULLETIN: AEROSPACE

DEFENCE SPOTLIGHT: AEROSPACE INDUSTRY THE BACKBONE OF UK DEFENCE EXPORTS

The UK is the leading defence exporter around two-thirds of all contracts by in Europe and behind only the United value. In the UK, the aerospace sector States in global terms. In 2015, the has been even more fundamental to most recent year for which official success, making up 85% of all defence Government statistics are available, exports over a 10-year period up to by BAE Systems) will build 15% of the global market was estimated to 2015. ’s more than 3,000 be worth £63 billion. The UK share planned F-35 Lightening II combat of this was valued at £7.7 billion, Exports of marquee platforms such jets. mostly down to the strength of the UK as the Eurofighter Typhoon multi-role aerospace sector. combat aircraft, BAE Systems’ Hawk The UK benefits from enduring trainer jet and Leonardo’s Wildcat with key importing Indeed, the helicopter are the most high profile nations, particularly in the Middle global market for contributors, though the UK is also East. The globalised nature of supply defence exports a major exporter into global supply chains also means that the UK realises is dominated by chains. Rolls-Royce remains the world’s significant value from supplying aerospace, which second largest provider of defence components into the programmes of broadly accounts for aero-engines, while UK industry (led our closest allies.

UK IS THE 2ND LARGEST DEFENCE EXPORTER IN THE WORLD Source: UKTI DSO (2015)

UK defence exports

Orders, $ billion, market prices

20 n UK defence exports (LHS) UK share of world total (RHS) 35%

18 30% 16

14 25%

12 20% 10 15% 8

6 10%

4 5% 2

0 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: UKTI DSO (2015)

AEROSPACE ACCOUNTS FOR 85% OF ALL UK DEFENCE EXPORTS Source: UKTI DSO (2015)

www.makeuk.org 13 A SECTOR TAKING OFF SECTOR BULLETIN: AEROSPACE

A SECTOR TAKING OFF

The aerospace industry, unlike many other manufacturing sectors, has experienced a rapid rise over the last 25 years. Output has grown by a staggering 73% since 1990, whereas traditional sectors such as basic metals and machinery have gone into reverse, contracting by 40% and 22% respectively.

Key to the success of the aerospace industry has been the by manufacturers, the deployment of “commercial ability of UK manufacturers to move up the value chain off-the-shelf” technologies for satellite production, the through continuous innovation. The global aerospace development of 4IR technologies such as 3D printers and industry is underpinned by a relentless drive and focus on collaborative robots, or developing a viable alternative fuel improving not just the performance and safety of the final to for aircraft; the sector is constantly evolving and product but also the manufacturing process itself. Whether has seen huge technological advances, especially in the last this is through the increased use of composite materials 10 years.

Aerospace output as % of total manufacturing output has increased dramatically in last 25 years

% yearly change in GVA output & aerospace GVA % manufacturing total

25 n % yearly change in GVA output (LHS) Aerospace % total mfg output (RHS) 6 20 5 15

10 4 5 3 0

-5 2 -10 1 -15

-20 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: ONS (2017)

UK manufacturers have made £30 billion in 2015, up 40% from its 16%, a likely consequence of the fall the most of these advances, with level in 2008. The growth in the sector in demand following the 9/11 attacks. aerospace output increasing at is further illustrated by the number of Since then however, the sector has the second fastest pace of any enterprises almost quadrupling in the performed consistently well with small manufacturing sector over the period between 2008 and 2015 – up contractions during the financial crisis past decade at an impressive from 617 to 2398, while the sector and 2014 being offset by the general 37%. Significant tailwinds from employed 107,000 people in 2015. positive trend in yearly output growth. globalisation since the turn of As a result the share of aerospace the century, combined with an It hasn’t been completely plain sailing output as a percentage of total insatiable demand for air travel have however. The industry’s nadir came manufacturing has increased from contributed to an annual turnover of in 2002, when output declined by 3.9% in 2006 to 5.6% in 2016.

107,000 PEOPLE ARE EMPLOYED IN THE AEROSPACE SECTOR IN THE UK Source: ONS (2015)

www.makeuk.org 14 A SECTOR TAKING OFF SECTOR BULLETIN: AEROSPACE

Aerospace turnover up to £30 billion in 2015

£ turnover (millions) & number of enterprises 30000 n Total turnover (LHS) n Number of enterprises (RHS) 3000

25000 2500

20000 2000

15000 1500

10000 1000

5000 500

0 0 2008 2009 2010 2011 2012 2013 2014 2015

Source: ONS (2016)

R&D that have made the UK aerospace the resurgent automotive sector. INTENSIVE industry such a success. The Whilst the sector’s share of total aerospace sector accounted for R&D spending has declined since Business spending on Research 12% of all manufacturing R&D 2004, the sector still invested £1.7 and Development (R&D) underpins expenditure in 2015, the third billion in 2015, or 19% of GVA most of the technological advances highest after pharmaceuticals and output.

Over 10% of all manufacturing R&D is in the Aerospace sector

R&D expenditure (£, millions) & aerospace R&D % manufacturing total

2500 R&D expenditure (LHS) % of total mfg R&D spending (RHS) 25

2000 20

1500 15

1000 10

500 5

0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: ONS (2016)

INNOVATIVE BUSINESS MODELS

The UK aerospace industry has where the company sells flying time maintenance costs with accuracy maintained its position as a leading rather than engines. The company and relieves aircraft manufacturers global player not only through guarantees engine flying time for from the need to purchase stocks of embracing new technologies but a fixed sum per flying hour, with engines and associated parts. also through unlocking new business a complete engine and accessory models. A classic example is Rolls replacement . This allows Recently, the rise of digital Royce’s “Power by the Hour” program, operators (airlines) to forecast technologies has enabled Rolls www.makeuk.org 15 A SECTOR TAKING OFF SECTOR BULLETIN: AEROSPACE

Royce to build in sensors that detect the quality of the service by slashing business model has led to several maintenance issues in real time and response times and often preventing other Tier 1 suppliers, such as transmit the data to its engineers the need to strip the engine down, a Bombardier, General Electric and around the world or even fix them costly and time-consuming process. Pratt & Whitney, developing similar automatically. This has improved The success of this “servitisation” programs.

1,433 Aircraft deliveries £27bn Aircraft delivery worth £ 13,567 Aircraft backlog UK aerospace industry pipeline STRONG

Source: ADS (2016) AIRCRAFT DELIVERIES AND BACKLOG

2016 was a record breaking year Encouragingly the sector’s recent other industries given the uncertain for the UK aerospace industry, with growth shows no signs of letting up, macroeconomic environment. figures from ADS illustrating that with 2016 also seeing a new industry unrelenting demand for air travel backlog record of 13,567 aircraft. With records being broken year on resulted in the number of new This represents almost 10 years’ year, and no sign of easing given global aircraft deliveries rising 3% worth of work in hand for the UK the growing demand from emerging to 1,433, up 74% from their level in aerospace industry, and potentially regions, manufacturers are looking 20063. This was the sixth successive worth up to £200 billion (at 2016 to raise production rates – bringing annual record in commercial aircraft prices). Manufacturers’ are therefore with them new jobs and investment deliveries, with 2016’s deliveries able to enjoy the of a strong to what is fast becoming one of worth up to £27 billion to the UK’s pipeline of work for the coming years, the great success stories of UK aerospace industry. a commodity afforded to very few manufacturing.

Current backlog represents 10 years work in hand to UK aerospace industry

No. of new commercial aircraft deliveries & no. of commercial aircraft backlog

1500 n New commercial aircraft deliveries (LHS) Commercial aircraft backlog (RHS) 16000

1400 14000 1300 12000 1200 10000 1100 8000 1000 6000 900 4000 800

700 2000

600 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: ADS (2016)

3 The ADS Group, “Economics Briefing”, 2016 www.makeuk.org 16 CLEAR SKIES AHEAD SECTOR BULLETIN: AEROSPACE

CLEAR SKIES AHEAD

The aerospace industry has become an integral part of the UK economy over the past two decades, achieving healthy growth rates on an almost yearly basis. This has been mainly driven by the rise in demand for air travel since the turn of the century and underpinned by huge technological advances in .

Encouragingly, the outlook remains bright, with order books opportunities, notably from growth in emerging regions, backlogged at record levels and consumers’ appetite and provides continued cause for optimism about the aerospace need for air travel showing no signs of abating. Further industry’s growth outlook in the medium term.

AEROPLANES ARE GETTING BIGGER

According to data from Ascend4, 161.7 seats per single aisle aircraft flight. UK airlines have recognised the need passenger numbers on UK airlines will However with new investment, this is set for greater capacity, and have already grow by a staggering 80% by 2034, to rise to 179 seats by 2034, according invested in over 370 new aircrafts, reaching 218 million. To cope with to ADS. This represents an 11% increase worth around $27 billion. These larger, increasing passenger numbers and and should go some way to fulfilling the greater capacity single aisle aircrafts growing demand for international flights, growing demand for European and other are expected to enter service over the UK airlines are looking to invest in new regional flight routes. Notably, instead next 8 years. Conversely wide body aircraft to increase seating capacity, of investing in similar sized aircraft and aircraft, used for long haul flights will thereby representing an opportunity attempting to squeeze in more seats, UK not see any rise in average seating for aerospace manufacturers. airlines are looking to follow the general capacity over the coming years, aviation trend, and invest in much larger rather greater flexibility and choice in Currently, UK airlines offer on average aircraft that can carry more passengers. seating.

A TRANSFORMED FLYING EXPERIENCE

A further opportunity for aerospace already invested significantly in R&D to high speed will soon be manufacturers comes from the to improve both the weight and common place on aircraft. At the new equipment and capabilities comfort of aircraft seats, across all moment, Wi-Fi connected aircraft that new aircrafts will possess, classes. This includes investment in have significant barriers, including and as such, the manufacturing “plug and play” capabilities, allowing prohibitive costs as well as the issue of these components. Over the passengers to use their electronic of protecting passenger privacy in coming decade UK passengers will devices, as well as thinner seats the air. However future experience a transformed flying which allow for greater leg room are set to overcome these barriers. experience as advances in technology without compromising comfort. Companies such as Inmarsat, a are implemented into new aircraft, British satellite telecommunications improving passenger comfort and A further key element in improving company, are actively looking at safety. passenger comfort levels, is increased ways to provide protected, low connectivity. As well as in-flight and fast internet connectivity to Airline seat manufacturers have improvements, access airlines and aircraft manufacturers.

4 The ADS Group, “The Great British Take Off”, data from Ascend Flight Global Consultancy, 2015 www.makeuk.org 17 CLEAR SKIES AHEAD SECTOR BULLETIN: AEROSPACE

DEMAND FROM EMERGING MARKETS IS GROWING

Rising GDP and household incomes in Europe or North America. According and cost effectiveness. As emerging from emerging regions, coupled with to ADS, currently around 32 million regions look to exchange expertise in the globalisation phenomenon is set to passengers travel to and from the UK manufacturing techniques and processes, increase the demand for air travel in the to destinations not in Europe or North UK manufacturers could find themselves coming years. There is therefore a clear America. This number is set to grow with increased demand for their proven opportunity for the UK aerospace industry to 86m in 2034 – an impressive 5.4% and established products. and its suppliers to position themselves to annual growth rate5. benefit from growing commercial markets The Middle East should continue in relatively untapped regions. The increased demand for aviation from to represent one of the greatest emerging region represents an opportunity opportunities, as the region looks to Over the next 15-20 years, growth of for UK aerospace manufacturers at itself as the centre for long haul UK airlines and the derived demand for various stages of the supply chain. New connecting flights. However it is in Asia aerospace manufacturers is expected aircraft production programmes will face where growth is expected be strongest to be underpinned by growing demand a number of challenges, most notably with Boeing forecasting that its aircraft from emerging regions and the “Rest of developing a reputation for reliable and fleet will more than double from 6350 the World” market i.e. destinations not safe air travel, product development in 2015, to 16970 in 20356.

World aircraft fleet expected to double by 2035, with Asia leading the pack

Numbers of aircraft

25000 n 2015 aircraft fleet n Projected 2035 aircraft fleet

20000

15000

10000

5000

0 Asia North America Europe Latin America Middle East Africa

Source: Boeing (2016)

CHINA: A CASE STUDY

As discussed, emerging regions million in 2016. Furthermore the IATA from this growing market through represent the greatest source of forecasts that China will displace the gaining long term contracts for the growth for the UK aerospace industry, US as the world’s largest aviation production and manufacturing none more so than China. Rising market (defined by traffic to, from of required aviation components. incomes, a growing middle class and within the country) by 20247. Investing in China will be key to the and reduced visa requirements have UK aerospace industry maintaining resulted in air passenger numbers The UK aerospace industry must and hopefully growing its global rising from 67million in 2000 to 320 therefore position itself to benefit market share over the coming years.

5 The ADS Group, “The Great British Take Off”, data from Ascend Flight Global Consultancy, 2015 6 Boeing, “Current Market Outlook 2016-2035”, 2016 7 International Air Transport Association (IATA), “20-Year Air Passenger Forecast”, 2016 www.makeuk.org 18 RISKS ON THE RADAR SECTOR BULLETIN: AEROSPACE

RISKS ON THE RADAR

Strong fundamentals and long order books mean that the aerospace sector is fairly resilient in the face of -term demand fluctuations. However, there is a range of risks and uncertainties that could jeopardise this positive outlook over the next few years.

In particular, the UK’s decision to leave the EU demand environment for the sector. How the industry could have significant consequences for the shape approaches these challenges will have a significant of the aerospace supply chain, while geopolitical bearing on the prospects of the UK aerospace sector developments could mean a less supportive external going forward.

IMPACT OF BREXIT UNCERTAINTY ON INVESTMENT DECISIONS

The UK’s decision to leave the the single market. Currently, Airbus both Germany and Spain in a strong European Union has thrown up risks employs around 15,000 people and position when it comes to bidding and uncertainties in effectively every manufacturers virtually the entire for further work as new models are manufacturing sector, and aerospace wing for the Airbus jumbo jet, the produced. is no different. In particular the A380 in Broughton, North Wales. concerns around the nature and However there have been moves by Concerns are also mounting over the conditions of any Brexit deal has German and Spanish manufacturers UK’s membership of the European raised serious questions about the to take away as much wing work as Aviation Safety Agency (EASA), next generation of aircrafts and possible, as this is the most lucrative which certifies aircraft, engines and where they will be produced. part of the supply chain. Both of their components. If the UK opts to these nations are keen to accelerate create its own regulatory regime, Airbus for instance is facing growing their aerospace sectors. With the UK and UK suppliers still have to seek political pressure to bring jobs back leaving the EU and potentially losing certification from EASA, costs would to France, Germany and Spain as a access to highly skilled EU labour, this rise. This would act as a further result of the UK’s decision to leave pressure is likely to ramp up, and puts disincentive to any future investment.

GROWING CONCERN EXPORTS WILL BE TARIFF HIT BY PROTECTIONIST MEASURES

The UK aerospace industry is export instance the UK aerospace supply In addition, there are concerns that driven, with data from ADS indicating chain could be hit if EU exemptions restrictions to the free movement of that the industry derives almost 90% for the raw materials used to make EU labour could adversely affect the of its turnover from exports. Whilst component parts are reversed, thereby UK’s ability to attract aviation-related aircraft and their parts are exempt raising the cost of production and talent from EU countries, as well as from tariffs under WTO rules, there is making UK aerospace products less non-tariff barriers such as changes a growing concern that competitors competitive. This effect is set to be to the regulatory framework creating could try to encourage governments compounded by the fall in Sterling, costly delays at borders if the UK leaves to find loopholes to raise the cost and the subsequent rise in the cost of the customs union. of production for UK . For imported goods used in production.

www.makeuk.org 19 RISKS ON THE RADAR SECTOR BULLETIN: AEROSPACE

AGEING SATELLITES UNDER THREAT FROM CYBER ATTACKS

The satellite industry is an integral become integral to the way we live Defence and Space, who are having part of the wider UK space industry. our lives, highlighting the growing to rethink how they build products According to the UK Space Agency8, importance of satellite manufacturing. and what solutions they can offer satellites, along with payload and to their customers who are looking spacecraft make up almost half of However, as satellites and their security for additional security assurances. total space manufacturing income systems become dated, they are With cyber-attacks becoming more in the UK. Today, satellites underpin increasingly susceptible to cyber-attacks. and more prevalent, innovating and almost all of our critical infrastructure This represents a significant challenge staying one step ahead of hackers is – from communications and GPS, to for UK satellite manufacturers such likely to shape satellite manufacturers’ defence systems. They have therefore as UK and Airbus strategy going forward.

INPUT COST significant upward pressures on While this is unlikely to cause significant PRESSURE ON manufacturer’s input costs. Input prices production disruptions, it’s likely to weigh MARGINS in the aerospace industry increased by on the profitability of domestic aerospace a hefty 8.4% over the year to October companies and put pressure on smaller Rising energy prices and the 2017, their fastest pace of annual growth companies that are less well positioned to depreciation in Sterling is putting since the time series begun in 1997. absorb the increase in input costs.

WEAKNESS IN THE OVERRELIANCE DOMESTIC SUPPLY CHAIN ON SAUDI MARKET The UK has a historic advantage in the defence Although the UK is known for gaining supplier accreditation aerospace export market that is based on enduring its competence in areas such and approved status can be time defence relations in the Gulf, most importantly with as engines and aerostructures, consuming and expensive. Added Saudi Arabia. The region accounted for nearly 60% there are also several weaknesses to this suppliers are often only by value of all UK defence exports over the ten year in the supply chain, in certain able to secure relatively short period 2006-15. Saudi Arabia is the world’s largest capabilities, availability of some contracts, which does not offset defence importer and, alongside the United States, products, but also in the skillsets the major investment they have the UK is its longstanding partner of choice. With on the manufacturing and to make to undertake this work. the Royal Saudi Air Force operating Eurofighter side. This means Typhoon, Tornado and Hawk aircraft, flown by pilots that the supply chain faces threats Despite the challenges for trained by the UK armed forces, this is a strategic from global competition as the the supply chain, there are relationship both economically and diplomatically. top tiers – who are not wedded to opportunities moving forward, buying domestically and who feel as aircraft manufacturers push However, the extent of the reliance of this that UK suppliers cannot deliver forward with innovation, for partnership exposes a distinct sectoral risk should all their needs – are increasingly example reducing aircraft investment not be sustained. Recent volatility in looking at the global supply weight by the increasing use oil price and the impact on Saudi budgets has chain to meet their needs. The of light-weight composites. If brought this into sharp focus although, despite industry naturally has an intense manufacturers can rise to the fiscal constraints, defence expenditure has to date focus on quality and standards, challenge of meeting these new been maintained. Should a scenario in which Saudi but this can act as barrier to the capabilities they would be well investment shrunk, or exports from the UK became lower tiers of the supply chain, as placed to secure future work. politically untenable, new near-term markets to fill such a void are not immediately apparent. 8 UK Space Agency, “The size and health of the UK space industry”, Dec 2016 www.makeuk.org 20 LOOKING TO THE FUTURE SECTOR BULLETIN: AEROSPACE

LOOKING TO THE FUTURE

Over the last decade, the UK aerospace industry has gone from strength to strength. While not without its challenges, the sector benefits from a well-developed ecosystem of world class research institutions, competitive supply chains, strong technological capabilities and collaborative partnerships. These advantages position the sector well to grasp the opportunities and minimise the risks in the short to medium term.

But in order to maintain its position as global manufacturing manufacturing processes, or entering relatively untapped powerhouse over the longer-term, the industry must also markets such as space , the industry must not rest on harness a number of emerging trends on the horizon. its laurels, but rather protect its competitive advantage by Whether this be through implementing new and innovative continuing to evolve and embrace new technologies.

FACTORY OF THE FUTURE/

Innovation is synonymous with the revolutionise the production process. such components are lighter yet aerospace industry. New and still strong, have lower lead times equipment are evolving at a rapid Traditionally, component parts are and ultimately less expensive than pace in the digital age, bringing with made from a solid block of material, conventional parts. them improvements in performance, which is cut away at to form the productivity and safety. However the required shape and dimensions. There are still some limitations very process by which these products However 3D printing works in reverse, to the technology, including the are being made is also changing, creating from the inside out. The size of component parts that can thanks to greater automation and process repeatedly prints very thin be created, a narrow range of 4IR technologies. The factories layers of material on top of each printing materials and inconsistent of the future will be dominated other until the layers form a solid quality. However as advances in by automated assembly lines, object. As a result components the technology continue to be collaborative robots and in created by 3D printers have a made, these challenges should be particular 3D printing technologies. natural and topologically optimised overcome, allowing widespread 3D printing or Additive Layer shape, greatly improving efficiency adoption of the technology and the Manufacturing (ALM) is set to and performance. Furthermore associated benefits.

USE OF COMPOSITES

Over the coming decade, the use and defence accounted for over aeroplanes in North America, Europe of composite materials in aircraft 65% in 2015, is expected to reach and emerging regions is expected to manufacturing is expected to rise $33.44 billion by 20249. Growing air drive the growth, as manufacturers significantly. The global composite passenger traffic and the resultant realise the full potential of composite materials market, which aerospace surge in the manufacturing of materials.

9 Grand View Research Inc., “Market Research report”, 2016 www.makeuk.org 21 LOOKING TO THE FUTURE SECTOR BULLETIN: AEROSPACE

Composite materials offer several much lighter, allowing for greater overall aeroplane weight, moving to advantages over conventional fuel efficiency and therefore travel a composite primary structure also metallic materials, namely their distances. It is estimated composites reduces the overall maintenance excellent durability and high stiffness enable a 20% saving in terms of needed to be carried out on the to density ratios. They are also weight. In addition to lowering the aircraft.

HYBRID AIR VEHICLES AND THE WORLD’S LARGEST AIRCRAFT

British company Hybrid Air Vehicles using a combination of buoyancy and Airlander 50, whose main purpose will be are the designers and manufacturers aerodynamic design to generate lift. movement of heavy . of a revolutionary new hybrid aircraft at their base in Bedfordshire. The Airlander has good environmental The next test flight for Airlander 10 is credentials versus other aircraft, being planned for the second quarter of 2017 This innovative company, who are world both low in noise and air . It is with further flights throughout the rest leaders in their field, have developed the capable of 5 days continuous manned of the year. Hybrid Air Vehicles expect Airlander 10, which at 300 feet in length flight at an altitude of up to 16,000 the first commercial to come off is almost 60 feet longer than a Boeing feet and has a multitude of potential the production line in early 2018, and 747 and is the largest aircraft currently uses, including communication and in the next 5-10 years the company flying anywhere in the world. Although it surveillance functions, as well as hope to have a full production line looks like a conventional , it is quite transportation for up to 10 tonnes established manufacturing at least 10 different, combining elements of fixed- of cargo. In fact the company is vehicles per year, for a wide variety of wing, rotary and lighter-than-air aircraft, developing an even larger vehicle, the uses across the defence and civil sectors.

ALTERNATIVE FUELS The aerospace industry recognises its responsibility and role in helping to combat the challenge of climate change and pollution. Aviation impacts the environment in a number of ways; contributing to climate change suitable for use in engines and aircraft The UK Government has also through emitting greenhouse gases, fuel systems. They must also be able recognised the need for further causing noise pollution and generating to be mass produced in a commercial research and investment into derived emissions and congestion from environment, as well as being alternative fuels. In the latest Autumn travel to and from airports. There has competitive on price to conventional statement the Chancellor announced, therefore been an increased focus in kerosene. through the newly formed National the industry to explore the possibilities Productivity , £20 of alternative fuels, namely biofuels, Research has found that second million for the development of which have the long term potential to generation biofuels, rich in bio derived alternative aviation and heavy goods reduce CO2 emissions. There is also the oils, such as soybeans and algae can vehicle fuels. added incentive that the increased use be chemically processed to make high of biofuels decreases dependency on quality . There has already However even with this extra crude oil as well as exposure to oil price been a marked move towards this investment, it is widely accepted that variations, which have been particularly technology with airline companies biofuels remain some way off replacing volatile in recent years. such as Lufthansa and EasyJet signing traditional kerosene in . deals with Solena, a US based aviation According to IATA an investment of For biofuels to be successful, and widely biofuel producer in 2012, to provide US$10-15 billion10 will be required to adopted, they must be technically new sources of sustainable jet biofuel. this gap.

10 Capgemini, “The changing face of the aerospace and defence industry”, 2011 www.makeuk.org 22 LOOKING TO THE FUTURE SECTOR BULLETIN: AEROSPACE

SPACE TOURISM

Space tourism is a new, highly sought minister Jo Johnson announced before achieving commercial after sector in the emerging “New that grants worth up to £10 million viability. Not only is the cost hugely Space” industry. Despite being very are being made available to help prohibitive – many have argued that much in its infancy stage, with only develop commercial launch capability the £10 million in government grant a handful of companies such as for spaceflight. This funding is funding falls short of the hundreds Virgin Galactic looking to develop underpinned by the government’s of millions that would actually be commercial spacecraft, it represents ambitions for the UK to capture required to build the necessary a growing market and opportunity a greater share of the commercial infrastructure – but safety issues for the UK aerospace industry and its spaceflight market, worth an estimated remain abound. As with any new supply chain. £25 billion over the next 20 years. industry, significant innovation will be required to iron out safety issues The government has recognised this, However this branch of aerospace and make the industry more cost- and in February 2017 the science faces many challenges and hurdles effective.

BAE SYSTEMS TAKE LEAD ON THE DEVELOPMENT OF UNMANNED AIR SYSTEMS

Unmanned Air Systems (UAS) For the UK to stay ahead from a technology demonstration already play a central role in the military and industrial perspective, programs such as Mantis and world’s leading air forces and attention is already focused on Taranis, the company is a world their strategic importance is next generation capability. These leader in the development and destined to grow exponentially in platforms will operate with a much application of autonomous system coming decades. For surveillance greater degree of autonomy, design. However, costs associated and reconnaissance missions in flying missions in highly contested with a UK-only capability are low-threat environments, UAS air space with the minimum of expected to be prohibitive, with offer greater persistence and human intervention. Such systems limited production runs and a broader coverage, delivering better are envisaged to replace existing strictly controlled export market. intelligence and contributing to manned combat capabilities from Collaborative development with more effective operations. As the 2030s. UK government and allied nations and their own entry-level costs fall, driven by industry are already funding R&D industries is therefore anticipated. maturing technology, volume in anticipation of this, reflecting In 2016 Britain and France production and miniaturisation, the strategic necessity to maintain announced plans to begin full- a growing number of operators both national security and scale development of such a will seek to incorporate such commercial advantage. system, building on BAE Systems’ technology into their force R&D in this field alongside the structure, opening up new export BAE Systems are the UK’s global complimentary work led by markets. pioneer and, with advanced France’s .

www.makeuk.org 23 ABOUT SECTOR BULLETIN: AEROSPACE

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Copyright 2019 Make UK. This report was first published by EEF, the manufacturers' organisation in 2017 and is now available under Make UK.