The Covid-19 dust will take a while to settle with Brexit uncertainty not helping

Aerospace, Defence, Rail & Advanced Manufacturing Industry Update

19th October 2020

As we move closer to the Brexit transition period deadline, concern about the possible impact of Brexit is once again elevated. Brexit, now combined with the Covid-19 pandemic, is increasing the uncertainty and pressure on businesses. On one hand the high exporting, global sectors such as Aerospace is anxious about the future and on the other hand the number of domestic businesses hoping to export continue to increase. In fact, according to the recently released Santander Trade Barometer research report, 26% of businesses say international markets are more important to them as a result of the pandemic, against only 5% who say less.

The Trade Barometer also shows that for international businesses, key challenges include regulatory changes post-Brexit, bureaucracy, challenges related to coronavirus and finding trustworthy partners and connections. Businesses remain surprisingly optimistic about future growth with 59% confident of growth over the next three years, down only slightly from 62% in spring 2020.

The UK government published the latest version of its Border Operating Model (BOM) on 8th October. This follows on from an earlier version in July. The BOM V.2 comes with added detail on many areas including New infrastructure requirements including locations, Delayed customs declarations and the requirements of Entry in Declarants Records (EIDR). BOM V.2. The document also contains more detail on goods movements and information relating to passengers’ policies, requirements for aviation, rail and energy sectors and requirement on member states. The model does not cover Northern Ireland or the Protocol. You can access the document here.

Aerospace

As the impact of Covid-19 continues, independent and diversified companies with defence and other sector involvement seem to be faring better than centrally managed multinationals focussed on civil aerospace alone.

The UK’s aerospace is largely in the Airbus supply chains and it is critical for the UK to be able to continue to be a key supply chain partner and also benefit from EU funding and joint R&D programmes. In order for this to happen, the UK needs to be cost competitive which means avoiding additional costs and barriers such as export licencing, customs checks, safety certification, tariffs, transportation and bureaucracy, all dependant on a successful Brexit trade deal for the aerospace sector.

If the UK becomes uncompetitive and a non-preferred partner amongst the Germany-France-UK aerospace partnership, the UK stands to lose on investment and risks losing production to France and Germany post Brexit. Covid-19 will only exacerbate things due to reduced demand and overcapacity in the supply-chains, with Germany and France driving more towards their local manufacturers. This would result in permanently reduced size and capability for the UK Aerospace sector where Advanced Manufacturing supplying into these and other sectors such as Rail and Automotive would also suffer. Defence which is a ￡22.7bn revenue sector in which the UK is the 2nd largest exporter in the world also stands to be damaged to a lesser degree. The UK’s expanding Space sector also relies on close European collaboration and an unfavourable Brexit deal would damage UK’s future ambitions and plans. Unanswered questions remain around UK’s participation in Space and R&D programmes potentially impacting Aerospace and Advanced Manufacturing. Similarly, export controls, Northern-Ireland, Chemicals regulations REACH and Aviation Safety Certifications by the European Aviation Safety Agency (EASA) are some of the main concerns.

 Aerospace Figures

When it comes to the state of the Aerospace, the latest numbers show that low aviation passenger numbers continue to impact the aerospace manufacturing sector. According to ACI World data, worldwide airport passenger numbers were down 58.4% year on year during the first half of 2020. International passenger traffic was most affected, falling 64.5%, with aircraft movements down some 41.6% and cargo volumes 12.4% lower. Some 4,500 aircraft remain out of service and around 650 are expected to be retired by the end of this year. According to the international Association of Travel Agents (IATA), the world’s airlines are haemorrhaging cash which could force large swathes of the industry into bankruptcy within months. The aerospace and aviation industries are focussed on restoring passenger confidence to fly and safe operating in the new normal for the short but also beyond. The designs, products and solutions being developed, such as anti-microbial materials and touchless operation, are likely to stick and become standard and put in permanent use. A new Global Travel Taskforce to support the travel industry and the safe recovery of international travel has been launched by the UK government on 7 October 2020. The taskforce will consider a wide range of measures to support the travel sector to make travelling easier and safer thereby helping it to recover faster.

Aerospace manufacturing grew by 0.7% in August, but has declined 27.7% in the six months from February. Commercial Aircraft orders and aircraft deliveries in 2020 continue to reflect a challenging six months for the global aviation and aerospace industry. Orders in August were the lowest for the month on record showing a 59% decline on August 2019 and a 91.3% decline on two years ago. In terms of Aircraft deliveries, there was a 13.3% decline on August 2019 and 55.9% decline on the same month in 2018. Part of the overall fall in figures is due to the impact of Boeing 737 Max issues and pause to its production and deliveries in 2019 and not all due to the pandemic. In fact, Airbus’s delivery figure for September was the highest for any single month so far in 2020. Airbus managed to keep its net order figure at 300 for the first nine months of the year – which is actually more than double what it had achieved at the same point in 2019.

Opportunities in space for UK businesses

The UK’s space sector is at the cutting edge with ￡14.8bn revenue in this fast-growing sector. The UK has set ambitious targets to secure 10% of the global space market by 2030, a market that is estimated to be worth around ￡400 billion by then and potentially creating a ￡40 billion UK sector in the same timeframe. The UK is aiming to create 30,000 new jobs in the coming decade in the space sector. The UK Space Agency (UKSA) and NASA have just signed a historic agreement on principles for space ahead of a future mission to the Moon. NASA’s Artemis programme aims to land the first woman and the next man on the Moon by 2024. UK industry will play a key role in this mission and is involved in building the service module and habitation module of the Lunar Gateway, a new space station orbiting the moon. This is great news for the industry, economy and jobs.

Defence

With the exception of small number, Defence focused companies are generally healthy and continue to perform well.

The latest official statistics published for the UK’s 2019 defence export orders and security export sales showed that last year the UK remained the world’s second largest defence exporter over a 10-year period, and is now the world’s third largest security exporter.  

The ongoing UK Integrated Review of foreign, security and defence policy is expected to report next month. It is expected that a rebalancing of budgets and effort will be announced with a delays and cuts to some of the army spending and targeted more towards the newest domains of air, space, cyber and sub-sea and the MOD will be a much more threat-lead organisation, moving away from what we have been used to see in recent decades.

Currently, the EU Defence and Security Public Contracts Regulations (DSPCR) require the Government to carry out international competitions for non-sensitive contracts. As we approach the end of the Brexit transition period, the MoD is exploring opportunities to tailor the regulations to meet the needs of the UK. Reforms to regulations, including the possibility of new legislation could relax the current rules which would support domestic defence manufacturing.

Advanced Manufacturing

Advanced Manufacturing has demonstrated its importance during the earlier days of the Covid-19 pandemic and continues to play a crucial part in the road to recovery and beyond. Advanced processes such as additive manufacturing, advanced composites and anti-microbial materials together with the lessons learned from rapid ramp up of manufacturing including use of robots and automation will be key not only for future competitiveness but also for prevention and fighting of future diseases and pandemics but also looking after the environment. Advanced Manufacturing is set to continue to be an important enabler for multiple sectors for the future and it is great to see that there is renewed appetite for continued R&D to develop new solutions for the UK and the world.

Rail

Rail industry moves ahead on HS2

High Speed 2 Ltd has awarded the contract to design and manufacture modular slab track for the HS2 project to a consortium led by Porr UK and Aggregate Industries UK. The ￡260m award, announced on 5 October, covers track for the London-West Midland Phase 1 and the West Midlands-Crewe Phase 2a elements of HS2.

The work will rely on the Slab Track Austria construction system developed by Porr and Austrian Federal Railways, with manufacturing taking place a in a new facility to be established near Shepton Mallet in Somerset. The work is expected to support up to 500 jobs over the life of the contract.

Elsewhere, the launch event for Rail Forum Midlands’ second SME Challenge, one element of the Rail Sector Deal Midlands Pilot workstream, took place on 21 October. This challenge focuses on “Opportunities for Decarbonising Freight”. More details are available here.

Manufacturing In General

The 2020 Santander Trade Barometer, published on 8 October, is the latest instalment of our regular landmark survey of business sentiment and their views about international trade. This edition of the report suggests many businesses remain surprisingly optimistic about future growth, with 59% confident they will grow over the next three years, down only marginally from the 62% who said the same thing in the spring survey. Among manufacturers, however, this figure falls to 54%.

The report also charts a deterioration in performance, with just 32% of all businesses reporting an in improvement in performance (compared to 46% in the spring), falling to 22% among manufacturers. And worryingly for the sector, where productivity improvements are badly needed in this challenging environment, business investment remains depressed; just 39% of businesses intend to invest in product development over the next 12 months, while only 36% expect to take on new staff.

It isn’t only the Covid-19 pandemic that presents difficulties for businesses, with the ongoing uncertainties of Brexit also representing a challenge. However, the Trade Barometer suggests businesses do not intend to back away from exports – 26% say international markets are now more important to them in the wake of Covid-19, against only 5% who say less.

This will require businesses to address obstacles to international growth, with the Trade Barometer highlighting areas including regulatory change post-Brexit, bureaucracy and the difficulty of finding trustworthy partners and connections. Then there are pandemic-related problems. Some 48% of manufacturers cite supply chain disruption from Covid-19, 44% point to falling demand, and 40% are concerned about the loss of opportunities for face-to-face meetings in overseas markets, or to attend events such as exhibitions and conferences.

Santander is able to assist businesses operating in key sectors with their international trading and expansion through its global presence, country and sector specialists and the ecosystem of partners.

Halil Bedevi MSc, CEng, FMM, MIET is the Head of Aerospace, Defence, Rail & Advanced Manufacturing sub-sectors within the Manufacturing Sector Team at Santander UK. He is responsible for leading and directing Santander’s strategy in driving client primacy and growth across the above four key manufacturing sub-sectors.