Industry Expects Demand to Accelerate Through 2021

Aerospace, Defence, Rail & Advanced Manufacturing Industry Update

24th September 2020

Aerospace & Defence

In the three months between April and June 2020, almost every part of the UK economy saw decline with only expenditure on public administration and defence remaining broadly the same with an increase of 0.4%. Pharmaceuticals is the only area of manufacturing to have a positive output growth during this pandemic due to the increased demand linked to Covid-19.

A 26% decline in aerospace manufacturing output was recorded in Q2 2020 from Q1 which is the largest quarterly decline on record. Aerospace repair and maintenance services recorded a quarterly decline of 21.8% as the whole sector suffered the impacts of COVID-19 and limited activity across global aviation.

Output from the sector continued to decline in June 2020 by 5.9% which means there have now been four months of declining output for the sector and June 2020 output was a third smaller when compared to February 2020, before COVID-19 impacted.

It is clear that some sectors such as aerospace and aviation are set to experience a slower recovery than others. In particular, a full recovery in the numbers of international air travellers to pre-crisis levels is expected to take several years to achieve, impacting the aerospace manufacturing industry.

With global travel restrictions still in place and risk of a second wave in Q3, aerospace manufacturing output and services the outlook remains bleak with many UK manufacturers, service operators and suppliers are running out of cash, threatening the survivability of the UK aerospace industry.

COVID-19 crisis have caused the worst quarter for global aircraft deliveries on record April-June with over 70% reduction. June figures were the strongest of the three-month period as restrictions started to ease. The orders were also down by 88% compared to the same period last year.

Despite orders facing the lowest Q2 on record, the total backlog of aircraft firm orders remains relatively high at 13,673 aircraft. The remaining order backlog represents many years’ worth of work for global aerospace manufacturers and potentially up to ￡210 billion to UK industry. 

ADS Chief Executive Paul Everitt said: “We are now seeing aircraft return to our skies and increasing consumer confidence. The outlook for the coming months remains uncertain, but industry is confident demand will accelerate through 2021 and beyond. “The coming months will be challenging for many aerospace businesses as they manage the significant reduction in demand.”

Aerospace suppliers normally order / buy materials well in advance due to special materials and long lead times and because of the slowdown due to Covid-19 there is now excess stock which will take longer to convert to cash. Similarly, payback on big and expensive items such as tooling (worth tens of thousands to several millions) will be longer. The UK Aerospace Supply Chain Taskforce led by the former Airbus COO Tom Williams is looking at ways to support the aerospace industry. Areas being explored include helping companies with financing for their WIP, Stock and Tooling. ADS and the Task Force has proposed the creation of a ￡1 billion ($1.3 billion) “patient capital investment fund”, backed by equal contributions from industry, the government and the financial sector, which would help the supply chain manage the immediate crisis and prepare for the longer term.

Paul Everitt, ADS chief executive, said that capital provided by the scheme would allow the aerospace sector to navigate the “challenges of the next few years in a robust way”. ADS has “an ambition” that the fund will eventually have ￡1 billion under management, although points out that this may need to be delivered in “a number of tranches”. However, he stressed that it will be vital for the fund to have a long-term outlook given aviation’s lengthy research and development cycles. He said, “The next generation of technology could take a decade to be developed and executed,” and “Government involvement will allow us to shape the rules and rates of return in a way that is more suited to the long-cycle nature of the aerospace industry.” Under the proposals, the fund would solicit private equity backing but, in exchange for a “de-risked” investment, would demand that “the rate of return and speed is stretched”.

Contributors would take a stake in the fund, rather than in any company receiving the investment from it, says Everitt. Backing for projects “based on expert advice” from industry, could be gained for production or system improvements, to advance the decarbonisation agenda, or even to aid supply chain consolidation.

The second-quarter earnings reports of Airbus and Boeing make a grim reading, as expected. Airbus lost EUR1.9 billion in Q1 2020 and reported free cash flow of EUR-12.9 billion. Meanwhile, Boeing’s losses amounted to $3.0 billion and free cash flow of $-10.3 billion. Both manufacturers were forced to temporarily close down production facilities, laid off thousands of employees and announced significant production rate cuts to match the post Covid-19 demand. In addition to Covid-19 impact, Boeing’s deliveries have suffered in the aftermath of two 737 Max crashes and the subsequent suspension of deliveries and grounding of the entire 737 Max fleet since March 2019.

British company Reaction Engines and Rolls-Royce have formed a new strategic partnership to develop high speed aircraft propulsion systems including exploring applications for Reaction Engines’ thermal management technology within civil and defence aerospace gas turbine engines and hybrid-electric systems. The two companies have been working together for the past couple of years on the potential of high-Mach systems. Additionally, Rolls-Royce is making a further investment in Reaction Engines as part of a wider funding round. This partnership follows Rolls Royce’s recent announcements with Boom Supersonic and Virgin Galactic where Rolls Royce will supply propulsion systems for their supersonic and hypersonic planes of the future.

Meanwhile in Space, the final planning permission has been granted for Scotland’s first spaceport in this growing and exciting sector. The ￡17.3 million plan to launch satellites from Sutherland represents a significant step forward for the project. Highlands and Islands Enterprise (HIE) has approved the budget to develop Space Hub Sutherland, which includes funding from the Nuclear Decommissioning Authority and the UK Space Agency. This is part of the UK’s plan to set up several launch sites to become the Europe’s leading destination for small satellite launches. Having launch sites will also lead to the establishment of several design and manufacturing hubs for satellites, helping to stimulate and grow the UK’s space industry at the time of increasing global demand.

Advanced Manufacturing

According to British Automation and Robot Association, BARA, the UK food and beverage sector has embraced robot technology and has been the largest adopter of industrial robots since the UK went into lockdown in March 2020. The results of the regular quarterly survey, undertaken by BARA, for the period April and June 2020 confirmed that the Food and Beverage sector accounted for no less than 29% of all industrial robots sold in the UK; almost three times more than the next highest: the pharma, healthcare and medical sector. While the number of robots sold were unsurprisingly lower than in Q1 of 2020, due to impact of the coronavirus pandemic, the number of robots sold in the UK in the first two quarters of 2020 is on par with the number sold for the first three quarters of 2019. 

This, perhaps, demonstrates the efforts of the sector to meet increasing demand during the Covid-19 crisis, while at the same time deal with labour shortages caused by Brexit, and the safety constraints caused by the onset of COVID-19.

Meanwhile, the Knowledge Transfer Network, KTN has launched its new identity and ambitious 5 year strategy. The new strategy outlines commitments as to how KTN will help companies transform innovative ideas into real-world solutions over the next five years. KTN, aims to help companies with the opportunities for innovation presented by various current and future challenges, working collaboratively between research, business, policy and investment. KTN is Innovate UK's network partner and provides innovation networking for businesses in line with its mission to drive growth in the UK. Its purpose is to connect ideas, people and communities spanning business, government, funders, research and the third sector, to respond to these challenges and drive positive change through innovation.

According to Alicia Greated, CEO of KTN, the new 5-year strategy “commits to focus not only on economic prosperity but also on societal and environmental benefit, starting with the goal to achieve net-zero carbon emissions. It commits to ensuring that KTN continues to embrace diversity and inclusion and it pledges that KTN will collaborate globally to create valuable international connections for innovators.” Companies can find out more about opportunities to accelerate their innovative project or challenge by contacting KTN here. You can download the condensed version of KTN’s strategy here or the full version here. 

Rail

Scandinavian Railways are making their biggest investments to date as they progress through their digital transformation. However, their biggest challenge is not having the local expertise to completely fulfil their digitalisation goals, and are therefore seeking help from international suppliers. To support this, Camilla Ahston, Senior International Strategist, Trafikverket will be speaking at the Scandinavian Rail Optimisation conference on the 10.11.20, specifically addressing the latest business opportunities in Sweden & how to become a supplier to Trafikverket. You can visit www.scandinavianrail.co.uk to learn more about this event & how to get involved in the opportunities.

Rail Sector Opportunities in India webinar was presented by Railway Industry Association, RIA and DIT on 18th August 2020. Indian Railways envisages an investment of ￡500 billion in Indian Railways between 2018 and 2030 of which ￡100 billion is expected to be spent in the next five years. Key focus areas include network upgrade & expansion, electrification, energy efficiency & reduced carbon footprint, safety, railway station redevelopment, improved efficiency and speed through modernisation & increased supply of rolling stock among others. The India railways modernisation programme presents opportunities for UK companies across the rail value chain, spanning from engineering design & consulting, which is dominated by international companies, to product and technology solutions in track electrification, digital & green technologies, systems, signalling & telecommunications, rolling stock, depot & maintenance supplies and railways station development. You can watch the recording of the webinar using the link here.

Rolling Stock Opportunities in Switzerland: Three specific opportunities for UK suppliers have been identified by DIT in Switzerland: supply of new luggage racks, galley redesign and equipment supply and business boxes/electrical equipment. For further details see the link here.

Hitachi Rail Ltd has agreed to acquire Southampton-based condition monitoring specialist Perpetuum as part of a strategy to strengthen the use of digital technology in rail operations. Established as a university spin-off less than a decade ago, Perpetuum developed the use of bogie-mounted self-powered vibration sensors to monitor the condition of rolling stock. Wireless equipment fitted to around 3 000 vehicles operating across three continents sends back real-time data about the performance of wheelsets, gearboxes, motors and bogies. This information can be combined with AI-led analytical tools to identify potential faults, allowing them to be addressed before any failure can impact on train operations. This reduces the need for maintenance and cuts cost, while extending the average life of critical components before replacement by more than 25%.

General Manufacturing sector news

Following the publication of UK GDP figures for the second quarter of 2020 which showed a contraction of more than 20%, MakeUK commented: “While industry is seeing some signs of a recovery in demand, with manufacturing production seeing its largest increase since records began in 1968, the sector has been through a profound shock and the impact of which will continue to be felt for some time to come, especially with major redundancies coming through the pipeline which are going to remove significant spending power from the economy.

“Some sectors of the economy are facing accelerated restructuring because of the pandemic, others which are fundamentally sound, and which will be vital to our future growth in high-value and high-skill sectors, will continue to be disproportionately impacted.”

The organisation has called for the government to be flexible in extending job support schemes, and to follow the lead of our European neighbours.

On 10 September, MakeUK publishes the 2020-21 Manufacturing Fact Card in conjunction with Santander: this will highlight the fact that the average salary across the sector’s 2.7m employees is ￡34,538, 13% higher than the national average.

MakeUK is also calling on ministers to ensure BTEC students receive their results as quickly as possible in order that they can access apprenticeship schemes and other manufacturing opportunities. The organisation has also created a guide for employers to help them manage workplace coronavirus outbreaks. It can be found here.

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.