Preparing for the post Covid-19 landscape

Covid-19 Bulletin - Aerospace, Defence, Rail & Advanced Manufacturing

3 June 2020

This is the latest weekly update for Aerospace, Defence, Rail & Advanced Manufacturing on how the Covid-19 pandemic is affecting the sectors as a whole.

Preparing for the post Covid-19 landscape

My Sector and Country Specialist colleagues and I continue to work with clients and partners from across the industry as they respond to the Covid-19 pandemic. In some areas, businesses remain mired in the crisis, while in others, attention is beginning to shift to the recovery from the virus.

More help is becoming available. Innovate UK, for example, has just announced the Coronavirus Business Support Package, offering ￡90m of grants to businesses it has already made awards to. It is also offering advisory assistance to around 6,000 high-growth businesses and scale-up firms. More details here.

Aviation

More airlines are now beginning to plan for the restoration of domestic routes, with extra cleaning and other protective measures for planes flying again. However, a return to international operations is more difficult with governments across the world taking different approaches to the opening of their borders.

Ongoing work from aircraft manufacturers on new measures to prevent disease transmission – drawing on academics, engineers and medical experts – could provide crucial reassurance, though a return to the air is bound to take place in phases. The first wave of more confident passengers will likely include those on essential business trips and those returning home after being stuck abroad. This will hopefully be followed by holiday makers travelling between defined safe zones or “clean bubbles” that are connected by “virtual corridors”, “green channels” and “air bridges”. The alternative is to accept passengers arriving in the country will have to go into quarantine for a period, which will not be an option for most travellers.

Elsewhere, we are now also beginning to hear about state rescue and aid packages in the airline sector. The German government has agreed a €9bn rescue deal with Lufthansa, for example, and wants to take a 20% stake in the company, though the plan is subject to approval from shareholders and the European Commission. It would buy in with the intention of selling up by the end of 2023, but also proposes to inject non-voting capital, which would give it enough power to block any hostile takeover.

The UK government has also indicated it is working on rescue plans for large and strategically important British companies. The plan, known as Project Birch, was discussed by Transport Secretary Grant Shapps in a recent debate on the aviation sector, which may bode well for the sector.

Aerospace

While most airlines are planning for an increase in flight numbers during June and July, this will be too late to prevent the aerospace sector downsizing before it starts to grow once again. The downsizing process, of course, will carry its own costs and require resources, adding another headache for the sector.

Already, we have seen Boeing, Airbus, Rolls-Royce, GE Aviation and Pratt & Whitney unveil plans for reduced headcounts and cuts to capacity in line with reduced demand. All are promising to keep plans under review, but the future is difficult to foresee: they may reinstate capacity if demand recovers more quickly than expected or make further cuts if the Covid-19 crisis does not recede as hoped.

Supply chain businesses are already suffering. One machine tool company surveyed all its customers and found that while most had carried on working during the crisis, production since late March had fallen to 70% of its usual levels. For many of these firms, it will be difficult to plan until the original equipment manufacturers (OEMs) have made all their plans clear, with order reductions unlikely to be felt equally across the supply chain. There is some evidence that OEMs are already looking for price reductions of 10-15% from suppliers, which could make certain businesses unviable. A focus on competitiveness, including continued investment where possible, is therefore crucial, with competition in both the UK and international markets likely to be fierce.

Diversification may make sense for some companies, with options in sub-sectors such as rail, defence and medical products. In other cases, internationalisation may now be a good strategy as new opportunities emerge in overseas markets, particularly if there are local incentives to exploit that require local manufacturing. The Made in India initiative is one example.

Space exploration could be another diversification possibility. The UK space industry is already world-class, generating nearly ￡15bn of revenues a year (37% of sales are international) and employing 42,000 people directly. The industry has grown 60% since 2010 and hopes to secure 10% of the global space market by 2030, when it should be worth as much as ￡400bn (rising to $1tn by 2040). In this context, the first commercial flight to the international space station, successfully launched by SpaceX last week, was fascinating to see. This is the beginning of a new era in which Nasa is purchasing transport services from the private sector – a development that will stimulate competition, innovation and efficiency.

Rail

The Railway Industry Association and the Department for International Trade last week jointly hosted a webinar on rail opportunities in Scandinavia. Participants pointed to multiple multi-billion-pound rail opportunities in Scandinavia and elsewhere in Europe; there are also large projects going on in both North America and Latin America. UK rail businesses (and manufacturers diversifying into the sector) may be able to tap into any or all of these opportunities and Santander’s sector specialists stand ready to provide support to companies exploring new markets. The RIA and the DTI are due to host a second webinar on 18 June covering plans for a new high-speed railway in eastern Europe.

Closer to home, HS2 Ltd has had its planning application for the “largest new railway station ever built in the UK” approved, paving the way for its construction at Old Oak Common in west London. Design is led by engineering consultancy WSP with architectural support from WilkinsonEyre. Construction is due to begin this month, with a joint venture between Balfour Beatty, Vinci and Systra.

Finally, in North America, Canadian Bombardier Transportation has signed contracts worth US$108m to supply train coaches to two West Coast operators in the US. Further evidence that the sector continues to throw up valuable opportunities worldwide.

Manufacturing sector news

• Our latest Views from Industry podcast is now available, featuring Paul Brooks, Santander’s Head of Manufacturing, in discussion with Stephen Phipson, the chief executive of MakeUK. Phipson has been a consistent contributor to our podcast series – this is his third appearance – providing regular updates on the sector’s response to Covid-19. His latest update covers:-
• News on government support for the sector, including changes to the loans package, adjustments to the job retention scheme, the latest on the Insolvency Bill and the extension of account filing deadlines.
• The impact of “track and trace” on manufacturers and other businesses.
• An overview of Project Birch, which we will hear more about from government shortly.
• Detail of the 14-day quarantine rules and their likely impact on aerospace and other sectors.
• MakeUK’s views on skills and redeployment, and the need to retain key people and their experience within the sector.
• Advice on supply chain resilience, opportunities for reshoring, dual sourcing and exports.
• A view on the automotive sector with showrooms reopening and the case for incentives to drive and fuel consumer demand.

Meanwhile, MakeUK has also published its latest Manufacturing Monitor, its regular update on the impact of the virus on the sector. It suggests 9 in 10 manufacturers have continuing to operate during the pandemic – but a third have seen orders fall by up to 50% and a quarter plan to make redundancies in the next six months (including a quarter that planning to let up to half their staff go).

Elsewhere, the government is striving to keep the Brexit timetable on course and has published its Preferred Legal Text for an EU Trade Agreement. The document forms the basis of negotiations with the European Union on the UK’s future trading relationship with the bloc and is therefore crucial for the competitiveness of UK manufacturers.

The government’s aim is a comprehensive free trade agreement covering all trade, with separate agreements covering certain technical areas, including aviation and aerospace. Talks were due to restart at the beginning of June, but the prospects for a deal by the end of the year are not good. Still, the government has consistently rejected calls to request an extension to the transition period, currently due to end on 31 December– and is running out of time to do so, since existing agreements set a deadline of 1 July for such requests. One particularly controversial piece of news to emerge in recent weeks is that the UK will need to prepare for customs checks on travel between Britain and Northern Ireland. You can access the documents here.

Halil Bedevi MSc, CEng, FMM, MIET 

Halil Bedevi is the Head of Aerospace, Defence, Rail & Advanced Manufacturing sub-sectors within the Manufacturing Sector Team at Santander UK. 

Halil is responsible for leading and directing Santander’s strategy in driving client primacy and growth across the four key manufacturing sectors above. He delivers bespoke products and solutions, both financial and non-financial, to meet the needs of targeted and specific UK manufacturing businesses, engage with front line relationship colleagues to add value to customers by identifying and facilitating opportunities, both international and domestic.

Halil is a Chartered Engineer with 30 years’ experience in the manufacturing industry ranging from engineering to board level senior management. He is a Visiting Fellow and Advisory Board Member of Cranfield University and Member of the IET.