Support needed to keep UK competitive

Covid-19 Related Industry Update

Aerospace, Defence, Rail & Advanced Manufacturing | 20th May 2020

Make UK’s plan for a manufacturing sector recovery from the Covid-19 pandemic – Manufacturing our Road to Recovery – calls for an extension of the Coronavirus Job Retention Scheme in more flexible form so that companies have more time to scale up operations. Santander is working closely with clients and contacts across the industry and we believe this would help many in the key sub-sectors of aerospace, advanced manufacturing, defence and rail.

There will naturally be different drivers in different sub-sectors. In aerospace, for example, the restart of passenger flights would be the biggest single factor underpinning increased demand. Elsewhere, advanced manufacturers and aerospace companies continue to focus on innovation – as seen in their support of efforts to ramp up supply of ventilators and personal protective equipment – and to respond to changing patterns of demand.

Aerospace and aviation wait for flights

The airline industry is keen to restart passenger flights as soon as possible, and is exploring extensive sanitisation and customer safety programmes, as well as emphasising high hygiene standards at every stage of the journey. This is likely to include a requirement for passengers to wear face masks in airports and on planes. One Santander client, Percival Aviation, has already begun manufacturing and supplying Covid-19 universal protection kits to airlines.

Airlines such as Ryanair and Lufthansa are preparing to resume some flights in June while others have begun operating scheduled services. Etihad, for example, is now flying from Melbourne to London Heathrow via Abu Dhabi and plans to start flights from London Heathrow to Melbourne via Abu Dhabi from the 21 May.

One major problem is the different rules now applying in different countries, including the UK government’s plan to impose a 14-day quarantine on people arriving in the UK. Industry bodies and airlines oppose this idea, with five key manufacturing sectors, including aerospace, warning that such a measure could disrupt production, lead to supply shortages and add to job losses. They argue that a quarantine period would not only restrict flights but also prevent engineers travelling to resolve technical issues and ensure production can continue.

In practice, passenger-to-passenger transmission of Covid-19 is not seen as a significant risk, given the sophisticated cabin air systems and hospital-standard HEPA filters installed on modern airliners. Aviation Week reports on cases of passengers found to have Covid-19 after having taken a flight; follow-up tracing has found no evidence they have passed the virus on to other passengers. Several independent studies appear to suggest cabin air is actually safer than the air in homes, shops and restaurants.

Nevertheless, barriers remain to resuming flights. Not least, pricing will be an issue and airlines will be nervous about the commercial impact of operating flights that aren’t full.

Elsewhere, Airbus is working on preserving cash, resizing and restructuring to become simpler and ensure profitability. CEO Guillaume Faury has reportedly warned the business will not survive without “radical” and “proactive” change. Emirates is thought to be drawing up plans to permanently decommission 40% of its Airbus A380 fleet; the decision will obviously reflect the Covid-19 crisis, but also fits a broader trend toward smaller and more efficient aircraft.

Embraer, the Brazilian business that is the third biggest plane manufacturer in the world, faces a historic crisis and looks set to remain in isolation following the collapse of a planned tie-up with Boeing. The company has already furloughed more than 90% of staff at its main Brazil plant and is expected to need strong government support to recover. There is some talk of a deal with China, but this would be difficult politically and seems unlikely in the near future. The company’s challenge now looks monumental.

Boeing is suffering from a triple whammy: the impact of Covid-19, its 737 Max issues and the fall-out of the Embraer deal. However, CEO David Calhoun expects to restart production of the 737 Max this month, albeit at a low rate until regulatory approvals are secured. Euro Weekly reports that the US carrier Delta is to retire all its Boeing 777 jets amid the pandemic. Again, this is part of the broader airline industry strategy to modernise fleets with a focus on more cost-efficient planes. Delta will continue flying its fleet of long-haul next-generation Airbus A350-900s, which burn 21% less fuel than the 777s.

Spirit Aero Systems, one of Boeing’s biggest suppliers, is thought to have agreed supply plans for 737 Max shipsets in 2020. Despite the problems of the last quarter, it is proceeding with its acquisition of Asco, a Belgian business owned by Bombardier. Asco makes structural components for aircraft including Boeing and Airbus, with operations in Belgium, Canada, Germany and the US. Spirit sees the deal increasing its Airbus work, which represents 50% of Asco’s revenues, and also securing its F-35 joint strike fighter work in the defence sector.

In the UK, meanwhile, we wait to hear from the government on any plans to aviation industry-specific support. Ministers are under pressure to act, with France and Germany injecting billions into their sectors. The fear is the UK could be disadvantaged just as it also has to cope with the impact of Brexit.

One suggestion is that government support could take the form of incentives to persuade airlines to scrap older craft. The trade body ADS CEO Paul Everitt warns that without help, the UK industry will struggle to compete. “The risk to the UK is we have cash-strapped and heavily indebted businesses having to compete with those with greater resources,” he cautions.

Advanced Manufacturing & Defence focus on productivity

Increased adoption of industrial robots will be a key factor in driving post-Covid-19 productivity says the International Federation of Robotics, IFR and the OECD in research just published. It suggests companies employing technology effectively are 10 times more productive. With companies around the world reassessing global supply chains and business models in the wake of the pandemic, there is now scope to accelerate the use of robotics.

Elsewhere, Honeywell is to produce respirator masks for the NHS in a new programme beginning in July that will create 450 jobs at its Newhouse plant in Scotland. Construction firm JCB has announced a partial reopening of five of its UK factories, though production will be limited by increase safety restrictions such as social distancing.

Rail services increase

Rail services around the UK have increased over the past month and many supply chain firms are now getting back to work or planning a return. We believe the rail sector can benefit from increased international trade, given the quality of the UK industry’s supply chain. We were therefore encouraged by the large number of companies that joined  recent webinars, arranged by Santander, the Railway Industries Association (RIA) and the Department for International Trade, to discuss opportunities in Europe (You can register for the 27th May 2020 webinar (Denmark, Finland, Norway and Sweden) here. We continue to work with both the RIA and the DIT to support companies seeking to exploit international opportunities.

Elsewhere, HS2 Ltd has formally launched the process of selecting a contractor to design, supply and support Control, Command, Signalling and Traffic Management Systems. The multiple contracts will have a combined value of ￡540m.

One other positive development to report this week is the Government’s announcement of support for businesses with supply chains relying on trade credit insurance. The new Trade Credit Insurance Guarantee may help many businesses maintain cover.

Manufacturing sector news

• New research from Make UK warns that many manufacturers are pessimistic about the prospects of a return to normal trading conditions following the Covid-19 crisis. The proportion of firms expecting it to take more than 12 months for the industry to bounce back has doubled since Make UK’s last survey two weeks ago. Sales continue to fall at an alarming rate, it says, with a fifth of companies planning to increase the number of staff on furlough in the next two weeks. Make UK reports:
• nine in 10 manufacturers have continued to operate during the crisis;
• a fifth have furloughed between a quarter and a half of their staff;
• a third think it could take more than 12 months to return to normal trading conditions;
• a quarter have seen orders fall by more than half.

Make UK CEO Stephen Phipson warns: “It’s clear that it is going to be a long road back to anything like normal trading conditions and, despite the lockdown beginning to be lifted, there will be a significant impact on companies and jobs for some time to come”. We’ll be hearing more from Phipson on a Santander podcast of 1 June. 

Make UK’s concerns are echoed by a report just published by law firm Irwin Mitchell and the Centre for Economic and Business Research. UK Powerhouse says manufacturing has been the sector of the UK economy hit hardest by the Covid-19 lockdown, with GVA down 75% – a loss of ￡540m in absolute terms. While manufacturing has been exempted from the rules on non-essential travel and work, slumping demand and supply chain disruption have taken their toll. More positively, the report suggests many manufacturers are continuing to plan for a restart during May and June.

One route to a manufacturing recovery may lie in capitalising on some of the impacts of the crisis, suggests Dick Elsy, CEO of the High Value Manufacturing Catapult on the latest edition of the The Manufacturer Podcast. Elsy has been leading the VentilatorChallengeUK consortium and is inspired by the way in which manufacturers have managed to rapidly set up new production lines and supply chains. Some of this experience may prove invaluable for the future, he suggests. You can hear more here.

Finally, manufacturers also need to keep a wary eye on non Covid-19 developments, including the ongoing Brexit negotiations. The European Commission has just rejected British demands that UK-based laboratories should be able to certify cars, chemicals and pharmaceutical products for export into the European Union. This could mean British manufacturers will need to seek certification from EU-based authorities, which would often be prohibitively expensive. There are widespread concerns that the negotiations are making little progress, but talks are ongoing.