After the UK voted to leave the EU on 23 June, what are the likely implications on the UK's aviation, aerospace, defence and space sectors? Prof KEITH HAYWARD FRAeS and TIM ROBINSON assess the fallout from this momentous decision.

Flying free? Britten-Norman was about the only UK aerospace OEM to declare for leave. (Britten-Norman)

Only last week the biggest news from the upcoming Farnborough Air Show, was the story that the Red Arrows display team would no longer be allowed to perform their trademark aerobatics routine, in the wake of post-Shoreham safety fears.

But a week is a long time in politics and aerospace trade shows. In three weeks' time, the biggest talk on visitors' lips around the chalets and halls at Farnborough will be Brexit - and the likely impact of this decision to leave the European Union. Aerospace and aviation is now a global, interconnected industry in so many ways, both large and small, that currently it is difficult to assess exactly how far-reaching the impact might be. Unpicking existing agreements bit by bit and forging new ones could take time. (What, for example, will be the effect on the UK's relationship with EASA – in terms of licensing, approvals, standards and certification?)

What form this will take is still largely unknown. If the outgoing Prime Minister, David Cameron, has his way, the two-year clock on formal withdrawal will not start until October at the earliest. Positive agreements on trade and things like air traffic regulations may take a lot longer to resolve. In the meantime, Whitehall will need to train up several hundred specialists: estimates put officials with the necessary experience of trade negotiations to be in the dozens - a real skills gap!

But this is not to embrace the doom merchants. The UK still has a vibrant and successful aerospace industry, the second (or third depending who you speak to) in the world after the US. Indeed the expected highlight of the show, the Lockheed Martin F-35 Lightning II is a US-led global industrial partnership, of which the the UK is a Tier 1 Partner. Revenues from this fighter over the next decades of this programme are thus independent of the UK's status in the EU. Demand for civil airliners, too continues on an upward trend as air traffic doubles every 15 years.

It is also worth noting that some successful examples of European aerospace co-operation pre-date the EU. Europe's most amazing collaborative aviation project, Concorde (The e stood for 'excellence, England, Europe and for the 'entente cordiale'', according to the Minister of Technology Tony Benn, who interestingly enough would also now be seen as a eurosceptic today) began in the early 1960s, as did the Tornado. Indeed, participating in these programmes was a way of staying 'in' Europe after General de Gaulle vetoed two applications to join the old Common Market, the precursor to the European Union.

Said one senior executive of a UK company of the British aerospace and defence sector: “we are a pretty resilient and persistent bunch, we will tackle the issues, and tackle the new political challenge.”

The view from industry

Winging it? The UK is Airbus's wing centre of excellence - but is future investment now in doubt? (Airbus)

The reaction from the UK aerospace sector has been a mixture, like everyone else, of initial shock and emerging pragmatism to the referendum. Prior to the vote, we saw a range of aerospace and defence companies, such as Airbus, BAE Systems and Rolls-Royce (as well as trade body ADS) urging to stay in the EU. (The only notable outlier being Britten-Norman, the last privately-owned British commercial aircraft manufacturer, which argued that the EU regulations were tailored to big OEMs and were de-harmonised for SMEs wanting to sell their products across Europe.)

Airbus, for example, had been vocal about its natural support for staying in, and had warned workers that it would have to 'reconsider' future investment decisions in Britain, should the UK exit. Following the vote, while Tom Enders cautioned that: "The world will not stand still, nor will Europe" he added:"I hope the divorce will proceed with a view to minimising economic damage to all impacted by Brexit. Britain will suffer but I'm sure it will focus even more now on the competitiveness of its economy vis-a-vis the EU and the world at large."

In the short-term, the major investments in facilities, engineering, skills, training and people then may make little difference. Removal vans (or Belugas) will not pack-up the Airbus factory in Broughton (which produces all the wings for its airliners) any time soon. However, it does mean, that Airbus, like other global aerospace concerns, may more carefully study its future investments in the UK. While others correctly have pointed out that Airbus is now a global concern, with assembly lines in China and the US, close to big markets and skills, in the future, the UK and its aerospace sector will have to work even harder to stay competitive. It will no longer be competing against traditional rivals such as Spain or Germany for slices of Airbus work, but now will be more squarely up against new entrants like Mexico and India. Even places like Morocco build pieces for Airbus, and many have ambitions to take on more important work. Redoubling competitiveness and boosting efficiency as well as investing in new technology will thus be key to maintaining the UK's place in a global industry.

Uncertainty may mean that until the dust settles, foreign investors or companies, may pause or reconsider any investments, mergers or tie-ups in the UK or partnerships with British firms - at least until a clearer picture emerges. Smart politicians, post-Brexit, will need to be thinking of incentives to increase investment from global aerospace companies.

Another firm that may be reconsidering its UK footprint is Leonardo-Finnmeccanica, and its Westland helicopter facility in Yeovil. Earlier this year, it hinted that it would have to 'reassess' operations in the UK, should the vote be to leave. Furthermore, after losing out on two recent UK defence projects (AAC AH-1 Apache follow-on/upgrade and rotary-wing MFTS) this too may put the future of Yeovil in doubt. Current orders will no doubt be honoured, but with a contraction in the global military rotorcraft market, what happens beyond then?

Yet it may not be all pessimism: UK aerospace and defence giant BAE Systems, for example, despite being involved as a Eurofighter partner, does little other recent defence business with Europe itself. The F-35 (for which it is bidding for an avionics repair and support facility in the UK) is an international programme, and the Anglo-French FCAS project is a bilateral government-to-government agreement. Meanwhile other key projects include a clean-sheet T-X trainer for the USAF (for which BAE is partnered with Northrop Grumman), and Turkey's manned fifth-generation TFX fighter, for which it is providing technical assistance. There are also significant naval shipbuilding projects, and of course the Trident successor Submarine - none of which are tied into the EU.

In short, the defence sector may be least affected, as the EU has been slow to integrate here and only slowly begun to commit funds to defence-related work. As long as the UK defence budget remains high, the UK will remain attractive to foreign investment. A precipitate fall in these commitments could trigger more serious problems. Equally, the UK's links with the US may prove to be an even more tempting option.

Air transport - a cloudy crystal ball?

Low cost airlines have benefited from the liberalisation of European air traffic in the past two decades. (easyJet)

For air transport and airlines, the most obvious impact is the status of UK air traffic regulations: These have been an EU responsibility for decades. Again no immediate change while the UK is still in the Union. An IATA note, the parameters are spelt out. The UK is the single largest destination market in the EU. Operations are determined by access to the Single Aviation Market and common technical regulations for air transport governing passengers and cargo. According to IATA, “Continued participation in these schemes will also have an impact on UK competitiveness.” Negotiating an access agreement will therefore be vital to UK air transport.

But the implications of Brexit extend well beyond Europe: in principle, all of the UK's bilateral relationships will have to be re-created. Perhaps the most high profile of these agreements is the EU-US open- skies agreement, which entered into force in 2008. The UK will have to fight its corner for access and other regulations, and at the same time as a raft of other complex trade-related talks. This may require reverting pro tem to prior arrangements such as Bermuda II with the US. None offer the liberal approach of later agreements. Services and prices could be negatively affected.

Some of the impact could be mitigated if the UK negotiated some form of continuation with the Common European Aviation Area. This is a subset of the wider deals expected to be made after the UK has left:

* Membership of the European Economic Area (EEA), which is the model currently followed by Norway and which ensures full access to the Single Market;

* Bespoke bilateral arrangements, akin to the bilateral agreements between the EU and Switzerland; and;

* WTO relationship (i.e., no special arrangement with the EU);

None of these will give the UK influence over EU aviation policy, and in the case of the first, all existing and future aviation related regulations, including airport air quality, would be enforced. It would help to secure other bilaterals to which the EU is a party. The second would imply more limited access, but fewer EU regulative interventions. The third would set the UK adrift to negotiate its own way, with no immediate access to the Common Aviation Area. This, according to IATA, could mean exclusion from new initiatives such as the Single European Sky. Although in this case geography would suggest that the UK would remain an interested party in respect of North American air traffic management.

Second, what does it mean for aviation industry performance? The IATA note suggests that the number of UK air passengers could be 3-5%lower by 2020, driven by the expected downturn in economic activity and the fall in the sterling exchange rate. The near-term impact on the UK air freight market is less certain, but freight will be affected by lower international trade in the longer term. This is equivalent to some of the worst of previous economic shocks, and recovery might be more attenuated.

What this might mean for airlines operating out of the UK is in the cloudier sections of the crystal ball. Ryanair is Irish, but still affected by shifts in UK originating traffic, which might be depressed in a recession or by a low valued pound (this might be matched to some extent by more visitors). IAG will retain two EU hubs, but its Heathrow transit traffic might be affected by any hiatus in the regulatory framework. easyJet would probably look to expand its EU-located hubs, but also face loss of revenue from the UK domestic market. Aviation jobs may well migrate, but how many is difficult to assess. MRO might benefit from a more attractive pound dollar rate, but this area is dominated by dollar pricing, and foreign exchange rates are likely to remain volatile for a long time.

Defence outlook

Britain still needs an MPA - but will P-8 get signed at Farnborough if the Government is in disarray? (Boeing) 

If industry itself is pragmatic about the knock-on effects, there could be negative implications for the UK's defence outlook. First, is that last year's SDSR, after the crisis of defence budget woes, succeeded in putting forward a strategic re-equipment plan for UK MoD that was now funded. However, this procurement programme, which includes (in its air platform portion), AH-64E Apaches, P-8 Poseidons, F-35s and Protector UAVs was predicated on certain levels of GDP growth. The fall in the pound yesterday, also means that for defence equipment (or indeed all aircraft) which are priced in dollars, these platforms suddenly became a tiny bit more expensive - throwing a spanner in the works of the UK's carefully crafted procurement plans. While it is highly unlikely that these long-term acquisition programmes will be axed, it may be that SDSR might need to be revisited and updated with new schedules.

Even if the fall in the pound is temporary blip, there is another factor in play here. With the Prime Minister now having announced his intention to step down in October, there is now the concern that a decision-making paralysis might grip Whitehall and prevent contracts being signed off, or action being taken on defence issues. It may be that the civil service is instructed to carry on as normal, but a political leadership fight may divert attention away from everyday matters. Will Brexit, for example, mean that the Boeing AH-64/P-8 buy, rumoured to be signed at Farnborough next month, still go ahead at the show? Or will ministers be too busy jostling for position in the next cabinet? Again, this should not detract from the strategic rationale of SDSR (The MPA gap still needs to be filled) but it could delay or disrupt timelines.

Strategically there is unlikely to be change as, despite the bogeyman of a 'EU Army', the EU has no defence competence yet, apart from ad-hoc initiatives like the anti-piracy EU Naval Task Force off the Horn of Africa. NATO will continue to be the main international defence alliance through which the UK participates in multinational cooperation. France, too, is the closest European partner in the UK's expeditionary mindset and in the willingness to not only acquire military power, but to wield it - with Anglo-French joint exercises cementing ties. That is (short of a complete London-Paris breakdown in diplomatic relations) unlikely to change.

However there may be other bodies and agencies that could well be affected by the UK's exit. The EDA (European Defence Agency) which exists to encourage cooperation and collaboration on European defence, with R&D project and joint training. OCCAR, meanwhile which deals with support of in-service programmes, may just see the UK switch to a similar status as Sweden or Turkey.

Time to boost UK aerospace R&D?

The UK will need to invest in and boost aerospace R&D if cut free from EU projects. (ARA)

Another aspect to consider is in the R&D aspect of aerospace. The UK's academic and scientific community has been vocal in their opposition to Brexit, citing loss of access to funding and denied research opportunities via EU-sponsored projects. In aerospace, this means programmes like the e EU's Clean Sky 2 project - a €4bn initiative to develop cleaner, quieter and more efficient next-gen aerospace technologies across a wide range of applications - including airliners, rotorcraft and regional aircraft. There are also other sources of EU R&D funding. Hybrid Air Vehicles Airlander, for example received €2.5 million from the Horizon 2020 project for innovation. Following the exit of the UK to the EU, will Britain have the same access, or will companies like Rolls-Royce, GKN Aerospace and others find themselves excluded or marginalised?

However, this may not mean the UK being cut out of European aerospace R&D programmes entirely. Indeed, some 13 non-EU countries (including Norway, Israel and Switzerland) have 'Associated Country' status and are able to participate in EU Framework Programmes. According to the Royal Society, which produced a report on EU research in December, Associated Country status for non-EU nations: "enables their researchers and organisations to apply for Horizon 2020 projects with the same status as those from EU Member States. Associated Country status is open to countries that are members of the European Free Trade Association (EFTA) and current EU candidate nations."    

What is true is that if the UK Government (of whatever hue) does consider the UK aerospace sector a worthwhile strategic and economic asset, then the ATI (Aerospace Technology Institute) - a UK 'virtual NASA' - has now suddenly become a whole lot more important. Post-Brexit, boosting British long-term investment in aerospace R&D, developing cutting-edge technologies and IP or even pioneering new service models, has never been more important to retain the UK's position in the highly competitive global aerospace industry.

Much will depend on future UK governments maintaining commitments to public funded R&D - matching EU funds and holding UK national budgets. This investment will help to keep aerospace multinationals in the country. But again we will have no control over the EU budget or policy. The UK will also have to keep the door open to skilled migration, with no ifs and buts about origin.

In every aspect of the UK's industrial future, quality is an outstanding virtue. This will hold and fix inward investors. Public and private investment in new aerospace technology will be vital. It is imperative that future UK governments maintain their historic commitment to aerospace. The danger is that if the economy shrinks over the next decade, the pressure will be on to allocate increasingly scarce national resources to other priorities. This might prove to be the hidden cost of Brexit to UK aerospace.


Spaceflight back to Earth?

What will happen to UK involvement in EU space programmes, like Galileo? (ESA)

The referendum decision might be especially baffling to those keenly following Tim Peake's highly successful mission to the ISS as the UK's first European Space Agency (ESA) astronaut and who recently returned to Earth. However, ESA is not a EU agency and includes two nations (Norway and Switzerland) who are not EU Members. Damage to this relationship, as long as the UK continues on its trajectory of participation in science missions and its renewed involvement in human spaceflight is likely to be minimal. However, there could be question marks over EU satellite projects that the UK is currently involved in, like the Galileo navigation system or Copernicus Earth monitoring initiative. Will the UK space industry (particularly important for Surrey Satellites (SSTL and Galileo) be now shut out of these as non-EU members? Will the UK be able to access the high-precision mode (suitable for example for weapons and critical aviation safety applications) of Galileo satellites as a non-EU member?

The UK should then remain well-placed in European space programmes. The bulk of the national civil space activity is channeled through ESA, which has several non EU members. As long as it contributes to the ESA budget, the UK will maintain our share of this high value work. This could be enhanced by a separately funded national programme. Industrially, the UK is also well served by a number of small companies as well as an important division of Airbus Defence and Space, where the UK is a well established specialist contributor.


Summary

Take-off to freedom and global opportunities or a slow-motion plane crash?

So where does this leave the UK aviation and aerospace sectors? In a cloud, really: The most we can say is that a structural impact is going to be in slow motion. Economic pressures may have a more immediate effect, if the economy does fall into a prolonged period of malaise, and Government funds become stretched, with sacrifices made in defence and civilian R&D funding. Oh, and as UK domestic politics hit a turbulent patch, don't expect an imminent decision on a new runway in the South East.


27 June 2016