More restrictive rules, regulations and paperwork or international investment opportunity? Ahead of the Farnborough Air Show, BILL READ, FRAeS reports on a recent ADS press briefing which discussed the implications for the future of the UK aerospace and defence sector of Britain’s decision to leave the European Union.
On 24 June the UK voted to leave the European Union.
On 27 June the UK aerospace industry trade association ADS held a briefing for journalists originally intended to provide an update on the condition of the UK aerospace and defence industry prior to the 2016 Farnborough Air Show. However, following the Brexit vote, the event instead focused on the economic implications of the UK’s decision to leave the European Union.
A good year - up to now
According to ADS statistics, 2015 saw the UK aerospace industry grow by 6.5% to an annual turnover of £31.1bn. Aerospace export sales increased by £700m to £27bn. At the beginning of the year aerospace companies were confident about the future, with over 50% anticipating further growth of over 10%. The UK defence -industry, despite having had a more difficult experience with sales, was also still positive, particularly after the announcement of increased spending in the last Strategic Defence and Stratgegy Review (SDSR).
However, all that changed on 24 June when the announcement came that the UK had voted to leave the European Union. “We live in interesting times,” observed the Chief Executive of ADS, Paul Everitt, admitting that: “Brexit was not the outcome we would have preferred. Today we are in a challenging environment.”
When looking at the possible implications of Brexit, Everitt considered three different time frames - the short term period until the UK government invokes Article 50 and begins negotiations to leave the EU, the medium term while this process is carried out and the long term future once the UK is no longer an EU member.
A need for stability
The value of sterling plummeted on the day of the referendum result but has since made some recovery.
In the short term, Paul Everitt did not foresee any immediate changes in the business environment. “Aerospace and defence are long cycle industries,” he explained. “It won’t exactly be normal business as usual but there should be no major changes.” However, he added that the longer it took for the UK to start the process of withdrawal, the more uncertainty would be created which made it difficult for business to take longer term decisions. “Stability in the markets is important,” he said. “In the next few months, the Government needs to demonstrate its commitment to the domestic economy by continuing work on major investment projects, such as airports, HS2. These are important not just to the UK but also as signals to the global market place that government is continuing to invest in industry. The danger is to wait to see what happens, as the process of waiting creates an economic vacuum which may tip us into more volatile trading conditions. We are not in a panic situation, we’ve got say six months of time, but the Government needs to be on the front foot and needs to send a signal in the Chancellor’s Autumn Statement and the Budget to make UK attractive for investment.”
The UK needs to show that it is still open for business.
Turning to the medium term, Everitt stressed that it was important to know as soon as possible what the terms of withdrawal from the EU were, so that measures could be taken to ensure that UK remained internationally competitive. “Once we’ve got the new Prime Minister, we need to know what our new relationship is with the EU,” he said. “Whatever happens, the Government must be visible about its industrial strategy and it is important that it works together with industry. The challenge is to prevent incremental erosion of competitiveness and we must do everything we can do to minimise any hold off in investments. This might include measures such as tax changes relating to research and development to provide positive incentives, changes to investment allowances and new business rates. The important thing is to send a signal to companies which may be wavering to invest that the government is committed to the aerospace, defence and other manufacturing sectors.”
Working to new rules
The UK currently supplies parts for the European aerospace industry but may now find it more difficult to be considered for new projects.
Two key areas of negotiation will be the UK’s continued access to the European market and the free movement of labour. “From the point of view of industry our ultimate goal would be for unfettered access to the single market and free access to the pool of specialist labour but we’re none the wiser at the moment as to what might actually happen,” admits Everitt. Europe is an important market for the UK aerospace industry, both for imports and exports and as a labour market. According to ADS Chief Economist and Director of Policy, Jeegar Kakkad, UK exports to Europe were worth around £27bn, of which 30% (£8bn) was related to aerospace. There were also currently 128,000 EU citizens working in the UK, of which 7% (16,0000) were in aerospace. Everitt admitted that, whatever the results of the negotiations are, UK aerospace companies will be facing a more challenging environment. “We realise that the UK may have to make some compromises which is why we think it’s important to have an ongoing dialogue with the Government,” he said.
Renegotiating trade agreements
Once the negotiations for leaving the EU have started, the UK will need to begin the process of setting up new trade agreements with different countries. “There will of course be trade-offs and compromises that will need to made,” said Everitt. “However, we’ve very keen that whatever agreements are reached are beneficial to all industrial sectors and not just particular ones, such as services. We need to be careful that we are not trading global competiveness for things we might not value so much in the future.”
“Another issue is that the UK no longer has any great expertise on negotiating trade agreements, as these were all done by the EU. Exporting is going to become more complicated as we will need to set up multiple trade agreements with different countries. We will need to invest in supporting businesses to help them with the new rules and what forms to fill in.
The EU Clean Sky 2 research project already includes non member nations.
“What is also important is that we want to maintain our access to European regulatory and industry bodies,” said Jeegar Kakkad. “Legislation on European aviation affects us, so we want a seat at the table. Our industry pays for these services so, as the largest player, we want to keep influence over rule making process. EASA already includes representatives from non-EU states, so the aircraft certification process would still be the same.”
Another area that is going to be affected by Britain’s withdrawal from the EU is the UK’s participation in EU-funded multinational aerospace research projects. Projects with UK participants which are already underway are likely to continue but the UK may find it more difficult to be included in new projects. “Projects, such as CleanSky 2, do include a number of non-EU participants,” said Everitt.
Future of defence?
The impact of Brexit on UK defence spending (such as the acquisition of Boeing PS Poseidons is not yet known.
Turning to defence, there were concerns that the Government’s proposed SDSR defence spending, such as the purchase of US Poseidon MPAs, was already being adversely affected by changes in the dollar exchange rate. “The government has planned for additional costs,” said Kakkad. “Let’s see where exchange rate ends up.” “We knew that defence budgets were going to be tight,” added Paul Everitt. “We need to keep focused on what’s happening in the ‘real economy’.”
When asked whether some of the government’s defence spending on SDSR might be put on hold, Everitt admitted that he did not know. “The Conservative manifesto was clear on defence but the reality is that it depends on the new Prime Minister,” he said.
Living with uncertainty
“We are going to have to live with uncertainty for up to two years,” said Everitt. “From our industrial point of view, the less change the better but the reality is that it may depend on politics and we could have to accept compromises. Over the next two years we need to do things to encourage investment, after which we need to focus on gaining skills and capabilities to operate in new economic conditions. In the longer term, the changes may be a good thing, as they might open up new business opportunities for exporters. Europe is important to the UK aerospace industry but the biggest growth is in Asia and the Far East.”
The 2016 Farnborough Air Show will be the first major trade event since Brexit.
Paul Everitt concluded by highlighting the opportunities offered by next week’s Farnborough Air Show. “Farnborough is the first big international event after Brexit and will have a high international presence from international governments, customers and potential customers,” he said. “The show therefore offers a significant opportunity for the UK Government to clearly signal its support for the British aerospace industry.”