Written evidence from the Department for Business, Energy and Industrial Strategy (BRS0011)

1.      The Government welcomes the BEIS Select Committee’s inquiry into Brexit and the implications for UK business – and in particular the inquiry’s focus on the UK’s civil aerospace sector.

2.      UK civil aerospace is world-leading with strengths in some of the most technologically advanced parts of aircraft, including: wings; engines; and advanced systems such as landing gears. The sector has real growth potential. By 2035, over 33,000 new, large passenger aircraft and freighters are needed. The demand for new aircraft is forecast to be worth around $5.5tn.[1] In the UK, there are approximately 2,500 aerospace companies, 2,200 of which have less than 10 employees.[2] The UK sector is extremely concentrated with large firms accounting for more than 90% of employment and turnover.[3]

3.      In 2016, the sector’s turnover was £31.8bn. Gross value added (GVA) for aerospace has grown 24% since 2010, compared to 3% for manufacturing as a whole. Today, it generates £11.2bn GVA, equating to 6% of UK manufacturing GVA. Aerospace supports 120,000 high skilled jobs; equating to 0.3% of total UK employment.[4] Salaries in aerospace are 34% higher than the average UK manufacturing salary.

4.      The regions with the highest concentration of aerospace activity are the South West (19% of workers), East Midlands (16%), and North West (14%). Clusters exist in: Wales (particularly Cardiff and Broughton); Northern Ireland (main cluster in Belfast); and Scotland (main cluster around Glasgow).[5]

5.      The sector is export orientated. This is reflected in the UK’s international customer base. In 2016, exports accounted for 10% (£29.6bn) of the UK’s total goods exports (90% of aerospace turnover), of which 30% (£9.0bn) was destined for the EU. Imports to the UK accounted for 5% (£26.2bn) of total worldwide aerospace imports, with 21% (£5.4bn) imported from the EU. The top three destinations the UK exports to, and imports from, for aerospace are the U.S., France and Germany.[6]

Industry concerns about the impact of Brexit

6.      Civil aerospace manufacturing has an increasingly global footprint. Barriers to entry are high due to expense, big risks and the stringent technological standards needed to satisfy aviation safety and environmental regulations. These factors have shaped the market. Within the EU, there is a high degree of collaboration between companies and governments (UK, France, Germany and Spain, in particular) to apportion risk, costs and capabilities to achieve economies of scale and compete for a higher proportion of the global market share.

7.      There is intense competition for supply chain opportunities among aerospace nations. Changes to the relative competitiveness of a country’s business environment could have an impact on the civil aerospace sector.

8.      The UK’s membership of the Customs Union and Single Market has aided the economic and operational efficiency of complex supply chains. This includes the high degree of harmonisation in critical areas like aviation safety requirements. UK aerospace supply chains are particularly interconnected with other EU countries and the cross-border movement of goods is high. Just-in-time manufacturing is applied. Individual components can get shipped between multiple EU Member States during the manufacturing process. The Airbus A380, for instance, has about 4 million parts, produced by 1,500 companies from 30 countries.[7]

9.      The EU’s labour market has been integral also for global market access. UK-employed, specialist engineers are able to relocate with minimal burden to assembly lines in France or Germany. This may be required at little notice, for short periods of time to keep production lines running. The same mobility is enjoyed by international consortia collaborating on R&D, where capabilities that require integration are located across EU countries. Civil aerospace benefits also from the WTO Agreement on Trade in Civil Aircraft.[8]

10.  Design and manufacturing are becoming increasingly integrated, with emphasis placed on R&D and technological capability. Aerospace is one of the most R&D intensive sectors in the UK, accounting for 8.1% of total business R&D (£1.7bn in 2015).[9] Services in civil aerospace are a key growth area. This now includes product health monitoring and prognostics, as well as the more traditional repair, overhaul and upgrade activities.

11.  Since the referendum, Government has sought the views of the civil aerospace community and continues to do so. Departments that have been involved include BEIS, DExEU, DfT, DIT, HMRC and HMT. As well as at detailed, operational levels, dialogue has occurred between Ministers and business leaders. Stakeholder engagement has involved the sector council, Aerospace Growth Partnership; the trade association, ADS Group; and the Aerospace Technology Institute.

12.  Key “asks” from business include, but are not limited to:

• Continued participation in the European Aviation Safety Agency (EASA).
• Maintaining free and frictionless trade arrangements.
• Access to the international skilled labour market and the ability to easily move skilled workers quickly between production sites across Europe.
• Participation in EU Research & Development (R&D) Framework Programmes.
• Implementation arrangements to adapt to the UK’s future partnership with the EU.

Views on implementation arrangements correspond with those expressed by manufacturers more broadly. They are regarded as an important part of the ‘level playing field’ that promotes trade across all sectors. Businesses have emphasised the need to facilitate continuity of goods on the market, as well as enabling integrated supply chains to function whilst avoiding multiple changes.

The outcome of Brexit for civil aerospace

Market access

13.  The European aerospace industry, including its supply chains and labour market, is integrated with a high degree of collaboration. For example, the ‘home nations’ that formed Airbus are the UK, France, Germany and Spain. Another specific example is the Engines Integrated Technology Demonstrator, a Clean Sky 2 work programme, which is led by Rolls-Royce (as a UK company); Safran (France); and MTU (Germany). (See R&D section below.)

14.  Timeframes in civil aerospace are long. Products can take up to 15 years to develop and have lifespans of 30 to 40 years. A challenge faced by companies is to develop technologies at the right time to meet the long-term demands of the primes and large tier 1 integrators.

15.  It will be in the interests of both sides in the negotiation to maintain closely integrated aviation markets and to have identified arrangements for this before the UK leaves the EU in order to continue to improve connectivity, choice and value for money for business and consumers.

16.  A significant advantage is that the UK is party in its own right to the WTO Agreement on Trade in Civil Aircraft Agreement. The Government is working to resolve the UK’s schedules. 

17.  The Agreement eliminates tariffs on civil aerospace imports. Product coverage includes: all civil aircraft; all civil aircraft engines and their parts and components; all other parts, components, and sub-assemblies of civil aircraft; and all ground flight simulators and their parts and components. The agreement does not cover: certain part-finished and intermediary products, or raw materials and consumable goods. With regard to these, companies may be eligible for relief under the UK and EU’s Inward Processing Relief (IPR) regimes.

Non-tariff barriers and regulation

Aviation safety and airworthiness certification

18.  Aviation safety is a key consideration for the civil aerospace sector. Statistics from the International Civil Aviation Authority (ICAO) show a consistently lower rate of accidents involving commercial aircraft operated by those holding an EASA Air Operator Certificate in comparison to accidents worldwide; plus accidents worldwide have declined over the long-term.[10]        

19.  The most significant non-tariff barrier for the civil aerospace sector would be the processes and requirements for airworthiness certification. On balance, the sector’s greatest concern is the UK’s future relationship with EASA. Both international standards and the work of EASA have enabled the development of consistent safety rules across Europe and the world. EASA is one of the world’s two largest aviation safety regimes, alongside the US’ Federal Aviation Administration (FAA). EASA, therefore, bears considerable global influence; and through our independent, national regulator – the Civil Aviation Authority (CAA) – the UK has played an important role not only in influencing those international standards, but also in providing considerable expertise to the development of EU safety regulations.

20.  Airworthiness certification is a prerequisite to market entry for civil aerospace goods and services, throughout the EU and much of the rest of the world. It is the Government’s intention to uphold consistently high standards of aviation safety and a close relationship with our European neighbours on aviation safety issues.

Customs procedures

21.  Due to supply chains being integrated across the EU, it is routine for components and materials to cross borders on multiple occasions. Civil aerospace benefits from the ability to transport goods quickly and efficiently. This is the case for development and manufacturing processes; including maintenance and repair, where aircraft components are disassembled and shipped to multiple EU countries for servicing, and then returned to the aircraft for reassembly. Additional checks and inspections at the EU-UK border have the potential to be disruptive and introduce commercial costs. This risk is higher where companies operate just-in-time production, for example, Airbus and Rolls-Royce.

22.  In the Government’s Customs Future Partnership Paper, published on 15 August 2017, HMG set out its three strategic objectives for its future customs relationship with the EU. The objectives are: ensuring UK-EU trade is as frictionless as possible; avoiding a ‘hard border’ between Ireland and Northern Ireland; and establishing an independent international trade policy. These were reiterated in the Customs Bill White Paper, published on 9 October 2017. Both papers also stated that in assessing our options for a future relationship, Government will be guided by what delivers the greatest economic advantage to the UK.

Cross sectoral regulatory issues

23.  The UK sector is subject to EU regulatory stability and influence across a variety of areas. For instance, as end users of chemicals and advanced materials, civil aerospace businesses are contingency planning for the impact on their supply chains of future registration and authorisation requirements. Changes to the regulation of data protection, transborder data flows, and financial services are also strong examples of areas where the sector will need to adapt to deliver products and services worldwide.  

Labour market and skills

24.  The Government recognise that civil aerospace is innately global and highly skilled. Mobility is an important issue for the sector to remain competitive, to attract international talent, and for those who are UK-based to participate in the sector worldwide.

25.  In aerospace, the vast majority of workers are employed by companies that are operational throughout the world. These employers regard international experience as fundamental to corporate culture, operational execution, knowledge and skills transfer, and for career development. The sector relies on the relocation of specialised engineers, as well as other executives, for varying periods of time – from one working day, up to years or on a permanent basis. The need to travel can be ad-hoc and require immediate action, for example, due to a technical issue on a production line. 

26.  Substantially more of the roles in aerospace require some form of post-compulsory education compared to the economy as a whole. Skills levels are reflected through salary information. Aerospace earnings in 2016 were 34% higher than the average UK manufacturing salary, and 37% higher than the average overall UK salary. In the last 5 years, aerospace salaries have grown at a faster rate than those across UK manufacturing and the economy as a whole.[11]

27.  The sector is developing its talent pipeline. Civil aerospace is a leader for high value apprenticeships, with 3,300 currently employed. The Aerospace Growth Partnership’s Skills Working Group helps the sector to recruit, and invest in, those with the required skills, and to benefit from opportunities created by technological change. Recent work has focused on: identification of future skills needs to capitalise on emerging trends (spanning digital, engineering and management); SME engagement; and promotion of the Aerospace Industrial Cadets Programme in 2016-2017 to improve the connection between schools and aerospace companies.

28.  Government is reforming the post-16 education system to ensure it can meet the needs of the labour market, both now and in the future. A key principle of the reform agenda is to put employers in the driving seat of the skills system. Employers are best placed to determine the skills businesses need, and this should drive the skills offer.

29.  Technical Education and apprenticeships will fit within a new routes framework. The routes map skilled occupations across the economy, allowing us to ensure there is a high quality skills offer available for all occupations. Employers will design standards for each occupation, setting out the skills, knowledge and behaviours required. These standards will determine the content of classroom based Technical qualifications, delivered as part of the new T-Levels, and apprenticeships.

30.  The civil aerospace sector has engaged well with these reforms, having developed 6 standards for the relevant route that are approved for delivery.

R&D

31.  Technology is a key driver for competitiveness in the civil aerospace sector. Airlines and passengers demand more cost-effective journeys that are quieter and more environmentally friendly. To achieve this, aircraft need to incorporate innovative products, materials, or new advanced manufacturing capabilities. The UK’s future competitive success will depend on the ability of industry to maintain an edge in key areas such as engines, wings and advanced systems. However, the UK is not alone in having capability in these areas. In addition to traditional aerospace nations, newer markets have emerged. Brazil, China, India and Turkey, for instance, compete alongside the UK, US, Germany, France and Spain. With the promise of long-term manufacturing, anchored by initial R&D investment, the UK is competing to secure, exploit and grow its existing aerospace research and development capability.

32.  In light of intensifying global competition, Government is working with the sector on a long-term partnership, underpinned by a joint government-industry commitment to funding £3.9bn of civil aerospace research and innovation between 2013 and 2026.  Much of this investment is directed towards the development of new technologies for more environmentally-friendly aircraft. Considerable investment is also being made in new design and manufacturing processes to raise productivity and improve the cost competitiveness of UK suppliers.[12] The Aerospace Technology Institute provides expert advice on strategic deployment of the funding, which will be guided by a market-aligned technology strategy. 

33.  International collaboration is important as EU aerospace nations specialise to share risk and costs. To demonstrate the performance of new technology or components, especially how they can be integrated into a whole new aircraft, is a particular challenge. For businesses, and academic and research institutions, EU R&D Framework Programmes, such as Horizon 2020, have enabled such collaboration. They create more diverse networks and enable participants to develop their understanding of customers’ needs.

34.  The UK has as strong track record of participation in EU R&D Framework Programmes. During the first three years of Horizon 2020, the UK received the second highest amount of EU funding (€3082.5m). Germany received the highest (€3464.4m) and France the third highest (€2097m). The UK had the highest number of participants in projects backed by Horizon 2020 funding – 6,289, with 1 in 5 serving as project coordinators.[13]

35.  Civil aerospace has been associated with the Smart, Green and Integrated Transport work programme. The initiative identified by the sector as most applicable is the Clean Sky (CS) Joint Technology Initiative (JTI), currently in its second iteration (CS2). CS2 was conceived to build and run large-scale integrated technology demonstrators. Typically, demonstrators run for 10+ years and are integral to the latter stages of R&D where commercial potential is tested. They are expensive, integrate products from different EU nations, and exploit technologies at levels that are more globally competitive than could be achieved by any single European country.

36.  The preference of UK-based businesses, and academic and research institutions, is that their access to Horizon 2020 and the forthcoming Framework Programme 9 (from 2021) is maintained. They are keen too that UK Government is well-positioned to shape the strategic direction of civil aerospace research, development and innovation in Europe.  

37.  The future partnership paper, Collaboration on Science and Innovation, highlights Government’s commitment to building on the UK’s history of working with European partners on science and innovation through EU, pan-European and other multilateral and bilateral initiatives. Government would like to build on its unique relationship with the EU and establish an agreement on science and innovation that ensures the valuable research links between us continue to grow.

Trade opportunities

38.  The UK is a world leader for civil aerospace with key strengths in the most complex parts of aircraft. Half of the world’s modern, large airlines fly on wings designed and built in the UK. Rolls-Royce is one of only three companies worldwide with the capability to design and manufacture large civil aero-engines – and the only one that is not U.S. owned. Also, the UK is one of the few nations with a supply chain capable of designing and producing advanced helicopters. As a result, exports for the sector in 2016 were significant, accounting for 90% of turnover (£29.6bn); 70% of these exports went to non-EU countries, which were the origin of 79% of UK imports.[14]

39.  The UK will continue to benefit from membership of the WTO Agreement on Trade in Civil Aircraft. Where applicable, civil aerospace should benefit also from comprehensive trade arrangements, both with the EU and other trading partners.

40.  While advanced markets will continue to be key targets for the UK, there are a number of significant emerging markets that we are well-placed to expand in. Over past 5 years, UK Export Finance supported almost £4.2bn of aerospace exports.

41.  Preparing for a Future UK Trade Policy, published by the Department of International Trade on 9 October 2017, sets out the initial steps Government will take as we build an ambitious trade policy based on the UK’s national interest and needs after we leave the EU. The UK will look to secure greater access to overseas markets for UK goods exports for example by reducing current tariff and non-tariff barriers faced by goods exporters in non-EU markets.

Transitional arrangements

42.  The sector welcomed proposals set out by the Prime Minister, during her speech in Florence on 22 September 2017, for an implementation period of around 2 years. This would follow 29 March 2019, the date when the UK will cease to be a member of the EU. This strictly time-limited implementation period, to be agreed between the UK and the EU, would allow business and people time to adjust, and to allow new systems to be put in place. Such a period should ensure that the UK’s and the EU’s access to one another’s markets continues on current terms, so that people and businesses will only have to plan for one set of changes in the relationship.

27 October 2017