Challenging times The impact of Brexit and the trend towards consolidation

Airbus wing factory, Airbus wing factory, Broughton, North Wales Broughton, North Wales

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Alongside the ongoing Brexit negotiations and a trend towards consolidation, there are plenty of other issues impacting on the European aerospace sector. Murdo Morrison, editor of Flight International Magazine, looks at the continued rivalry between Airbus and Boeing, as well as how the smaller players are faring in today’s uncertain climate.

For an illustration of how tightly Airbus’s UK operations are bound with its final assembly lines in Hamburg and Toulouse, visit the European aircraft maker’s wing factory in Broughton. As Airbus prepares to ramp up production of its A320 narrowbody family to roughly 60 a month by 2019 – mainly to meet unprecedented demand for air travel in Asia and other emerging regions – some four wings a day will need to be shipped from North Wales. And that is not counting around a further one each day of the larger and even more complex structures for Airbus’s widebody range. Not since World War Two has Europe’s aerospace industry depended on such just-in-time output.

Whatever the outcome of the Brexit negotiations, they are unlikely to pitch an immediate spanner in the works of this intricate relationship. But many UK aerospace leaders – and their continental counterparts – fret that a hard departure from the EU that leaves the country outside the customs union and single market could cause massive disruption to Airbus and its UK supply chain. As with other industries, the prospect of trucks and Beluga transport aircraft being held up at Channel ports or Toulouse and Hamburg airports as endless documentation is checked and approved leaves many profoundly worried about UK industry’s longterm ability to remain in the Airbus machine.

But should it? While the time taken to transport goods from supplier to customer is as valuable as in any other sector, aerospace manufacturers have been operating with diverse global supply networks since the beginning of the century. A factory in southern Italy makes large sections of Boeing 787 Dreamliners that are assembled in plants on the east and west coasts of the USA, while European firms, not least engine-makers RollsRoyce and Safran, are key Boeing suppliers. Similarly, US, Canadian, Korean and Chinese companies design and build components for Airbus. Commercial aviation may connect the world, but the supply chains that produce the aircraft also span the planet.

Therefore, those more sanguine about Brexit believe that the ingenuity of logistics will find a way around any complications caused by a 2018 UK departure from the European Union. Changing suppliers in aerospace is not easy. Programme partners, as they are often called, share investment risk and intellectual property. The complexity of creating a competitive aerospace industry – even at second-tier supplier level – can take decades of training and investment. This is partly why only one commercial airliner manufacturer – Brazil’s Embraer – has emerged in the past 25 years, and why even high-tech economies such as Japan and China have struggled to join the club.

Deeper issues

Brexit aside, Europe’s dominant aerospace manufacturer has a few other concerns. While the challenge of rallying a supply chain to

crank up output to meet rising demand for your products may seem the nicest problem to have, Airbus is not having it all its own way. First to market with a re-engined single-aisle – the so-called A320neo – ahead of Boeing, which responded with the 737 Max, the European company still leads its arch-rival in orders and deliveries of short-haul aircraft. However, when it comes to larger, longerrange twin-aisle airliners, Boeing has been more sure-footed with its big strategic decisions – namely the launch of the 787 and 777 successor, the 777X.

Airbus – to be fair – has done well with its 325-seat A350-900 variant, and its latest A330neo should extend the production of its top-selling medium-haul A330 for at least a decade. However, after Airbus abandoned its smaller A350-800 (effectively replacing it with the A330neo), there are now question marks about market demand for the largest variant, the A350-1000: two prominent airline customers have recently downsized their commitments to the -900. Most worrying of all for Airbus is that its flagship programme – the A380 – will soon cut production to just one aircraft a month as a lack of orders continues to eat into the backlog.

Emirates alone is a true believer in the world’s biggest airliner, the Dubai carrier having ordered 142 of the double-deckers since the programme’s launch in 2005, with almost 100 in service (no other carrier has more than 20). Unfortunately for Airbus, the first A380s to go into service around 2007 are being retired by the original customers, with no sign that they will find a ready secondhand market. Airbus believed – and still claims – that increasing demand for slots at capacity-constrained hubs would make the 500- to 600-seat superjumbo a winner. However, airlines have voted with their chequebooks for smaller but less-costly two-engine alternatives such as the A350 and Boeing 777.

Airbus’s problems go deeper. Four years ago, the Franco-German controlled aerospace group EADS renamed itself as its dominant commercial aircraft unit. The new integrated Airbus – which has under chief executive Tom Enders long shed its clumsy dual-headquarters and double-management structure and much of its governmental oversight – now has helicopter and defence/space units. While its helicopter business has been hit badly by the decline in the oil and gas sector, its most prestigious military aircraft programme – the A400M transporter – has wreaked havoc on Airbus’s balance sheet and profitability.

The four-engined turboprop was designed to give the armed forces of France, Germany, Spain and the UK, as well as some export customers, a versatile tactical platform to deliver troops, materiel or emergency aid into inhospitable terrain, and as a modern alternative to the US-built Lockheed Martin Hercules. However, it has been beset with problems

since its launch more than a decade ago. In its 2016 financial results, Airbus wrote-off around $2.6 billion as a result of additional costs incurred on the programme. This meant a 3.3 per cent increase in overall revenues to $70.8 billion – boosted by strong sales of its A320 family – translated into a 44 per cent decline in profits, to just $2.4 billion.

The other players

Beyond Airbus, Europe’s other big aerospace concerns have been wrestling with their own challenges. Five of the biggest 20 aerospace firms in the world – ranked by sales in the FlightGlobal Top 100 listing – are European. Safran – number eight– has businesses comprising landing gear, helicopter and military jet engines, and aerostructures. Its most lucrative, however, is its 50 per cent share in the CFM International joint venture with GE that supplies every Boeing 737 engine and half of those powering Airbus A320s. Additionally, Safran is in the process of moving into the increasingly-important cabin interiors segment, with the acquisition of troubled fellow French player Zodiac.

Immediately behind Safran come BAE Systems, Leonardo (formerly Italian group Finmeccanica), and Rolls-Royce. BAE made the decision to exit the commercial aircraft business in the 2000s when it axed the Avro regional jet programme and sold its 20 per cent share in the Airbus commercial aircraft business. Since then, the civil segment has grown while the military market has struggled. However, BAE’s unique position as a national champion in the UK defence sector – in military shipbuilding, for instance – as well as its substantial stateside foothold in the world’s biggest defence market have allowed it to maintain a strong position.

Italy’s Finmeccanica was long seen as a basket case among Europe’s top tier. A hotch-potch of ailing state-controlled industries lumped in with powerful Italian aviation brands such as Alenia, Selex, Aermacchi and AgustaWestland, and known for swapping chief executives more regularly than a struggling Premier League football team, the group has rebranded as Leonardo and is promising an Airbus-style streamlining of its management and corporate culture. The legacy brands and failed businesses have been off-loaded and Leonardo says it is replacing an old silo mentality with a fluid structure that will see operating units share technologies and platforms, and talent.

While Rolls-Royce faces questions over the future of its non-core propulsion operations, its aero engine business remains one of the big three in the sector alongside the USA’s General Electric and Pratt & Whitney. The company was a pioneer in seeing the potential of the aftermarket – it makes more money from service contracts than it does selling new engines – and its Trent family dominates on Airbus widebodies. However, after it sold its share in the International Aero Engines consortium to Pratt & Whitney in 2012, it has been absent from the top-selling narrowbody segment. The UK company plans to address this with an as-yet unspecified programme launch next decade.

Consolidation trend

As well as the B-word – Brexit – the C-word, for consolidation, dominates many conversations about the immediate future of aerospace in Europe and elsewhere. The past few months have seen US avionics specialist Rockwell Collins buy cabin interiors firm B/E Aerospace and in turn be acquired by United Technologies. In Europe, as well as the Safran-Zodiac merger, smaller players such as the UK’s GKN and France’s Figeac Aero have been slowly absorbing rivals in a bid to bolster their negotiating power against aircraft manufacturers looking to deal with fewer partners, who in turn should share risk in programme investment and manage their own supply chains.

Consolidation will apply in another way. Despite President Trump’s threats, defence spending by Europe’s NATO members will continue to dwarf that of the USA, even on a per capita or GDP basis. Post-Cold War budgets are not big enough to sustain national industries, something recognised in the 1990s with the birth of the four-nation Eurofighter consortium. Cooperation on an even wider pan-European basis is likely to be necessary when it comes to the next generation of armed combat and surveillance aircraft. Sharing the crown jewels of know-how and industrial capability will not come easily to all, but it will be the only way to ensure a European defence sector survives. n