The international air travel and civil aerospace sector has been flying high for several years with IATA predicting annual air traffic growth to double to 7.2bn passengers from 3.8bn by 2035. This will require more than 29,000 new passenger and freight aircraft valued at nearly $4.4tn.
To pick up the pace, demands on productivity are being ramped up by all the major industry players but crucially, it’s how UK suppliers to these companies respond to new technologies will be crucial to their future success is the view from CMF Capital, a leading asset funder within the aerospace and engineering space.
There continues to be a growing threat from China which will develop domestic competitors on larger scales and with cheaper labour as has been the case within the automotive sector over the past decade.”
The UK is a global leader within the aerospace sector continuing position as the world’s second biggest source of aerospace equipment after the US. Issues with productivity levels, availability of correctly skilled people and the rise of Asia as an aerospace powerhouse are all adding to the pressure on businesses.
According to CMF Capital’s Ian Briggs who believes whilst the outlook remains positive there are hurdles to overcome, “Our view is the UK does have the right tools to remain an aerospace superpower, although retaining a flexible labour market in a post Brexit world is crucial and being able to further develop our strong skills base. Businesses have historically had a willingness to seek and invest in new technologies and to a degree we have a supportive Government. It is how it applies these skills to the rapidly changing world market that will dictate its success.”
“From our research, we’re finding there is a mixed spread of concerns about companies’ prospects in the next five years. The need to invest in research and development to remain competitive and to fulfil the new, higher production rates required by prime contractors continues to drive the agenda.”
Cash Flow Problematic for SME’s
The industry typically works on long lead projects which can cause issues with cash flow. “One solution we provide to SME’s is debtor financing as a full order book doesn’t always equate to cash in the bank and this allows businesses to unlock working capital quickly. This can be especially useful when dealing with global companies who operate 120-day payment terms.” Continued Briggs.
Retaining a critical mass in the supply chain is a key aspect of British industry and the ability of companies to win orders. A recent report by Accountants BDO and the Institute of Mechanical Engineers it cited 63% of UK businesses needing more home-grown, mid-sized companies to strengthen the domestic sector.
It implied that only companies of a certain size have the capacity to win certain contracts, so ensuring UK SMEs were sufficiently nimble and capable of coping with the demands of global growth – a trend that is not exclusive to aerospace either according to CMF Capital’s expert.
“Britain’s civil and military aerospace industry is the largest in Europe and second only in the world after the US. According to UK Trade and Investment (UKTI), it supports 230,000 jobs and creates revenues of approximately £27bn a year exporting over 90% of that figure, to the tune of some £25bn.”
“To remain competitive and mirror this trend, prime contractors have taken plant and maintenance, repair and overhaul facilities to countries with growing air transportation. Some of the biggest growth in air travel per capita is in China, India and the rest of Asia. Skills and knowhow for aero engineering and maintenance in these countries is rapidly improving. Asia, including China and India, will represent 55% of the growth in the global industry in the next two years.” Commented Briggs.
“As we start to reposition ourselves in the wake of leaving the EU, the government needs to consider how other countries are working to lure businesses to their shores. Singapore offers zero business rates and other tax concessions and Mexico is even more generous with their government underwriting some of the investment risk when establishing joint ventures. This is something we should be looking at and Brexit may provide the catalyst.”
Brexit, Labour and Need to Invest in Technical Skills
The lack of technical skills and the high displacement of trained personnel from SME’s to bigger companies is frequently cited as one of the most common inhibitor to manufacturing growth with companies continuing to find recruiting technically skilled labour difficult – a pattern that won’t change unless we invest at grassroots through apprenticeships and staff retention.
Aerospace is not alone in tackling the UK’s biggest headache – productivity and research shows that 70% of the industry is struggling to keep up with global competitors. For many UK factories making aero components, productivity was ‘best in class’ until recently. Production rate ‘ramp-up’ on some new aircraft platforms is being addresses. Airbus at Broughton, for example, is running a programme called Single Aisle Step Change, which uses more automated manufacturing processes. processes to take the production rate from 42 wing sets per month back in 2015 to 50 per month in 2017.
The UK needs to fight hard to retain and win project and services here which will mean better training coupled with a greater understanding of data – understanding Big Data, the Internet of Things and how companies use the immense volumes of data they generate will drive efficiencies and make us more productive.
Can the UK Retain its Global Aerospace Dominance?
The aerospace sector has been and always will be of national strategic importance to Britain. Several big, well-funded and often industry match-funded programmes support this sector – Aerospace Growth Partnership, the principle vehicle to implement the Aerospace Industrial Strategy. However, when meeting with clients many are either unaware of government investment programmes or how to access them.
Where Government is addressing the skills gap in aerospace, despite the slew of new training programmes such as the Aerospace Technology Institute and Aeronautical Masters programme, and the aspirational status of the sector to work in, nearly a quarter UK SME’s said these activities would probably not address their company’s recruitment issues in the next ten years.
Direct Government Investment Needs Questioning
Last year the Chancellor announced £1bn over 4 years of direct investment through the Industrial Strategy Challenge Fund. They also announced a further £4.2bn over four years into R&D as part of a wider investment plan which has identified support for six key sectors; healthcare, AI / robotics, cyber, advanced manufacturing techniques, clean energy and driverless cars.
Aerospace would benefit from this overall fund but, specifically only £26m of direct investment will be received……a drop in the ocean for the 230,000 it employs and given that post Brexit we need to be competitive globally, the figures may need a rethink.
While additional tax breaks and more funding for Catapult Innovation centres is seen as a way of closing the productivity and skills gap, the report cited more funding for apprentice schemes (25%), channelled support for smaller companies (23%) and a government-funded strategic productivity review in aerospace (20%).
In addition, 23% of businesses surveyed wanted more channelled support for SMEs and that the Catapult Innovation centres don’t do enough to engage or help smaller businesses develop.
CMF Capital – Key Themes and Recommendations
“Striking a balance between globalisation and regional or local investment is the first step. By understanding how the industry is changing, the right levels of funding would be allocated appropriately.” Commented CMF Capital’s Ian Briggs.
“The government also needs to better understand what the UK can successfully compete for in this new world order, so that the UK can pick the right battles for new business and major procurement contract.”
“Lastly, it is ensuring there is a focus on SME’s and how they will can be a major factor in driving sector growth. The focus should not just be on the major players who are able to access higher levels of funding. CMF Capital is able to help achieve this, with a panel of willing funders, we work to understand the fundamentals of every business and tailor our investment solutions accordingly.” Concluded Briggs.
The evidence is building that with the right steps, the UK can continue to develop a strong advantage in a growing global market, but it will need to enable a more multi-skilled workforce, be more fluent in ‘big data’ techniques and to be adaptable to both manufacturing and service-sector jobs.