Select Committee on Trade and Industry Appendices to the Minutes of Evidence


Memorandum submitted by the Department of Trade and Industry


  1.1  This memorandum provides information on the UK civil aerospace industry and the Government's policy towards the sector. In particular it addresses key policy areas identified by the Trade and Industry Committee namely; launch investment, the A3XX, the SBAC Competitiveness Challenge and the administration of the CARAD programme. The memorandum considers the defence aspects of the aerospace industry only where this impacts on the civil aerospace sector.

  1.2  Government policy for the aerospace sector is managed by the Engineering Industries Directorate (EID) which is part of the Department of Trade and Industry's Business Competitiveness Group. The Directorate maintains and develops close relationships with leading firms in the industry and with the relevant trade associations, primarily the Society of British Aerospace Companies (SBAC). These relationships are supplemented by economic analysis aimed at identifying the industry's strengths and weaknesses. This knowledge informs the development of Government policy towards the sector and to the development of specific programmes, to promote the industry's competitiveness. The general aim of these programmes is to encourage enterprise, innovation and increased productivity.


  2.1  The UK aerospace industry is the largest in Europe, employing almost 155,000 people in 1999 and generating sales of £17.6 billion. By contrast the French industry employs around 100,000; the Germany industry 72,000 and the largest aerospace industry in the World—the US—approximately 580,000. Around 55 per cent of the UK industry's turnover is accounted for by civil products, a significant increase from the 35 per cent recorded in 1980 (the first year for which reliable figures are available). Over £16.5 billion worth of new orders were generated in 1999 (split equally between civil and military products). The UK aerospace industry is also a significant exporter (in 1999, 60 per cent of sales were exported) and has a consistently positive trade balance which reached £2.1 billion in 1999.

  2.2  The UK has two of the largest aerospace companies in the World in BAE Systems and Rolls-Royce. British Aerospace had a turnover of £8.9 billion in 1999 (the vast majority of which was from aerospace) and employed almost 83,000 in a number of sites throughout the UK. However, in future aerospace will be a less dominant part of the business due to the merger of British Aerospace and Marconi Electronic Systems in November 1999 to create BAE Systems, Rolls-Royce, one of only three major aero-engine suppliers in the World, generated sales of £4.7 billion (£2.7 billion from civil aerospace) and had 41,000 employees. On the civil side these companies contribute significantly to the UK's export performance through the production of wing sets for Airbus (from BAES) destined for France and Germany and of Rolls-Royce aero-engines for Airbus and Boeing.

  2.3  The sector comprises a small number of world-class systems integrators or primes, major first tier suppliers and a large pool of small and medium sized enterprises. Many of these are world leaders in their particular areas of expertise. The greatest challenge which has impacted on the sector in recent years, has been the globalisation of the sector. This has led to the consolidation of the civil aerospace industry through the formation of a relatively small number of global players. Recent international consolidations include the creation of BAE Systems, of Thomson-Racal (now Thales), Westland-Agusta, and Rolls-Royce acquisition of Allison in the US as well as TRW's recent acquisition of Lucas Aerospace in the UK. In Europe, the French, German and Spanish partners of Airbus have merged to form EADS (European Aeronautic, Defence and Space Company). A unified Airbus company known as the Airbus Integrated Company is to be formally established with EADS holding 80 per cent and BAE Systems holding 20 per cent of the share capital.

  2.4  The supply chain has also witnessed the effect of globalisation with the number of enterprises reducing due to the changing relationship with the primes. The supply chain has been forced to reduce costs, increase efficiency and be more competitive as a result. As the primes have been forced to become more efficient and leaner, research and development activity is increasingly being out sourced to the supply chain providing greater added value activity. The challenge for companies is to be able to respond to this evolving pattern of activity and to do so on a global basis. DTI policy is aimed at helping companies to operate in this challenging environment.


  3.1  Scheduled airline passenger traffic has grown at annual rates of 5-6 per cent over the past few years with freight traffic continuing to grow in excess of these rates. Despite a small reduction in these growth rates caused by the Asian economic difficulties of 1998, growth has recovered well. Driven by this growth in demand, airline earnings have been at record levels over the past few years, with aircraft orders also being stimulated to record levels.

  3.2  However, the air transport industry is typically cyclical in its growth patterns, which have historically been closely correlated to the general economic cycle. Many air transport analysts are now therefore predicting a period of reduced growth rates, although long-term growth is still expected to be at an average 5 per cent per annum over the next 20 years. This period of reduced growth is expected to coincide with reduced airline earnings, in particular driven by increased costs as a result of higher fuel prices and increased staff costs. This in turn will lead to a period of reduced demand for new aircraft to meet both traffic growth and also to replace older aircraft presently being operated.

  3.3  To meet the present record order and backlog levels, aircraft manufacturers have been increasing production rates from the lower levels that prevailed in the mid-1990s, as illustrated in Annex 1. In 1999, Airbus and Boeing, the world's only two remaining suppliers of large jet aircraft, delivered over 900 aircraft in total whilst the regional jet manufacturers, including BAE Systems, delivered a further 215 aircraft.

  3.4  Although production rates declined slightly in 2000, annual deliveries of large aircraft are expected to stabilise at around 800 units over the next couple of years. This is consistent with long term estimates for aircraft demand—DTI's own independent analysis predicts a requirement for nearly 15,000 new passenger aircraft in the next 20 years worth an estimated $940 billion in 2000 economic conditions. Beyond that, some further decline is expected although rates are not expected to fall as low as the levels experienced during the past two downturns. Whilst this will have some impact on UK suppliers, many of these companies have introduced cost disciplines and flexible work processes as a result of experience gained during the mid-1990s, such that the impact of the next down cycle is expected to be significantly less damaging than the last.


The Competitiveness Challenge

  4.1  Recognising the need for the UK aerospace industry to increase its competitiveness in order to improve its position in the world market, the DTI has for several years been supporting a series of competitiveness improvement programmes managed by the SBAC.

  4.2  The aim of the Competitive Challenge is to help aerospace companies understand factors that affect their competitiveness; promote open and competitive markets; promulgate and encourage best practice. The general and long-term objective is to "enhance the performance and effectiveness of the UK aerospace companies through the promotion of proven quality techniques that improve business results". The Competitiveness Challenge strategy was designed to achieve the following overall objectives:

    —  increase value added in the supply chain by 10 per cent;

    —  improve the average European Foundation for Quality Management (EFQM) Business Excellence Model (BEM) score by 200 points; and

    —  improve market share by 1 per cent, equivalent to £1 billion.

  4.3  The Competitiveness Challenge, supported by DTI from April 1997 to March 2000, was probably the most comprehensive and ambitious programme of its kind attempted in any industry. It comprised five elements: Supply Chain Relationships in Aerospace (SCRIA); Lean Aerospace Initiative (UK LAI); People Management; Business Winning; and Knowledge Management. Over the three-year period DTI grant totalled £1.5 million, which was matched by contributions from the SBAC and the aerospace industry valued at £5.17 million.

  4.4  There have been a number of measurable improvements in the UK aerospace industry which may be attributed, directly or indirectly, to the Competitiveness Challenge programme. For example, the UK industry has overtaken that of France to become second in the world in terms of turnover. The average BEM score for UK aerospace companies has increased from 242 to 296, or by 22 per cent. There have been remarkable efficiency gains in supply chains, such as cost savings of 60 per cent, lead time reductions of 60 per cent, and 30 per cent improvements in schedule adherence. In the Lean Aerospace area there have also been very significant improvements, such as 200 per cent improvement in stock turns, 250 per cent in delivery schedule achievement, 70 per cent in set up/change over times, and 33 per cent increase in output.

  4.5  Over 4,500 aerospace industry managers have been trained in SCRIA principles and techniques. (SCRIA is now continuing as a wholly self-funded industry activity and has also been adopted by other industries, such as non-aerospace defence, machine tools and the rail industry.) An Internet-based marketing information facility has been established and is widely used. An aerospace careers video has been produced and distributed widely to schools and universities. A national survey of human resource management in aerospace has established the benefits for competitiveness of high performance HR practices, such as team working, appraisal, job rotation, broad grading structures and problem-solving groups, and the findings have been widely distributed.

  4.6  In October 1999 DTI announced £2.45 million funding, over two and a half years, from the Industry Forum replication programme for a major extension of the Lean Aerospace Initiative. The "MasterClass" technique has been well proven in the automotive sector and is designed to achieve sustainable real improvements in quality, cost and delivery. It involves a specially trained engineer visiting a company's premises and showing management and staff how to reorganise their plant and practices to achieve the benefits of lean manufacturing. Nine lean manufacturing engineers have been trained by the Society of Motor Manufacturers and Traders (SMMT) and introduced into the programme so that the aerospace industry has its own lean practice experts. The DTI grant enables smaller companies (SMEs) to participate in the programme and obtain the services of the lean practice experts at a discounted rate.

  4.7  In October 2000 DTI agreed to provide a further £950,000, over two and a half years, to enable the SBAC to continue to attract at least an equal amount of industry funding for the continuation and development of the Competitiveness Challenge programme. Targets have been set for increased UK market share in key projects, improved value-added per employee and further improvements in the BEM scores. The new programme includes elements addressed to e-business, where a DTI-funded study by PA Consulting found that UK aerospace companies were not keeping pace with their US customers and competitors.

Launch Investment

  4.8  The Civil Aviation Act of 1949 (re-enacted in 1982) placed a general duty on the Secretary of State of " . . . organising, carrying out and encouraging measures for the designing, development and production of civil aircraft . . . ". Over the past 50 years, Secretaries of State have discharged the duty with separate measures to provide grants for pre-competitive research (through the Civil Aircraft Research and Demonstration (CARAD) programme and its forerunner budgets) and risk-sharing investment funding (known as Launch Investment. In April 1990, following a major review of aeronautics support, CARAD replaced an earlier similar programme (known as the Aircraft and Aero-Engine budget). The Department is currently preparing for a fourth phase of the CARAD.

  4.9  Launch investment remedies a market deficiency in the availability of development funds for aerospace companies to undertake large development projects. These projects typically have high costs and pose a high level of risk, and generate a return only in the very long term. Although financial institutions understand the long-term nature of the industry they are reluctant to risk investment in these projects because of the payback period and as a result Launch Investment bridges this gap in funding. Launch Investment is a risk-sharing investment by Government in the design and development of specific civil aerospace projects in the UK. It has been used to support developments of airframes (or parts of airframes, such as wings), helicopters and aero engines. The investment is repayable to the Government at a real rate of return, usually via levies on sales. By this means, the Government shares in the risk of the project but at the same time also benefits through a successful launch.

  4.10  The provision of Launch Investment is discretionary. There is no formal scheme, promotion or budget for launch investment. Each launch investment application is considered on its merits against a range of established criteria and also, by the Treasury, against public expenditure constraints. An applicant must demonstrate that the project is technically and commercially viable; that Government investment is essential for the project to proceed on the scale and in the timescale specified in the application; and that the Government will recoup its investment and share in the success of the project at a real rate of return.

  4.11  The Government undertakes a detailed assessment of the viability of the project and the company's additionality case (ie the company has to demonstrate that a project could not proceed in the UK without Government support). In addition, the Government assesses the technical viability of the project and the market for the project. Finally, an assessment is made of the wider benefits of the project to the economy beyond the company itself. These can include the spin-off of new technologies or production methods with wider applications in other sectors, or transferable improvements to the skill base as well as job creation or safeguarding. If it is decided to support an application, the Government will provide the minimum support required for the project to go ahead.

  4.12  In view of the significant amounts of public expenditure involved, DTI closely monitors the progress of a supported programme. Payments are linked to actual expenditure by the company and to the achievement of specific technical milestones. Information is also required from the company on the delivery programme, the commercial position of the project and the financial position of the company.

  4.13  The provision of launch investment is also subject to European and international rules. All support is required to be approved by the European Commission and support for airframe research and development is required to be compatible with the 1992 Agreement on Trade in Large Civil Aircraft which is discussed later in this paper. All applications for launch investment are carefully scrutinised by the DTI for compatibility with these requirements.

  4.14  Significant projects supported through Launch investment in the past include the Airbus A320 and A330/340 programmes. The A320 investment has already been repaid to the Government, and continues to provide a return. The A330/340 is contributing a steady stream of funds to the Exchequer, and is expected to pay for itself in the medium term. A list of the major launch investment contracts is detailed in Annex 2.

  4.15  Most Western countries with aerospace industries have some form of launch investment (including France, Germany, the Netherlands and Italy). The US supports its industry by indirect measures, in particular through large R&D programmes run by NASA and the Department of Defense. Overall government support to the US aerospace industry is proportionally higher than that of the EU. US gives funds around three times that of the EU, whilst US aerospace industry turnover is about twice the EU level.

A380 (A3XX) Launch Investment

  4.16  On 13 March, the Secretary of State for Trade and Industry announced agreement to provide launch investment of up to £530 million to BAE SYSTEMS to design and develop the wings for the A3XX, now known as the A380. The A380, a 480-650 seater, double-decked super-jumbo airliner, will compete at the top end of the market, where Boeing have had a monopoly to date with the 747 jumbo-jet.

  4.17  This is an important project for the UK which will underpin Airbus's centre of excellence in wing development at plants in Filton and Broughton. Up to 22,000 new jobs will be created and 62,000 existing jobs safeguarded in the UK as a result of the A380, including in the supply chain and indirect employment. Airbus Industrie have subsequently formally launched the A380 programme on 19 December 2000 after reaching 50 orders and 42 options from six customers; Air France, Emirates, International Lease Finance Corporation, Qantas, Singapore Airlines and Virgin Atlantic.

  4.18  This is also an important project for other European countries. The German government has recently announced agreement to provide support of approximately DM2 billion to DASA and the French and Spanish governments have also agreed in principle to provide similar repayable investments.

The 1992 EC-US Agreement on Trade in Large Civil Aircraft

  4.19  The 1992 LCA Agreement applies to aircraft over 100 seats (not engines) produced by Airbus and manufacturers in the US (at the time Boeing and McDonnell Douglas, now only the former). For the US this means Government is permitted to provide indirect (mainly R&D) support up to 3 per cent of the annual commercial turnover of the civil aircraft industry. For Airbus it means European governments can provide up to 33 per cent of the development costs of a new large civil aircraft programme, subject to the following conditions:

    —  there has been a critical project appraisal;

    —  reasonable expectation of repayment of the support within 17 years; and

    —  interest payable at no less than the government cost of borrowing plus a small margin.

  4.20  The 1992 Agreement provides for both sides to have regular consultations to avoid disputes.

  4.21  The US has recently instigated discussions under the 1992 EC/US Agreement over the support being provided by EU Member States for the A380 project. The first of these discussions took place in Washington on 11 January. The EU position is that it will ensure that any support is compatible with the Agreement and details will be provided to the US as required under the Agreement once Member States' commitments are finalised.


  4.22  The capability of the UK aerospace industry depends on a number of factors of which technology is crucial. The Civil Aircraft Research and Technology Demonstration (CARAD) Programme supports pre-competitive research and technology demonstration (R&TD) to enhance the competitiveness and environmental sustainability of the UK's civil aeronautics industry. The UK has a particular strength in that, apart from the USA and possibly France, it is the only other nation that has a presence across the range of aeronautics technologies. CARAD has been established for many years and is a well-focused programme aimed at promoting and anchoring a long-term UK capability in aeronautics.

  4.23  Nature of Support. CARAD seeks to encourage basic and applied research effort of industrial relevance for the longer term to help the UK aerospace industry to compete successfully in world markets. The aerospace industry works to very long timescales and we work in partnership with the industry, research organisations and academia to secure the long-term availability of essential aeronautical technologies and preserve national capability. It helps to maintain a strong UK technology base from which UK companies are able to enter into successful European and international collaborations. The programme also supports (at around £500,000 per annum) the operation of the European Transonic Windtunnel in Cologne.

  4.24  Funding. The annual budget for CARAD in 2000-01 is £20 million. Before the Comprehensive Spending Review in 1997 it was £22.7 million and historically the budget had been three times as large in real terms. Following last year's Spending Review, future funding levels for CARAD will, as with all DTI budgets, be announced in March when the Department publishes its Expenditure Plans Report.

  4.25  Balance of expenditure. CARAD supports research in the following technology areas which reflect the key centres of expertise of the UK industry:

aerodynamics15 per cent for airframes;
propulsion30 per cent for engines and engine equipment;
materials and structures35 per cent for airframes, engines and equipment;
advanced systems20 per cent for avionics, systems and equipment.

  4.26  Impact of globalisation. There are many factors affecting the decisions on where to locate industrial activity. In the aeronautics sector where there are long product and development timescales and a heavy reliance on technology for the competitiveness of the product, it is often natural to locate manufacture where there is a centre of technical expertise. In supporting long-term technology acquisition, CARAD has played a significant role in establishing these centres of excellence in the UK. These are a basis for launch of future projects providing benefit to the UK in terms of employment and balance of payments.

  4.27  Harnessing military spend on aeronautics research for civil benefit. MoD has traditionally spent significant sums on aerospace research mainly at its Defence Research and Evaluation Agency (DERA). Where research is generic in nature and has potential for dual use (civil/military application) CARAD has traditionally supported such work and hence the civil sector can access much larger defence programmes. Much of the work is collaborative with industrial and academic partners. MoD is currently developing proposals for DERA to become a Public Private Partnership. DTI is maintaining a close dialogue with MoD and DERA to ensure that industry and DERA continue to work in partnership to achieve benefits for the civil industry.

  4.28  Aims and Targets. Consistent with the way DTI seeks to identify clear outputs from its programmes, the measurable targets set for CARAD are reductions in the:

    —  cost of air travel: target 2 per cent a year until 2010;

    —  noise generated by civil air transport aircraft: target 1 decibel every two years until 2010;

    —  emissions of carbon dioxide from aero-engines: target 1 per cent per year per passenger mile until 2010;

    —  emissions of nitrogen oxide from aero-engines: target 5 per cent average per year until 2010;

    —  aircraft accident rate: target is a sufficient reduction to offset traffic growth which is predicted to grow at 5 per cent per annum until 2010.

  4.29  By way of illustration, in 2000-01 there were two important initiatives supported by CARAD which will result in projects which in turn will contribute to the above targets. The More Electric Engine and Wing Systems Programme will research and demonstrate "more electric" technologies that will eventually replace hydraulic and pneumatic systems and deliver significant cost savings to manufacturers and operators. The Flight Deck Technologies for Enhanced Safety programme will address technologies specifically aimed at minimising pilot error thus contributing to the reduction in the aircraft accident rate.

  4.30  Objectives. These may be summarised as follows:

    —  competitiveness—helping the industry to improve its competitiveness and to develop the technology necessary to launch successful ventures in world civil aircraft markets;

    —  collaboration—encouraging UK participation in European and international collaboration by equipping the UK civil aircraft industry with the necessary underpinning technology;

    —  long-term perspective—encouraging industry to maintain a long-term perspective with investment in innovative work which has no immediate prospect of commercial return;

    —  dual-use—helping to maximise the spin-off to civil aircraft from military research and demonstration support;

    —  partnering—encouraging industry to work on collaborative projects with higher education institutes so as to "pull-through" academic research.

  4.31  Reporting. CARAD activity is reported to the Aerospace Committee (an advisory non-departmental public body advising Ministers on aerospace matters), the Defence Aerospace Systems Foresight Panel and a suite of national research advisory committees under the auspices of the panel. Progress on the programme is collated into a CARAD Annual Report which is placed on a CARAD "page" on the DTI's internet website and issued in hard copy to industry, research organisations, academia and Government. Copies are placed in the libraries of both Houses of Parliament.


  4.32  Following on from their work under CARAD, DTI staff are also able to undertake a number of related technology partnership activities in support of the aeronautics industry. These are in the areas of:

    —  Foresight. DTI has contributed strongly to the work of the re-constituted Defence, Aerospace and Systems Panel (DASP);

    —  Engineering and Physical Sciences Research Council (EPSRC). DTI keep in close touch with EPSRC which supports aerospace relevant research at universities (further information in annex 3);

    —  European Commission Framework Programmes. Overall the UK won a significant share of the funding under the aeronautics budget in Framework 5. DTI has been involved in ensuring full awareness of the opportunities in the programme for UK industry and we have been consulting the industry and aeronautics research community over its initial views on Framework 6;

    —  Group for Aeronautical Research and Technology in Europe (GARTEUR). DTI Director is one of the UK representatives on the Council of GARTEUR which is a unique body created to promote collaboration between member countries in civil and military aeronautics research.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 20 March 2001