Select Committee on Trade and Industry Minutes of Evidence

Attachment A


  Before 11 September, the civil aerospace industry was expecting a period of reduced demand in line with deteriorating world economic conditions. Adjustments to production levels were likely. It was also evident that forces likely to cause a major restructuring of the world airline industry (especially in Europe) were already apparent. Set against these pessimistic conditions was the view that the underlying demand for commercial aircraft would be boosted by the retirement of older types, especially those unable to meet increasingly stringent environmental requirements. However, the precipitate fall in the demand for air travel following 11 September had an immediate impact on the demand for commercial aircraft good and services. All of the leading airframe and aero-engine companies announced severe cuts to planned production for 2002 with a commensurate on revenue and employment throughout the supply chain. Although there are signs of recovery in air traffic, the SBAC cannot see an upturn in civil aerospace production before 2003.

Affects on UK Aerospace Industry

  UK Aerospace has not escaped the consequences of these events. The industry was expecting a reduction in the demand for commercial aerospace products due to cyclical factors; this will now be deeper and more prolonged than predicted. As noted above, around 55 per cent of UK Aerospace turnover is in the civil sector, but some individual companies are more or less dependent on commercial business. Although the immediate effects was felt by companies at the top of the industry, problems cascaded throughout the extended supply chain, affecting smaller firms throughout the UK, but especially in the North West, South West, South East and the East and West Midlands. To date, UK prime contractors (BAE SYSTEMS, Airbus UK, Bombardier-Shorts and Rolls-Royce) have announced redundancies totalling over 11,500. Applying standard multipliers, 18,000 jobs will have been lost in the immediate supply chain. The SBAC estimates that to date over 40,000 jobs have been lost or are vulnerable to further cuts in civil aerospace production. Again, some of these may have been part of planned responses to the cyclical down turn, but the rapid deterioration of the civil aerospace market contributed greatly to the severity of the losses. Falling demand will inevitably affect the supply chain, with a commensurate impact on employment. Again, while it is impossible accurately to predict with confidence these effects, the SBAC believes that well over 900 UK supplier companies are especially sensitive to the civil down turn.

  Defence-related activities were less affected; indeed, several companies are likely to benefit from increases in the defence and aviation security businesses. However, the civil sector was seen as the most important source of long-term market growth for the industry as a whole. Although the engine of commercial growth will return, we cannot assume that the future will reflect the past in terms of demand. Similarly, companies further down the supply chain are less likely to make a sharp distinction between civil and military business and the impact of a sharp down turn in the civil sector will depress demand generally throughout the aerospace supply chain with a commensurate effect on capacity and employment.

Affects on Airport Equipment Sector

  Initial conclusions are that the effect on levels of activity has not been consistent. Traffic is down 50 per cent in some markets but less than 10 per cent in others. Worldwide, the most drastic effect was felt in the USA where all airport projects were suspended for three months and are only slowly beginning to recover. That being said all many projects have been put on hold or cancelled until passenger figures recover. This could be as long as two years.

  An area in which business rapidly increased following 11 September was that of security systems with companies in this area being extremely busy with both enquiries and orders. Some companies have also seen issues with personal security in that it has affected their operations (particularly in Pakistan and Palestine) where insurance is becoming progressively more difficult to obtain.

  Airport authorities are pausing to reflect on capital expenditure plans which means that some strategic and master planning work has been cancelled. Most developments affecting capacity issues have been shelved for the time being.

  11 September has had a very tangible effect on companies in the airport systems/equipment business. A great number of clients/customers have applied embargoes on capital expenditure for new systems and equipment. Time scales on embargoes range between six to 18 months. Some contracts that companies were close to finalising negotiations on have been shelved, delayed or cancelled.

  On the other hand some areas have maintained a satisfactory level of activity—these mainly relate to work associated with refurbishment, repair and maintenance where existing systems and equipment items will be made to last or perform longer via a policy of make do and mend until the sector activity starts to pick up again.

  Due to reduce flights and less passengers, ATC customers are revisiting their budgets with the effect of new programmes being delayed and existing programmes being re-scheduled. One company has quoted that they have seen their order book forecast for 2002 and 2003 reduced by 30 per cent. This is leading them to have a serious look at their internal resources and reconsider their way forward.

Final Observations

  Along with the rest of the air transport community, the SBAC argues strongly that confidence will return once the public can be assured that advances in technology and improved procedures are in hand to counter the threat of terrorism. In many parts of the world, there is no viable alternative to air transport and generally other modes of communication offer only partial solutions to business and social needs. IATA is confident that long-term growth rates should at least match those of its provisional 2001-05 forecasts. The UK Aerospace Industry, as a major player in the world civil aerospace market, will continue to benefit from this growth. It is imperative, however, that all of the stakeholders of UK Aerospace (public and private), remain committed to long term solutions to the industry's technological and commercial challenges that will enable the UK respond to the inevitable upturn in demand.

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Prepared 13 June 2002