Exceptionally high levels of inflation (10 percent plus) and the soaring interest rates (4.5 percent) imposed in a bid to suppress them are the biggest single headache facing UK aerospace and defense companies, according to the country’s trade association ADS. The resulting squeeze on finances is impeding the ability of companies to make the investments needed to overcome continuing supply chain logjams that, in turn, are constraining output and therefore revenues, the group’s CEO, Kevin Craven, confirmed at a press briefing this week to present a summary of the British industry’s performance in 2022.
Nonetheless, the numbers are generally encouraging, reflecting progress last year after the Covid-blighted 2021. In the aerospace sector, revenues grew by 20 percent from £22.4 billion ($27.8 billion) to £27 billion, while exports increased in value from £15.2 billion to £18.6 billion and the value added to the UK economy climbed from £8 billion to £10.9 billion.
Perhaps surprisingly given rising international tensions, the defense sector numbers showed a slight decline in revenues and exports at £22.8 billion and £7 billion respectively. However, companies involved in the security and resilience sector, which ADS also represents along with space activities, showed impressive growth, boosting revenues to £23 billion.
“There is no doubt that investment is a challenge because to achieve production rate ramp ups companies know they need to invest in automation and new tooling, but the cost of capital has gone up significantly,” Craven told reporters at a May 16 press conference.
Meanwhile, in view of the fact that much of the supply chain crisis boils down to skills shortages, the aerospace sector employed about 3,000 fewer direct employees in 2022 compared with 2021. On top of that, the number of apprentices also dipped over this period by 300, to 5,500.
Across the aerospace, defense, security, and space sectors of the ADS membership, there are more than 10,000 currently unfilled vacancies, some of which resulted from reductions in aerospace headcount inflicted by the unforeseen Covid-induced dip in demand in 2020 and 2021.
ADS said that the recruitment of apprentices and graduates continues to be a high priority. It pointed out that, in part due to more flexible working arrangements, more skilled workers now serve in consultancy roles and not all included in the official statistics.
In a survey of the group’s member companies conducted at the end of the first quarter, 75 percent said that they see the workforce and skills shortages significantly affecting their businesses. ADS pointed out that filling some vacancies, especially in the defense sector, can be especially complex, while acknowledging that finding solutions to the skills shortages and recruitment challenges remains one of the biggest nuts the industry needs to crack.
Industry Needs More Certainty On Post-Brexit Government Strategy
ADS has told the UK government it could help matters in several ways, including by relaxing post-Brexit visa restrictions on skilled staff from European Union countries. But that remains a point of contention dividing the ruling Conservative party and strains on the public finances could threaten future levels of support for research and development in the UK.
The fact that the country faces a general election that must be held no later than January 2025, but will very likely be called in 2024, does not help to create a clear outlook for industry. “Most businesses are seeking certainty about the climate against which to invest and it’s a challenging time with the election next year, because it’s hard to be sure what business conditions will be like,” said Craven.
The post-Brexit regulatory environment adds to the challenges. With the UK now outside the remit of the European Aviation Safety Agency and its government resolved to unilaterally and apparently indiscriminately scrap elements of European Union law, ADS is concerned that such moves could bring further complications to their 1,200 member companies and affect their competitiveness.
The group hopes that the prospect of improving EU/UK relations heralded by the recent Windsor Protocol prove to be steps towards a more constructive balance in business relations. However, the continued uncertainty as to whether the UK will continue to participate in the EU’s massive Horizon Europe research and development fund is a further source of anxiety and the British government has so far failed to confirm its Plan B if a deal cannot be struck.
Craven indicated that while larger businesses have adapted to the new environment, it has been harder for smaller companies and those with a presence in Northern Ireland. “There are greater levels of bureaucracy to deal with and aircraft need to be made and operate to the same standards,” he commented. “The so-called bonfire of Brexit regulations is not helpful and more work needs to be done on regulation.”
One particular concern is the need for the UK’s domestic Civil Aviation Authority to address certification and other regulatory tasks that the European Aviation Safety Agency handled for more than two decades. “The CAA is not adequately resourced in terms of the demand [from UK companies for type certification support, etc],” he explained. “It’s a fact of life that more could be done. There is great potential [for the UK industry to exploit new technologies such as electric propulsion] but we don’t feel the CAA is adequately resourced. They are resourced for yesterday’s world, but the world is moving on.”
Nonetheless, global aircraft deliveries supported by ADS member companies increased by 8 percent in the first quarter of 2023. While that’s still below pre-pandemic levels, ADS chief economist Aimie Stone said she expects stronger recovery by year-end and that her forecast might well be revised upwards by the end of the second quarter.
The UK government insists that inflation will start to move markedly in the right direction throughout this year; however, Stone told reporters, “It's hard to say when or how this will trickle into our businesses.”