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When the Farnborough Airshow opens its doors on Monday, less than three weeks will have passed since the UK voted to leave the EU. While the shockwaves are still being felt politically, the government is under pressure from industry to use this gathering of global aerospace and defence companies to send a reassuring message about the UK’s commitment to a sector that is one of its most important export engines.
“Farnborough is where global aerospace and aviation industry comes to talk business,” says Paul Everitt, chief executive of ADS, an industry lobby group. “The referendum was a major disruption to the way in which both countries and businesses look at the UK. It is important that we are seen to be coherent.”
Mr Everitt says the government has to “send some important messages about stability, and particularly stability of intent”. He argues that initiatives are needed to encourage investment now as the aerospace industry gears up for a level of production not attempted by many companies since the second world war. Research and development incentives, a reduction in UK business rates and other measures would mean more to aerospace than the recent cut in corporation tax rates, he says.
Britain’s aerospace industry is second only to the US, with roughly 17 per cent of the global market and annual turnover of £55bn. It has also been a leader in air travel, with London’s Heathrow until 2014 the world’s busiest airport for international passengers.
But the vote to leave could threaten some of that dynamism, argue many in the industry, in particular at a time when aircraft orders already show signs of slowing down after a six-year boom.
Iata, the airline industry trade group, estimates that air travel to and from the UK will grow more slowly, by up to 1.5 percentage points a year. The effect of slower growth could mean that by 2020 the UK’s aviation industry will be 3 to 5 per cent smaller than it would have been without Brexit.
In defence, too, the prospect of the UK’s exit has sparked fears of a retreat from the UK’s recent commitment to buy urgently needed US-made equipment — such as maritime patrol aircraft from Boeing — as the decline in sterling raises already hefty price tags. However, the need for the P-8 submarine hunting aircraft — which will protect the UK’s new aircraft carriers — is so pressing that industry experts are confident this deal and others will be announced at the airshow, whatever the exchange rate.
“The trade-off may be that Boeing should pledge a greater level of investment in the UK,” says Howard Wheeldon, an aerospace and defence analyst.
People close to Boeing suggest there will be an announcement showing the company’s commitment to the UK in return for an agreement to buy the P-8. Dennis Muilenburg, Boeing chief executive, says the UK will continue to be an important base for the US aircraft maker. “We constantly have to manage major changes in political circumstances around the world. And that’s exactly what we will do now as the situation continues to evolve in the UK and in Europe,” he told the FT. “The UK is an important base of our operations . . . and we have an important network of suppliers and technology partners there.”
UK companies are just as keen to stress that they will adapt to the new environment, although it could take years before the final shape and form of Britain’s relationship with Europe is decided.
Certainly, businesses such as BAE Systems, the world’s third-largest defence company by sales, will benefit in the interim from any continued weakness in the pound. While BAE says it expects no immediate effect to its business before the outcome of the UK’s negotiations with the EU, the company urges that strategies already laid out — at least for the defence industry — should not be meddled with.
“The result of the EU referendum will lead to a period of uncertainty for all businesses but our industry is not in the same position as companies in sectors that sell directly into the single market,” a BAE statement said. “The Strategic Defence and Security Review [announced last autumn] was a definition of the UK’s defence requirements as a sovereign nation, it was not related to membership of the EU. We would expect the UK to maintain its posture on defence and security and to have a continued focus on UK exports.”
For BAE, the appearance at Farnborough of Lockheed Martin’s fifth-generation stealth jet, the F-35, will be a chance not only to put paid to doubts over the cost of buying the US aircraft, it will serve to remind ministers of the substantial export revenues the UK business earns from its 15 per cent share of the joint strike fighter’s sales.
Mr Everitt of ADS believes the fears over Brexit — at least in the short term — may prove to be exaggerated. In the meantime, there will be other pressures to preoccupy exhibitors at Farnborough, such as the race by Boeing and Airbus to accelerate production to unprecedented rates and at ever lower cost. “If you flip to what the big issue will be, it will still be ‘ramp up and cost down’,” he says.
With orders slowing — and likely to be even more muted this year than at last year’s Paris Airshow — there are fears that a turn in the cycle could be imminent. But Sandy Morris, veteran aerospace analyst at global banking group Jefferies, is sceptical that either Farnborough or Brexit will mark a definitive turning point for the aerospace industry. In the end, global demand for air travel is rising so steadily that such fears risk clouding judgment, he says.
“These are just more excuses for everyone to be looking for problems rather than solutions. What does it matter if the UK ploughs its own furrow?” he says. “And we had a period of above average growth [in orders] and now it might settle back to the long-term trend. That is just fine.”
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