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Last Chance ‘Brexit’ Warning From Airbus to British Government By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

 

Get your act together, listen to what we are telling you, understand the implications of what you are doing or not doing and be in no doubt that unless the ‘transition deal’ that you have agreed with Brussels, but that has not yet been signed, is extended there will undoubtedly be major implications for jobs and future investment by Airbus here in the UK.

That, in my words, is how I would interpret the message that Airbus has made plain to the British Government and Prime Minister Theresa May this morning. There is no messing with words here and make no mistake, Airbus is serious that if it does not get what it needs in respect of absolute reassurance then the future of its operations in the UK really will be put in jeopardy.

With thousands of aircraft parts and components moving across borders of Germany, France, Spain and the UK, the company which is a four nation partnership needs to be certain that the decision by the UK to leave the European Union will not lead to disruption in respect of goods movement in respect of both time and cost.

That a transition deal which has been agreed but not signed lasts only until December 2020 is clearly insufficient for a company of this size, importance and magnitude to plan for the future. Clearly a permanent arrangement that allows free movement of parts and components between the various Airbus plants is required but in the meantime, it is clear that a transition deal going out to say 2023 is what is required here.

No one should be in any doubt that the other partner nations, Germany, France and Spain, would relish the opportunity of gaining the wing manufacturing that Airbus plants at Broughton in North Wales and Filton near Bristol currently produce. The company is not threatening to leave the UK but its loud and very clear message today that if the UK and EU negotiators do not get their act together and provide the keys to reassurance in relation to required customs free movement then they will need to reconsider future investment in the UK. For now they are asking for the transition arrangement to be extended.

As reported this morning in regard to the Brexit ‘risk assessment’ plan Airbus is warning that it could choose to leave the UK if the country exits the European Union single market and customs union without a transition deal. The warning was not part of “project fear, but moreover, a “dawning reality”.

Airbus said that if the UK left the EU next year without a deal – meaning that it left both the single market and customs union immediately without any agreed transition – this would “lead to severe disruption and interruption of UK production” and that if such a scenario was to exist it would be forced to reconsider its investments in the UK and also, its long-term footprint in the country.

Airbus which makes wings for all of its passenger aircraft in the UK, has said that the current planned transition period which is due to end in December 2020 was “too short for it to make changes to its supply chain and that as a result it would refrain from extending its UK supplier base”. Airbus which employs a direct workforce of 15,000 in the UK and indirectly supports an estimated 110,000 jobs right across the supply chain bringing an estimated £7.8 billion gross value added contribution to UK GDP, has a UK supply chain of over 4,000 companies with which it spends £5 billion annually with large primes such as Rolls-Royce and GKN to the many hundreds of small and medium sized enterprises, each of which plays a vital role in helping the company and the economy. The importance of Airbus in relation to training through its STEM related work, its apprenticeship (4,000 plus trained over the past ten years) and graduate trainee schemes (based around over 20 UK Universities) and for skills retention can never be underestimated.

Airbus Commercial Aircraft Chief Operating Officer Tom Williams is reported as saying that in “any scenario Brexit had severe negative consequences for the UK aerospace industry and for Airbus in particular and that without a deal Airbus believed the impacts on its UK operations could be significant”. Williams added that “We have sought to highlight our concerns over the past 12 months, without success and that far from being Project Fear, this is a dawning reality for the company” and that “put simply, a no-deal scenario directly threatens Airbus’ future in the UK”.

The Full Airbus Brexit Risk Assessment Statement Published Yesterday is reprinted below:

Airbus has four major engineering and manufacturing facilities in the UK, 14,000 employees at 25 sites, our people make 80,000 business trips between the UK and the EU a year, we have 1,900 expatriates and we support more than 110,000 jobs in the UK supply chain. The decision by the UK to leave the EU will set new boundary conditions cutting through this highly integrated system. Brexit thus raises major operational challenges for Airbus as UK employees and suppliers are today key and efficient contributors to Airbus’ success.

 

Airbus has more than 4,000 suppliers in UK and an integrated supply chain with parts crossing the Channel multiple times. This is operated on a just-in-time basis relying on frictionless trade today provided by the combination of the EU Customs Union and Single Market rules. Any change in customs procedures, logistics and environmental standards would have major industrial and cost impact.

 

Aerospace operates in a unique, safety driven and heavily regulated environment. The design, production, maintenance, repair & overhaul and use of parts follow tight regulations and can only be executed by certified organizations under EASA, such as Design Organisation Approval (DOA), Production Organisation Approval (POA) and Maintenance Organisation Approval (MOA). More than 10,000 original aircraft parts originate in the UK.

 

In the absence of a Brexit agreement, UK aerospace companies will not be covered anymore under existing regulatory approvals including EASA approvals. All UK companies will need to transfer their DOA, POA and MOA into the EU. This means that should a single supplier not be certified, its parts cannot be installed and consequently prevent the delivery of aircraft. It is therefore vital that the EU supply chain gets duly prepared.

This is why Brexit imposes additional major risks to the aerospace sector compared to other industries and Airbus is getting increasingly concerned by the lack of progress on the Brexit process.

 

No deal Brexit

In case of the UK leaving the EU without a deal on the 29th March 2019, there would be no Transition Phase, the UK would leave the Single Market, the Customs Union and the European Court of Justice Jurisdiction. Therefore, WTO rules would kick in and numerous frictions would heavily impact our operations and that of our supply chain.

 

Airbus’ production is likely to be severely disrupted due to interruption to the flow of parts and/or discontinued airworthiness. Given today’s prevailing uncertainty, buffer stocks would be needed (estimated value circa €1B, not accounting for lead time and logistics disruptions).

Given Airbus’ steep ramp-up demands on the best-selling A320 and A350 families, our critical industrial capabilities are already running at full capacity. With no spare capacity left over years to come, every disruption to production would most likely turn into an unrecoverable delay.

 

Every week of unrecoverable delay would entail material working capital impact, re-allocation cost, cost for inefficient work, penalty payments to customers and up to €1B weekly loss of turnover. Despite the incremental stocks, the disruptions in a no deal Brexit situation are likely to add up to several weeks; potentially translating into a multi-billion impact on Airbus.  no deal Brexit must be avoided, as it would force Airbus to reconsider its footprint in the country, its investments in the UK and at large its dependency on the UK (with many potential undesirable consequences such as repatriating competencies, patents, revisit Research and Development footprint, reduce UK’s weight in the supply chain etc.…).

 

Given the “No deal/Hard Brexit” uncertainties, the company’s dependence on and investment in the flagship “Wing of Tomorrow” programme would also have to be revisited, and corresponding key competencies grown outside the UK.

 

This extremely negative outcome for Airbus would be catastrophic. It would impair our ability to benefit from highly qualified British resources, it would also severely undermine UK efforts to keep a competitive and innovative aerospace industry, while developing high value jobs and competencies.

 

Orderly Brexit (with an agreement and transition period)

 

An orderly exit in March 2019 would lead to a new EU/UK relationship after a transition phase currently planned to end Dec 2020. The UK will no longer be part of Single Market, Customs Union or European Court of Justice Jurisdiction.

 

Though a much better outcome than a no deal scenario, this way forward would still pose a significant amount of risk and be difficult to manage as the proposed transition phase seems too short for governments to agree on all important open points, and for Airbus and its tier one suppliers to agree and implement all changes with their extensive UK supply chain.

During the transition phase, the current boundary conditions will be maintained, but the details of the new EU/UK relationship will only be known late in the process, leaving short lead time for preparation. The necessary change from an old to new framework contains inherent risks for all involved elements like data, systems, supplier readiness etc. Thus, it is likely that short-term production disruptions of 1 or 2 weeks may occur post-transition due to the supply ecosystem not fully ready (though the weekly amount would not vary, the number of weeks of delay is likely to be significantly reduced compared to a no deal scenario).

Past the transition phase, the new EU/UK relationship will entail new procedures, regulatory regimes, duplication of tasks, divergence of standards etc… potentially leading to higher complexity, more effort, more cost, more risks; more friction/delay in our cross-channel, deeply integrated supply chain (€10B UK EU; €5B EU UK) operating today on a just-in-time basis.

 

Until we know and understand the new EU/UK relationship, Airbus should carefully monitor any new investments in the UK and should refrain from extending its UK suppliers/partners base.

 

Customs Union and a harmonized regulatory framework with the EU on aviation are the two major issues for Airbus that will determine its future strategy in UK, and they need to be addressed urgently.

 

The critical issues amongst others are the increased cost base due to trade procedures, airworthiness efforts and difficulty to move people. For trade procedures (non-tariff cost) alone, an OECD study estimates the range of the recurring extra cost between 2% and 15% of overall trade. This translates to up to €1B per year to be borne by the Airbus UK-related aerospace ecosystem.

Thus, even with an orderly exit and transition, the active engagement of all stakeholders, including Airbus and the UK government, will be necessary to build an environment in which UK aerospace companies can continue to be world leaders in our ever-growing industry.  

CHW (London – 22nd June 2018)

Howard Wheeldon FRAeS

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

@AirSeaRescue

 

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