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Aerospace Market Report 2003
Key Note Publications Ltd, July 2003
The UK's aerospace industry is currently the second-largest in the world with turnover in 2002 standing at £16.14bn. It provides employment for around 348,000 people (including ancillary sectors) and is one of the UK's major export earners. A recent Department of Trade and Industry (DTI) study highlighted aerospace as the UK's most globally competitive industry - a key measure of its global success being its penetration of the US market. The industry in the UK has benefited from a long-term improvement in productivity, with output per worker rising by 4% a year since 1980.
However, the industry is currently experiencing its worst downturn since the Second World War, both in the UK and internationally. An unparalleled sequence of events has precipitated this decline. The industry has always been highly dependent on the global economic cycle and the economic slowdown that began in 2001 has undoubtedly had a major impact on demand in the civil aerospace sector. However, the terrorist attacks on the US on 11th September 2001 caused confidence in air travel to collapse, leaving many airlines on the verge of bankruptcy, while others went into liquidation. Orders for new airliners crumbled and many carriers mothballed aircraft in the desert.
Furthermore, the war in Iraq, and the build-up to the conflict, led to a further downturn in global air travel, while the outbreak of the Sars (Severe Acute Respiratory Syndrome) virus has had a significant negative impact on Asian airlines and other carriers that serve that region. The constant threat of further terrorist attacks suggests that recovery will prove gradual and fragile, but in the long term, the growth of the airline industry will surely continue. Airbus predicts that demand for air travel will double by 2020. Even so, we believe that the civil aerospace sector is unlikely to experience a substantial upturn in its fortunes until 2006 at the earliest, and even then, such an upturn would assume no further terrorist activity on the scale of the events of 11th September 2001 and a revival in the global economy towards the end of 2003 or in 2004.
As a result of recent events, the UK aerospace industry has become increasingly dependent on the military sector. The events of 11th September 2001 and the launch of the US-led war on terror have unleashed a huge wave of spending on military projects, which is helping to support the aerospace industry through the current downturn. The UK is also launching a number of substantial defence programmes that will provide guaranteed revenues for aerospace companies for many years to come.
The trend towards global consolidation of the industry has continued, with mergers and takeovers proceeding apace in recent years. The downturn in the industry is likely to ensure that the process of consolidation continues. For example, Boeing has long been rumoured to be interested in acquiring BAE Systems - Europe's largest defence contractor. The huge sums now required to research and develop new products means that small companies cannot produce major weapons systems on their own. Meanwhile, the major contractors are increasingly outsourcing non-core activities to smaller companies.
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