This is marketing research on the Aviation or Aerospace - U.K. industry and can include information on the background, market structure, definitions, competitors, trends and developments of aviation or aerospace - U.K. and is related to other topics such as airlines and defense.

United Kingdom: An overview of the aerospace market

The UK aerospace industry, the second largest in the world, enjoyed a turnover of $39.6 billion in 2006. This represented approximately 13% of the worldwide aerospace market. Increasing demand for both passenger and airfreight services, encouraged by the recent Open Skies agreement, is expected to fuel continued growth. "Open Skies" or the new European Union Air Transport Agreement entered into effect on March 30, 2008. As a result, U.S. and UK carriers immediately introduced 30 new flights between the U.S. and UK. In particular, Delta, Continental, US Airways, Northwest, United and American, will begin thirteen new flights to Heathrow, increasing competition, connections and choices for passengers on both sides of the Atlantic. This stimulus of the airline market has had a particularly positive impact on the maintenance, repair and overhaul sector, bringing significant benefits to the aerospace market as a whole.

The United Kingdom is home to several leading manufacturers, including BAE Systems, Rolls Royce and Airbus. Defense accounts for much of this sector’s activity, driven by projects such as the Eurofighter Typhoon and the F35 Joint Strike Fighter. Global defense sales of $19.1 billion represent for just over 48% of the United Kingdom’s aerospace industry output. However, growth in the defense side of the aerospace market has been negligible in recent years as several major programs are nearing completion. Future prospects are also dampened by concerns over the equipment budget available to the Ministry of Defence. By comparison, civil aerospace turnover increased 8%, to $20.5 billion, in 2006 and is expected to continue to grow over the coming years.

U.S. manufacturers are well represented in the United Kingdom, including Honeywell, Raytheon, Rockwell Collins, Lockheed Martin and Goodrich. Transatlantic relations are considered critically important to the UK aerospace sector. According to the Society of British Aerospace Companies (SBAC), UK aerospace companies employ over 34,500 people in the United States and generate U.S. revenue of over $9.2 billion annually. Similarly, approximately one-fifth of the SBAC’s members are U.S.-owned. In 2006, U.S. companies exported $5.4 billion in aerospace products and parts to the United Kingdom, the highest level since 2001. Aircraft, propulsion, and aircraft parts comprise the great majority of these exports.

Market Demand

Aerospace is an important contributor to the UK economy, directly employing some 124,000 people nationwide. The majority of activity is concentrated in the South West, South East and North West of England. Over 2,500 small and medium-sized enterprises (SMEs) are involved in the UK aerospace industry, emphasizing the importance of the sector and its contribution to the national skills base. As one government report noted in 2003, aerospace is “second only to pharmaceuticals in terms of value added per head in the manufacturing area”. The worldwide success of UK companies such as BAE Systems and Rolls Royce further underlines the strategic significance of aerospace to the national economy. Over the past five years, much of the momentum behind the growth in UK aerospace has come from a resurgent maintenance, repair and overhaul (MRO) sector. The UK MRO market was estimated to be worth $12.3 billion in 2006, up 8% from the previous year, with aircraft manufacturers taking an increasing share of the MRO market from independent operators and the airlines. The emergence of a strong MRO sector is in part a consequence of the large number of low-cost and regional carriers throughout Europe, as well as consolidation and increased outsourcing among the larger carriers. Again, this is the result of rising demand, with passenger volume at UK airport terminals having grown 30% from 2001 to 2006. As in the United States, serious congestion has plagued major UK airports, with responses varying from increased terminal development to greater interest in executive and charter aviation.

Rising passenger numbers have in addition prompted growing concerns about the environmental impact of aviation. The UK’s Sustainable Aviation strategy, based on a partnership between government and ndustry, is considered a pioneering approach in this area. With growing public concern over the ‘carbon footprint’ generated by air travel, government-backed research, including the Environmentally Friendly Engine program, demonstrates an emerging demand for greater aircraft efficiency and low-emission technologies.

Market Data

The United Kingdom’s aerospace industry is the second largest in the world with a turnover in 2006 of $39.6 billion, equivalent to around 13% of the worldwide aerospace market. Defense-related sales to customers in the United Kingdom and overseas accounted for $19.1 billion or 48% of total UK aerospace revenues, although there has been only limited overall growth in the defense market in recent years. UK industry is increasingly export-oriented, and no less than 63% of aerospace sales in 2006 were export-related.

These sales generated export revenues of $24.9 billion and over one-fifth were destined for the United States, the industry’s second-largest export customer after the European Union. UK aerospace sales to the U.S. totaled $8.1 billion in 2006. The U.S. is also by far the single largest source of aerospace imports into the United Kingdom. In 2006, U.S. companies exported $5.4 billion in aerospace products and parts to the United Kingdom. Also, exports of both light aircraft and helicopters increased ignificantly over the 2005-2006 period (the latest year for which complete figures are available).

U.S. Aerospace Exports to the U.K.

                       U.S. Exports to the UK 2006 ($ Million)                       % of Total

Aircraft Engine Parts              $1,680,393                                            31
Aircraft Parts                     $1,630,523                                            30
Aircraft                             $970,122                                            18
Engines                              $802,930                                            15
Guided Missiles & Parts              $241,930                                             5
Trainers & Simulators                 $38,554                                             0.7
Other Aerospace                       $10,900                                             0.2

Total                              $5,375,351

Source: U.S. Department of Commerce / U.S. International Trade Commission

Best Prospects

Broadly speaking, the UK aerospace industry can be divided into five sectors: aircraft systems and frames (31% of turnover); aircraft equipment (28%); aircraft engines (24%); missiles (6%); and space (3%). Aircraft maintenance accounted for a further 8% of industry sales in 2006. Within these sectors, the United Kingdom is home to some of the world’s leading manufacturers of aircraft engines, avionics, and specialized products such as in-flight refueling systems, safety systems and ejector seats.

While the United Kingdom does not produce whole civil aircraft, the development of airframe sections and major components, including those for the Airbus A380 and A350, create opportunities for aircraft equipment suppliers. UK firms have significant involvement in both programs, as well as the Boeing 787. The Bombardier C Series also potentially includes substantial UK content, sourced from the firm’s Belfast plant, though the future of this design remains under review by the company. Some of the work on these projects reflects a growing expertise in composites and specialist materials, an area the UK government has determined as key to the future competitiveness of the industry. Airbus has made major investments in composites manufacturing at its Broughton and Filton facilities, partly funded by the UK government and regional bodies. The Filton plant, however, is now a GKN facility, having been sold by Airbus because of the Power 8 restructuring program.

The Aerospace Innovation and Growth Team (AeIGT), a joint government and industry initiative, has identified engine technology as a key prospect for the United Kingdom. The importance of propulsion has also been underlined by the launch of a Sustainable Aviation strategy for the United Kingdom, which was also endorsed by government and private industry. The strategy highlights the increasing importance of the environment in aviation policy, and is the result of the rapid growth in UK air travel, involving both established airlines and, perhaps more importantly, a proliferation of charter airlines and low-cost carriers. Sustainable Aviation establishes specific targets for the reduction of engine emissions over the period to 2020, and additionally aims to promote the use of low-noise procedures by airlines. It is also closely related to the forthcoming extension of the European Union Emissions Trading Scheme (EU ETS) to aviation.

Airport development remains a further important trend within the UK aerospace sector. Airport expansion programs have been closely linked to the growth of both low cost carriers and a number of new regional airlines, serving routes both in the United Kingdom and Europe. Major capital investment is underway at most UK airports, with the expansion of facilities originally identified as a priority in a 2003 UK Government White Paper. Airports operator BAA plans to spend approximately $19 billion over the next ten years on London Heathrow, London Gatwick, and Stansted airports. The first phase of the new Terminal 5 at Heathrow opened in March 2008, after which BAA will press ahead with the development of a new ‘Terminal East’ to replace the ageing Terminal 2 at Heathrow, and which is expected to open in late 2012. BAA investment currently excludes funding for a possible third runway at Heathrow, potentially to be built by 2020, subject to planning and environmental approval. An additional $79 million has also been pledged by BAA to add security-screening capacity and reduce congestion at its seven UK airports, ahead of the 2012 Olympics.

Share of Passengers at All UK Airports

                                2001                  2006                      Change

Major London airports          62.6%                 58.2%                      - 4.4%
UK regional airports           33.5%                 40.6%                      + 7.1%
Aerodromes, airfields           3.9%                  1.2%                      - 2.7%

Source: CAA

Major London airports’ comprise Heathrow, Gatwick, Stansted, Luton and London City As indicated above, the United Kingdom’s largest airports, situated around London, have in recent years lost market share to a number of emerging regional airports. This trend has primarily been driven by the advent of low-cost carriers and charter airlines. Between 2001 and 2006, some of the largest increases in terminal passenger figures have taken place in Bristol, Liverpool, Exeter, Southampton and Bournemouth. Equally, there has been notable growth among scheduled regional carriers, following British Airways’ (BA) disposal of many of its domestic routes, including the March 2007 sale of BA Connect’s UK and European regional network to FlyBe. A further development has been the emergence of all business class or ‘premium’ airlines such as Silverjet, with British Airways having plans to introduce its own premium routes in 2009. This has been repeated elsewhere in Europe, including in France and Germany, although the demise of Maxjet in late 2007 and EOS in April 2008 have sounded a note of caution for this new segment of the market.

Further, significant changes are anticipated in long-haul transatlantic travel, following the agreement of a new ‘Open Skies’ accord between the United States and the European Union. In particular, this has placed renewed emphasis on competition for slots at Heathrow. As a result, new alliances, mergers and acquisitions amongst the major airlines are expected, as companies seek to try and take advantage of the new agreement. Over 30 new routes have been announced by all major U.S. carriers, starting on March 30, 2008, when the Open Skies agreement enters effect. British Airways has gone further, launching an entirely new venture called ‘Open Skies’, operating from Paris and potentially Brussels, in addition to its expanded services at London Heathrow. The Open Skies agreement will, however, present logistical challenges at Heathrow, especially regarding fuel availability.

Prior to the Open Skies accord, BA announced in February 2007 that for the first time in several years it intends to buy new long-haul aircraft. Initially, BA will acquire four Boeing 777-200ER aircraft, for delivery in early 2009, and has options for the delivery of a further four the following year. In December 2007, BA also confirmed that it would replace a large proportion of its existing Boeing 747-400 and 767-300ER fleet with the purchase of 24 Boeing 787 aircraft, plus 18 options. Delivery is in the 2012-2014 timeframe, and the equipment will be equipped with Rolls-Royce engines. BA will also buy 12 Airbus A380s, plus seven options.

A second phase of the acquisition program is expected to be announced in late 2008, and is anticipated to involve competition between the Boeing 777 and the Airbus A350XWB. Another important recent change has been the increased funding in aerospace research and development. Public and private sector research spending fell slightly from 2005 to 2006, to a reported $5.1 billion, with two-thirds of R&D activity occurring in the defense sector. The National Aerospace Technology Strategy (NATS) of 2004 provides a framework for research. Aerospace has to date received greater funding from the government’s technology program than any other industry sector, though there remains concern that aerospace research no longer has a separate funding line from the Department of Business, Environment and Regulatory Reform (BERR), as was previously the case under the Civil Aircraft and Technology Demonstration (CARAD) initiative. NATS established a series of Aerospace Innovation Networks to coordinate government, industry and academic research in areas considered critical to the future of the UK aerospace industry. Funded at national and regional levels, these areas include:

• Aerodynamics and Computational Fluid Dynamics (CFD)
• Environmental technology
• Advanced aerospace materials and structures
• Health management and prognostics
• Through-life support
• Synthetic environments and systems simulation

Separately, the government has also launched a number of Aerospace Technology Validation Programs (ATVPs) to look specifically at risk-reduction in the following technology areas:

• Civil Powered Wing
• Environmentally Friendly Engine
• More Electric Aircraft
• Autonomous systems
• Future air battlespace
• Air traffic management

Skill development programs by BERR and SBAC have targeted areas such as advanced materials engineering, software systems, modeling and simulation, in both the civil and defense sectors. Additionally, the focus on the future air battlespace is indicative of a substantial commitment by the Ministry of Defence to achieve Network Enabled Capability (NEC), generating potential prospects for U.S. companies with technologies for Command & Control, as well as Intelligence, Surveillance, Target Acquisition and Reconnaissance (ISTAR).

Key Suppliers

While the UK aerospace industry is characterized by a large number of SMEs, the sector is ultimately dominated by supplier relationships with BAE Systems, Rolls Royce, and Airbus. Although there has been significant coverage of the difficulties encountered by Airbus recently, the UK government and regional bodies have been very active in striving to maintain Airbus operations in the United Kingdom. This is despite the fact that BAE Systems no longer owns a 20% stake in the company. The Airbus UK workforce is highly skilled and specialized, and the firm maintains capabilities, including composites, which are considered vital to the United Kingdom’s future development as an aerospace center. As a consequence of the ‘Power 8’ reforms, Airbus has announced that it will sell a number of plants across Europe, including Filton in southwest England. GKN was selected as the winning bidder for the Filton site, ahead of U.S.-owned Spirit AeroSystems, which owns facilities at Prestwick and Samlesbury. The sole remaining Airbus plant in the United Kingdom is located at Broughton, in north Wales.

In both the civil and defense sectors, U.S. manufacturers are well represented in the United Kingdom. Honeywell, Raytheon, Rockwell Collins, Lockheed Martin and Goodrich all have major operations in the United Kingdom, either through subsidiaries or directly managed facilities. Transatlantic relations are critically important to the UK aerospace sector. According to the Society of British Aerospace Companies (SBAC), UK aerospace companies employ nearly 35,000 people in the U.S. and are responsible for creating over $9.2 billion in revenue annually.

Similarly, a wide range of U.S. firms are well established in the UK market. Around one-fifth of the SBAC’s members are U.S.-owned, and the Society is developing ever-closer ties to the Aerospace Industries Association of America (AIA). BAE Systems remains one of the world’s largest defense companies, and has a leading role on a range of projects that include the F35 Joint Strike Fighter, the Hawk 128 trainer, the Eurofighter Typhoon, and the upgrade of the Nimrod MRA4 reconnaissance aircraft. In addition to BAE Systems, Airbus, and Rolls Royce, the United Kingdom is home to a wide variety of well-established tier one suppliers. Leading firms are listed in the table below. Some, such as GKN, Cobham and Ultra Electronics, have strong transatlantic ties and sizeable operations in North America. U.S. suppliers should consider each of these firms as a prospective buyer interested in the UK market.

Leading UK-Based Aerospace Companies (2006, by Revenue)

                  2006 Turnover ($ million)             Sales Growth 2005-2006          Global Rank*

BAE Systems                  27,530                                9%                       5
Rolls-Royce                  10,688                                7%                      14
Smiths Group                  7,046                               15%                      27
Cobham                        2,030                               -9%                      36
GKN                           1,390                                9%                      45
Meggitt                       1,340                                7%                      48
Ultra Electronics               754                                8%                      68

Note: Position in the Flight International Aerospace Top 100, August 2006 Smiths Aerospace was acquired by GE in January 2007

Source: Flight International, SBAC, company information

One challenge to the U.S. position in the UK market comes from the world’s emerging markets, which are increasingly well represented as low-cost suppliers to the larger UK aerospace companies. A March 2005 report by the House of Commons Trade and Industry Committee repeated an earlier warning from the Farnborough Aerospace Consortium that “between 30% and 50% of the UK aerospace industry’s smaller suppliers could close due to competition from low-cost economies”. Despite the warnings, this is an area that is yet to be fully examined by the UK aerospace industry, and the timescale for such apparently dramatic change remains unclear.

Prospective Buyers

Much of the aerospace industry is engaged in the supply chain for major manufacturers, with government procurement a rather less significant source of business. The SBAC reports that sales to UK government, worth $7.3 billion in 2006, represented just 18% of total turnover in the industry. By contrast, the figure is typically closer to 26% elsewhere in the EU, and around 51% in the U.S. Of all prospective buyers, the maintenance, repair and overhaul (MRO) sector continues to present some of the most valuable opportunities. MRO revenues increased 8% to $12.3 billion in 2006, of which aircraft and engine manufacturers now account for over two-thirds of the total, up from around half in 2001. Moreover, UK companies today claim a 17% share of the worldwide MRO market, and several of the major airlines have sizeable maintenance operations, particularly British Airways Engineering, Monarch, and Virgin Atlantic. Each of the major airlines, as well as rapidly-emerging low cost and regional airlines including FlyBe and Eastern Airways also present opportunities in other areas, as buyers of in-flight entertainment, flight safety, in-flight catering, and a variety of other equipment.

Top 10 UK Airlines by Available Capacity (October 2007)

                                      Output in Available Seat          Percentage of All UK Airline
                                     Seat Kilometers ('000.000)            Available Seat Kilometres

British Airways                         147,804                                     37.2
Virgin Atlantic Airways                  52,455                                     13.2
Easyjet                                  36,771                                      9.3
Thomsonfly                               26,874                                      6.8
First Choice Airways                     18,023                                      4.5
Monarch Airlines                         17,956                                      4.5
Thomas Cook Airlines                     17,818                                      4.5
Mytravel Airways                         13,514                                      3.4
BMI Group                                13,442                                      3.4
XL Airways UK Ltd.                       12,289                                      3.1

Source: Civil Aviation Authority (CAA)

Market Entry

Consolidation within the supply chain has had a major impact on UK distributors, a trend reinforced by the adoption of online procurement portals by prime contractors such as BAE Systems and Rolls Royce. In addition, trade shows such as the Farnborough International Airshow (FIA) and the Airline Purchasing Expo (held in London), remain an excellent means by which to meet potential distributors and by which the distributors themselves seek new leads. However, U.S. companies should familiarize themselves with leading online procurement portals, including:

• AirbusSupply.
• BAA plc’s AMA-net and airportsmart.com.
• Third-party procurement portals, such as Exostar, an open Internet trading exchange founded in 1999

by BAE Systems, Boeing, Lockheed Martin and Raytheon. Rolls Royce is also a partner in the scheme.

• For defense:

• The MoD’s Defence Contracts Bulletin, available at www.contracts.mod.uk
• The European Defence Agency’s (EDA) Electronic Bulletin Board, which lists government

tenders as well as contract and sub-contract opportunities with some of Europe’s largest defense companies. Available online at www.eda.europa.eu/ebbweb

Within the United Kingdom, companies might also consider an approach based around participation in a cluster of suppliers organized by regional trade bodies, such as the Midlands Aerospace Alliance, the Farnborough Aerospace Consortium, Northern Defence Industries or the North West Aerospace Alliance. These selective teaming arrangements are increasingly important and are recognized by industry and government alike. Networking opportunities within the supply chain also arise from initiatives of the Society of British Aerospace Companies (SBAC), such as Supply Chain 21 (SC21). For smaller U.S. companies, however, the initial route to market will still typically involve the appointment of a suitably qualified agent, representative or distributor.

Market Issues and Obstacles

In civil aerospace, the regulatory environment has been transformed in recent years, with European organizations having taking over responsibilities from individual national authorities. The European Aviation Safety Agency (EASA), based in Cologne, Germany, today has responsibility for aircraft and product certification as well as for rules related to the design and maintenance of aircraft products and parts. In addition, EASA sets the standards for organizations involved in the design, production and maintenance of aircraft products and parts.

In the United Kingdom, the Civil Aviation Authority’s (CAA) Safety Regulation Group acts as the executive arm of EASA, and additionally serves to develop and uphold national regulations in areas where EASA does not yet have full oversight, such as flight crew licensing and air traffic management. The Safety Regulation Group can be contacted at:

Safety Regulation Group Civil Aviation Authority Aviation House Gatwick Airport South West Sussex RH6 0YR Tel.: +44 (0) 1293 567171

For airworthiness issues, enquiries should be directed to the CAA’s Flight Operations and Airworthiness team. Companies also must be aware of a European Commission requirement, implemented by EASA, that all design organizations must be certified under their Design Organization Approval (DOA) rules. Approvals of minor and major aircraft modifications are directly affected by this process, and more detailed advice for U.S. firms and aircraft owners should be sought through the CAA.

For manufacturers of large civil aircraft, and their engines, the aircraft subsidy issue has proven a major source of debate and concern. Despite protracted and continuing U.S.-EU negotiations in this area, Airbus proceeded in 2006 to request further financial launch aid assistance for the A350 from the French government, while in the United Kingdom, the Labour Government has publicly indicated its willingness to render aid in support of UK-based component manufacture for the development of this aircraft.

With regard to defense aerospace, in addition to U.S. export licensing requirements, such as ITAR and EAR, companies should also be aware of the UK licensing regime, overseen by the Department of Business, Environment and Regulatory Reform (BERR) and enforced by HM Revenue and Customs (HMRC). Import regulations are harmonized with those of the EU, and relate specifically to firearms, nuclear materials, and antipersonnel landmines (contact the Import Licensing Branch for further information). This UK export licensing policy, particularly the Export Control Act of 2002, is of significant importance for most U.S. defense companies. This places controls not only on the export of goods, but also on the transfer of technology and on trafficking and brokering activity. U.S. firms need to be aware of these provisions as they can cover negotiations with any party from a third-country held in the UK, including discussions at trade shows. The Export Control Organisation, another department within BERR, offers a comprehensive resource online.

In bidding for work, firms should note that the MoD contracts to the Quality Assurance Requirements of the NATO Allied Quality Assurance Publications (AQAP) 2000 series. As a consequence, Invitations to Tender often (but not always) include a requirement for companies to have in place a certificated management system – that is, ISO 9001:2000, obtained from a third-party certification body approved by the UK Accreditation Service (UKAS) or a signatory to the International Accreditation Forum – Multi Lateral Agreement (IAF-MLA). As a further consideration, for larger programs, the United Kingdom has a published Industrial Participation (IP) policy, currently implemented by the Defence Export Services Organisation (DESO). The issue of IP arises where the offshore content of any work exceeds $20 million in value. IP proposals are submitted along with a company’s response to a specific Invitation to Tender (ITT), and are confirmed in a Letter of Agreement (LoA) negotiated with DESO. IP policy is typically applicable only to larger U.S. contractors involved in major projects, for whom the resulting need to engage with a variety of UK companies, often SMEs, represents a good opportunity to demonstrate commitment to the UK market. This can be valuable when competing for subsequent work. Please note that the functions of DESO will be transferred in mid 2008 to a new Defence and Security Group within UK Trade & Investment, an agency of BERR.

Trade Events
Airline Purchasing Expo 2008
May 7-8, 2008
London, United Kingdom
www.aviationindustrygroup.com

Farnborough International Airshow (FIA)
July 14-20, 2008
Farnborough, United Kingdom
www.farnborough.com

FIA is one of the world’s largest aerospace events. The last show, in 2006, featured over 1,480 exhibitors and attracted over 243,000 visitors. Similar, if not greater, numbers are anticipated in 2008.

For more information, please visit The U.S. Department of Commerce

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