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AEROSPACE

Politics with Wings On: BREXIT & Airbus

Victanis Advisory Services GmbH
2018-06-22
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Airbus today released its ‘BREXIT – Risk Assessment’. Airbus as a company, is the most significant civil aerospace customer in the UK after Rolls Royce with 14,000 employees in the UK and supporting 110,000 jobs in the wider UK supply chain. The main part of Airbus supply chain that is fulfilled in the UK are the design and manufacture of wings for many of its aircraft, often considered by many informed observers to be a reasonably critical component on an aeroplane.

Severe Concern over Airbus UK if ‘No-Deal’ BREXIT

Airbus warns that Brexit will have “negative” effects whatever form it takes. Furthermore, if no agreement between the UK and the EU is reached, it would “force Airbus to reconsider its footprint in the country, its investments in the UK and at large its dependency on the UK.” This “catastrophic” outcome would result because of two effects of a ‘No-Deal BREXIT’. Firstly, general disruption as trade is affected by a new regime.

Secondly (and more importantly), the company cite the problems associated with the UK no longer being under the jurisdiction of the European Aviation Safety Authority (EASA);

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[2] 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.”


Cue the usual fevered headlines, largely indicating that Airbus will pull out of the UK because of BREXIT.

And yet, despite the fact that the company is careful not to state this explicitly, by using the language of ‘revisiting’ investment, dependence and R&D footprint in the UK it is not unreasonable to infer a clear threat here, although perhaps ‘consequence’ would be the word Michel Barnier as well as Airbus might prefer is used.

Impossible to be an Airbus Supplier without EASA?

However, while Airbus is careful not to say that it would be impossible for UK aerospace suppliers to get the necessary approvals to continue to supply Airbus (and indeed other EU aerospace manufacturers), it fails to say that this would in fact be eminently possible and indeed would appear to any neutral observer to be the natural and desired outcome for all concerned.

After all, one obvious question that the Airbus’ statement raises is, ‘How do suppliers from countries outside EASA currently supply Airbus?’. Aerospace supply chains are global, with many countries from outside the EU and EASA suppling aerospace OEMs within the EU, Morocco, Turkey, India and Canada to name but a few.

Most notably of course that other great aerospace economy, the United States, also has many suppliers who provide parts for aircraft manufacturers and engine makers in the EU. Airbus itself has a major assembly facility in Mobile, Alabama, recently opened in 2015. This would suggest that it is not impossible to have distributed and efficient supply chains that include both large and small suppliers from jurisdictions outside of EASA.

And, of course, this is in reality the case. EASA publishes on its website no less than 53 agreements with other national aviation authorities to enable cooperation on safety and approvals, effectively mutual recognition agreements that are termed ‘Working Arrangements’.[3]

Planes without Wings, Wings without Engines?

Of particular relevance to Airbus’ potential problems in putting wings on its aircraft, is an agreement between the US Federal Aviation Authority (FAA) and EASA that puts the whole Joint Venture between Safran (EU) and GE Aviation (US) (called CFM International) under a single agreement. CFM designs and manufactures a series of engines for both Airbus and Boeing and the aim of the ‘Working Arrangement’ is:

“…the joint type certification and continued airworthiness management of the CFM International engines with the objective that one programme will provide compliance with the applicable standards and requirements of both the European Union and the United States of America.”


It goes on to summarise the basis of the arrangement:

“Because the FAA and the EASA type certificates are essentially the same, manufacturing may occur under either the FAA Production Certificate or the EASA Production Organisation Approval (POA) under both TCs. The arrangement covers procedures for certification, design changes including repair designs, and continued airworthiness.”[4]


The example of CFM is doubly relevant as it begs a further question. Namely, that if Airbus anticipates such ‘catastrophic’ disruption as a result of disruption to its own internal supply chain for wings, what damage does it contemplate if the engines that go on those wings made in the UK by Rolls Royce could also no longer be certified and approved?

In reality, there exist multiple agreements between EASA and other aviation authorities to allow supply chains to operate smoothly. And if a specific agreement can be made between the FAA and EASA for a joint venture, how much more straightforward would it be for Airbus to benefit from a similar arrangement between two aviation authorities (the CAA and EASA) who have worked together for decades before now?

Investors Spooked?

It is possible there is a very good reason, although (barring the influence of politics) this appears unlikely, and it is also true that Airbus is careful not to suggest that an agreement covering these aspects will definitely not be reached. However, the fact Airbus does not mention it as a possibility surely begs the question of what exactly the purpose of this ‘BREXIT Risk Assessment’ is and why it was released at this juncture.

For surely the problems posed by BREXIT would impact the entire business of Airbus very deeply if what is foreseen in the Risk Assessment came to pass, if we put to one side the effect on UK aerospace for a moment? As far as investors are concerned, serious disruption has in the past had a significant impact on Airbus’ share price. During 2015 to mid-2016 when Airbus was struggling with supply chain issues that severely impacted its A350 production schedule, the share price fell from €60 to a low of €49 in June 2016. June 2016 saw the EU referendum in the UK and (somewhat ironically), since that period Airbus’ share price has doubled to reach a high of €104.6 last month.

Given the drastic warnings of disruption to multiple aircraft production schedules (including the A350 which is now back on track after considerable effort), hugely increased operational costs and other consequences posited within the BREXIT Risk Assessment, it is surprising that there has been no impact whatsoever on investor sentiment as far as Airbus is concerned. As of writing, the share price is unchanged at €99 on the day.

Politics Without Wings

The description of Airbus as ‘Politics with Wings on’ is highly apt. The German and French governments continue to hold controlling shares within the company and the Byzantine internal politics at the top of the company are legendary. The politics referred to in that original quote by a Senior VP of Airbus was primarily in reference to the strategic importance various EU governments, as well as the EU Commission itself, attributes to the giant aerospace manufacturer. An attempt to pressure the internal politics of another nation in order to benefit its two major government shareholders would surely represent a significant departure from the kind of ‘politics’ that Airbus has hitherto engaged in.

 

[1] Katherine Bennett, Senior VP Airbus UK (22nd. March 2018)
[2] Design Organisation Approval (DOA), Production Organisation Approval (POA), Maintenance Organisation Approval (MOA).
[3] See: www.easa.europa.eu/document-library/working-arrangements
[4] ‘Working Arrangement for CFM International SA’, p.2 at www.easa.europa.eu/document-library/working-arrangements

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