Sector Intelligence Report



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Cyrus Investment Management LLP
Sector Intelligence Report


The UK Aerospace Sector





Gustaf Hemberg – Head of Research

Revenue

£29.2 bn

(2014)


Exports

26.3 bn


(2014)

Employment

110,000 people

R&D


Employment

21,900


10y Average Growth

5.5%


(2015)

Order Book

13,380 aircraft

(2016)



UK Sector Overview


The UK has the second largest aerospace industry in the world and will be an integral region supplying the global market with aircraft to meet the rising demand. 2015 was a very strong year for the UK aerospace sector with 1,397 aircraft manufactured in total in the UK – this corresponds to a value of ca. £3 billion. The demand appears to be rising much more rapidly than production, even though the UK production has increased by ca. 50% since 2009, the backlog has nearly doubled over the same period, now worth up to £108 billion to the UK aerospace sector.


During 2015, CIM made two important acquisitions providing key exposure to the aerospace sector: FGP Systems and Ramp Surface Coatings, both of which are ISO9001 and AS9100 accredited for servicing companies in the aviation, space, and defense sectors.
This report aims to explore the key drivers of the global and UK aerospace sector and how Cyrus Investment Management is positioned to benefit from the positive outlook in the sector.


Sector Drivers


2015 saw the strongest air passenger traffic growth since the ‘post financial crisis bounce’ in 2010, with 6.5%, well above the average annual growth of 5.5% over the last decade. This is a very positive number given the weak economic backdrop during the year. The International Air Transport Association (IATA) has forecast the global passenger numbers travelling by air to reach 7.3 billion by 2034, up from 3.2 billion in 2014, which represents an annual growth of ca. 4.1%. A likely explanation to this could be that the average fare throughout the year was around 5% lower (when adjusting for distortions from a strong USD) than the previous year, resulting from a further drop in oil price and as a result in jet fuel. Furthermore, the total traffic growth outpaced the 2015 rise in capacity, resulting in an all time high in the global load factor of 80.3%. Over the next few years this positive trend is likely to find further support in continued low oil prices coupled with airlines taking delivery of new more fuel efficient aircrafts, hence resulting in lower fuel cost (see figure).


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European airlines had an overall strong year, growing 5.0%, largely fuelled by an increase in consumer spending in the Eurozone as well as a moderate increase in flight frequency. This growth came despite extensive strikes at Lufthansa and the shutdown of Russian carrier Transaero. The UK has the second largest aerospace industry in the world and the largest in Europe, as well as one of the busiest transport links. In 2014, 219 million passengers travelled to or from a UK airport, a number which Ascend has forecast is set to increase by around 165% over the next 20 years, to ca. 370 million passengers in 2034. During the same period passengers travelling on UK airlines alone is set to grow by 80% to 218 million. The vast demand growth is likely to greatly benefit the UK aerospace manufacturers and supply chain.

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Airlines are tackling the huge projected increase in demand for air transport by:

  • Replacing old planes – newer models are designed with better seating capacity, higher fuel efficiency, and lower pollution.

  • Expanding their fleets – over the past ten years the UK airlines has seen a slow expansion in their overall fleets (624 aircraft in -03 to 701 in -14), as well as a period of consolidation as a direct result of the global economic downturn. Ascend Flight Global has predicted the annual growth in the UK fleet alone will be around 2.3% per annum.




Production Forecast

As stated in previous section, the International Air Transport Association (IATA) has forecast the global passenger numbers travelling by air to reach 7.3 billion by 2034, up from 3.2 billion in 2014, which represents an annual growth of ca. 4.1%.
As a result, global airlines are set to (1) further expand their fleets and (2) replace existing older models. This will be a strong driving force for a ramp-up in aerospace manufacturing, directly benefiting the UK supply chain, as well as the precision engineering sector, through which CIM has several key investment exposures to the aerospace industry. To break down these key points further:



  1. Airlines are set to expand their fleets: Airbus has predicted that nearly 32,600 new large civil aircraft (+100 seats) will be delivered over the next 20 years, at a value of over $5 trillion. Currently the global order book stands at 13,380 aircraft, a record high which represents nine years’ worth of work. There is currently $30 billion worth of orders in the UK aircraft order book. For UK airlines alone 913 new aircraft are expected to be produced over the same period, equating to an overall value of ca. $75 billion. This will replace a significant portion of the UK airlines’ existing fleet, as well as expand the total fleet to ca. 1,110 aircraft by 2034. The support and maintenance of the new builds is estimated to be valued at ca. $49 billion for the UK supply chain.

  2. Airlines are set to replace existing aircraft models: Ascend has predicted that UK airlines are set to replace more than 700 aircraft currently in use use with new, more fuel efficient, higher seating capacity, lower emission and noise pollution aircraft. This is global trend, airlines across the world have realised that new technology can efficiently help them cut costs. This will be a key growth area for UK precision engineering firms that are an integral part in enabling the production of new high performing parts and materials that enable new technology, designs, and possibilities. The UK government is strongly supporting this change and development of new technologies, with initiatives including the Aerospace Technology Institute (ATI), combining industry and governmental efforts to boost new projects. The ATI was created in 2013 with combined government and industry funding of £2.1 billion, and has since initiated over 100 projects involving a broad range of technologies, on which it has spent approximately half of its initial funding.

The UK has the second largest aerospace industry in the world and will be an integral region supplying the global market with aircraft to meet the rising demand. 2015 was a very strong year for the UK aerospace sector with 1,397 aircraft manufactured in total in the UK – this corresponds to a value of ca. £3 billion. The demand appears to be rising much more rapidly than production, even though the UK production has increased by ca. 50% since 2009, the backlog has nearly doubled over the same period, now worth up to £108 billion to the UK aerospace sector.


The UK aerospace industry is a soaring success and the government recognises the importance of this vital sector. Aircraft deliveries have increased for a fifth successive year and are now worth up to £23 billion to the economy.
By committing an extra £900 million in aerospace R&D up to 2026 we’re giving the aero industry the chance to reach new heights. We will continue to work closely with our industry partners to maintain our position as a global leader and to help develop the highly skilled jobs we need for a 21st century economy”


  • Business Secretary Sajid Javid.



New Technologies


UK precision engineering firms play an important role in enabling the development of new technologies through manufacturing of high precision, durable components in a variety of materials that aircraft manufacturers then go on to test and replace existing parts and designs with. The UK has traditionally been a key player in this development of new, quieter, more fuel efficient, and more ‘connected’ aircraft. To give a few important examples:




  • The composite wing technology: this new designed employed in Airbus’ latest model the A350 combines strength and lightness which yields a significant 25% fuel savings. The design has largely been done in Filton, Bristol while the wings are assembled in Airbus’ factory in Broughton, Wales. These type of technologies are likely to be essential to new aircraft models. CIM is likely to greatly benefit from these developments through our strong expertise in the manufacturing of composite components through our portfolio company FGP Systems. Furthermore, CIM has a strategic advantage in its geographic locations – Ramp Surface Coatings is located in Bristol, and Cyrus RW Group and Bradford Cylinders (CIM collaborators), located in Wales all with a strong historic presence in servicing the local aerospace supply chain.

  • Rolls-Royce Trent XW B: the latest jet engine from Rolls-Royce, manufactured in Derby. The engine is arguably the most fuel efficient on the market and has cost the company approximately £1 billion in R&D costs. It is estimated to yield a 25% lower fuel burn per seat compared to other models, as well as being 15% lighter. The design appears to be paying off for Rolls-Royce, the Trent XWB represents ca. half of the company’s order book, and is set to enter the market on 18 Airbus A350s. Rolls-Royce are working on further improvements to hit the market over the next decade. Once again CIM has a strong strategic presence to be able to take advantage of the supply chain demand of these developments. The CIM portfolio companies previously mentioned have extensive experience as well as accreditation to service Rolls-Royce, and are hence likely to benefit significantly through the increased demand of high precision prototype parts needed for new engines.

  • 3D Printing: the technology has made huge leaps forward and has reached the point where it can start benefitting the industry. Modern 3D printing machines can simplify production of components through a reduction of production stages, and through the use of lightweight materials contributing to weight reduction in aircrafts. In 2015 the National Centre for Net Shape and Additive Manufacturing was founded at the Manufacturing Technology Centre in Coventry, through a £15.3 million government funding. The aim is to research ways to improve current 3D printing process and make them industry feasible and accessible. CIM realised the value of 3D printing early on and acquired FGP Systems in 2015, a top tier aerospace precision engineering firm, which was one of the early adopters of 3D ABS and metal printing capability, putting the company at the forefront of the sector in terms of 3D printing expertise and experience.



CIM’s Positioning in Market

During 2015, CIM made two important acquisitions providing key exposure to the aerospace sector: FGP Systems and Ramp Surface Coatings, both of which are ISO9001 and AS9100 accredited for servicing companies in the aviation, space, and defense sectors.


  • FGP Systems: one of the UK’s top three aerospace precision engineering firms, highly specialised in the aerospace sector. The company has a wide customer base including some of the preeminent aircraft and aerospace parts manufacturers in the world. It supplies mission critical products from actuators and auxiliary power units to ejector seats for fighter jets and business class seating for the OEM’s Airbus and Boeing. Airbus and Boeing are key suppliers to meet the projected demand for aircraft over the next 20 years, and with their increased production, top tier precision manufacturers such as City and FGP are set to benefit from the increased demand on a supporting UK supply chain.




  • Ramp Surface Coatings: the company has been servicing the aerospace industry since its inception in 1989. Ramp Surface Coatings is located in Yeovil, an important area for aircraft manufacturing. Several important aircraft manufacturers, and aerospace parts manufacturers are present in the area including Leonardo (previously AgustaWestland) and Honeywell, two key companies for the development of the next generation aircraft, and aircraft components. The strong investment in new technology and development of better, more efficient components will likely benefit local SMEs. Traditionally maintenance of machinery and manufacturing of bespoke high precision components, have been outsourced to the top tier local precision engineering firms.






References

Boeing – Current Aircraft Finance Market Outlook 2016

Boeing – Current Market Outlook 2015-2034

Airbus – Flying on demand

Airbus – Flying by the numbers

IATA – Data

Deloitte – 2016 Global aerospace and defense sector outlook

PwC – Mission Control Fourth Quarter 2015

ADS – The China Challenge



ADS – The Great British Take-Off

BDO – The aerospace report June 2015

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