Ratings agency Moody’s has warned that a no-deal Brexit would be to the European aerospace and defence industry’s detriment, with smaller companies likely to be most severely affected in the short term.
In a market analysis released on 3 October, the agency says it expects the EU and UK to eventually reach an agreement that "preserves many of their current trading arrangements".
But vice-president and senior credit officer Jeanine Arnold states: "The risk of a no-deal Brexit scenario is increasing and will remain a significant near-term threat to the aerospace and defence industry until a withdrawal agreement with transitional arrangements is signed."
While admitting that it is "hard to quantify the impact of a no-deal Brexit", Moody's expects that "trade disruption will pose a significant near-term risk".
Potential new border checks could complicate the sector's highly integrated supply chain – which, the agency notes, is "already strained" as a result of a production ramp-up – and create additional costs for manufacturers by necessitating stockpiling of goods and management of customs procedures.
Increased trade barriers and restrictions on movement of people could meanwhile "prompt aerospace and defence companies to consider changes to their manufacturing footprint [and] where to base their intellectual operations".
Moody's does acknowledge that moving manufacturing operations to new locations would require long-term planning and that some companies might be able to "wrangle concessions from governments to stay put" while others prefer to "wait and see the extent of any disruption that a no-deal Brexit might cause".
But the agency adds: "It is more probable that a no-deal Brexit will affect newer, long-term investments, such as Airbus's 'Wing of Tomorrow' programme."
Rolls-Royce, Airbus and Leonardo are listed as the large manufacturers most affected by a no-deal Brexit, but Moody's foresees that smaller suppliers would be "hardest hit… because they would lack the scale, resources and liquidity to manage abrupt swings in working capital, relocate personnel and manufacturing sites".
It predicts that "any moves [outside the UK] by larger aerospace and defense companies would most likely persuade smaller suppliers to follow suit due to the benefits of being in close proximity to their customers".
While the UK's aim is to remain a member of the European Aviation Safety Agency, "a no-deal Brexit scenario heightens the risk that it may be excluded", Moody's argues.
Given that such an outcome would cause a "substantially negative fallout" for the aerospace sector across Europe, the ratings agency believes that the EU will "take measures to limit this risk".
Source: Cirium Dashboard
