COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS - A Coherent Framework for Aerospace - a Response to the STAR 21 Report

1. Introduction

Over recent years the European Union has set out clear objectives aimed at improving the security and the economic well-being of its citizens. The Cologne European Council recognised the need for sustained efforts to have a competitive and dynamic industrial and technological defence base in support of Europe's capacity to respond to international crises. At the Lisbon Council, the Heads of State and Government set the Union the strategic goal of becoming the most competitive and dynamic knowledge-based economy in the world within the next decade. This message was reinforced at the Barcelona Council which called for a significant boost in the overall R&D and innovation effort in the Union. More recently still, the Thessaloniki Council decided that the time had come to take concrete steps in the defence field.

As a high-technology and highly-skilled, dual-use industry, the European aerospace industry is uniquely placed to contribute significantly to these economic and strategic objectives. It plays a crucial role in maintaining Europe's industrial and technological capability for transportation, communication, observation, security and defence. A globally competitive aerospace industry is central to the achievement of Europe's economic and political objectives.

Europe is now facing the challenge to build an environment in which its aerospace industry will be encouraged to retain and improve its competitiveness thereby contributing to Europe's key objectives. That is why the Aerospace Advisory Group, which brought together senior industry representatives and members of the Community Institutions, was created to look afresh at the existing political and regulatory framework for aerospace in Europe, to highlight deficiencies and to make proposals for improvement. In its report (herewith), "STAR 21: Strategic Aerospace Review for the 21st Century", the Group sets out its analysis and recommendations for creating a coherent market and policy framework.

This report has been the subject of widespread comment and discussion since its publication in July 2002 and has served to place in context a series of important Commission initiatives which impact on the sector. It has also helped to channel industry's support for Community initiatives in this field.

The Group met again in June 2003 to review the progress which had been made. It examined the key relevant initiatives that had been launched by the Commission or had progressed in the Council and noted with satisfaction the Commission's emphasis on the need to increase the momentum towards the achievement of the goals set and on the importance of generating a debate in the other Community Institutions on key political objectives in this area.

The Commission's position on aerospace

Over the past decade, the Commission has regularly identified aerospace as a key industrial sector requiring supportive policies in order to improve its global competitiveness. Its 1997 Communication "The European Aerospace Industry - Meeting the Global Challenge" (COM (1997)466), focused on the urgent need for consolidation in the European aerospace sector, an area where considerable progress has been achieved. Recognising the need to ensure the competitiveness of Europe's industries, and in particular to tailor policies to the specific situation of industrial sectors, the Commission's Communication "Industrial Policy in an Enlarged Europe" (COM (2002)714) identified the aerospace sector as a particular example of a sector whose activities are governed by specific factors, stressing the need for a clear commitment from the EU and the Member States to improving the competitiveness of this industry.

The STAR 21 analysis drew attention to the need to develop a more efficient defence market as an essential pre-requisite to further enhancing the competitiveness of the aerospace industry. Already in 1997 the Commission had pointed out the difficulties facing Europe's defence related industries and called for specific actions to strengthen industrial competitiveness and to preserve the technological base ("Implementing European Union strategy on defence-related industries" COM (1997)583). More recently, taking into account important developments towards the implementation of a European Security and Defence Policy (ESDP) and the growing recognition of the need for pooling of resources in research and development and procurement as a necessary precondition for cost-effectiveness, the Commission adopted a new Communication "European Defence - Industrial and Market Issues" (COM (2003)113) which stresses the importance of creating a genuine European defence equipment market.

The second critical area identified by STAR 21 is space which, under the pressures of a depressed market in telecommunications and increasing global competition, has been experiencing serious difficulties in recent years. In this case the Commission addressed the need for close cooperation between the European Space Agency (ESA) and the European Union in 2001 in its Communication "Towards a European space policy" (COM (2001)718). Furthermore, with the recent Green Paper "European Space Policy" (COM(2003)17) the Commission, together with ESA, launched a broad consultation process with the aim of initiating a debate on the medium and long term future use of space for the benefit of Europe. This will lead to the preparation of a White Paper and action plan later this year.

A common theme in these Communications has been the disadvantages arising from the relative fragmentation of the policy framework for European aerospace and the need for coherence in public policy measures which affect the sector. In recent years there have been promising developments at industrial and political level which, despite the current difficult economic conjuncture, have placed the sector in a stronger position and, if confirmed, notably in the case of security and defence, hold out better prospects for the future.

This Communication sets out to demonstrate how the Commission has already responded to the analyses and prescriptions of STAR 21, to identify the steps that should be taken to help to create the framework needed to secure the long-term competitiveness of aerospace in Europe, and, more generally, to raise awareness of the key issues in other Community Institutions.

2. Aerospace in Europe

Today, the manufacture of large civil aircraft is the biggest single element in Europe's aerospace turnover accounting alone for over EUR 20 billion annually. This market is cyclical as it depends on the acquisition plans of airlines which fluctuate considerably, especially in a period of uncertain economic perspectives and global security concerns. On the defence side, demand depends on the defence budgets and the procurement policies of governments which in turn depend on geopolitical developments and the changing perception of threats. As products on the civil and the defence side have many commonalties, it is essential for industry to have as much predictability and stability as possible in both segments. This helps to make best use of the knowledge base, to optimise technical, human and financial resources, and to iron out fluctuations in demand when either segment encounters periodic difficulties.

As regards specific aspects, the overall development of the market for large civil aircraft and the competitiveness of Airbus are key elements for the future development of the European industry. The general economic downturn, the terrorist threat, the Iraq crisis and SARS have had a significant dampening effect. However, Airbus has been less affected than its main international competitor, Boeing and this has helped the company to improve its market share to roughly equal that of Boeing with its current product range. This performance could even be improved upon in future depending on the successful development and market introduction of the new A380 super-jumbo, scheduled to come into operation in 2006.

On the defence side, the number of new programmes in Europe and also world-wide is limited. If brought to completion as planned, the US Joint Strike Fighter is expected to be the single most important programme for shaping the combat aircraft industry over the coming years and could constrain the possibility of developing new European products in this market segment. In helicopters the European aerospace industry has developed a strong position on global markets. Significant capabilities also exist in the areas of missiles and unmanned aircraft.

However, the lack of a predictable framework at European level affects industry. For example, with regard to military transport aircraft the procurement procedure of the Airbus A400M has been complicated and cumbersome. As far as missiles are concerned, the decision-making process on the future ammunition for the Eurofighter Typhoon has posed similar problems. Such situations increase the pressure for European companies to focus on the much larger US defence market and to seek to build alliances in order to secure access to new business of a scale and continuity capable of assuring a stable flow of revenues and an acceptable return to their shareholders.

In the space sector, the drop in demand for satellite communications has affected both the satellite and the launcher business. No significant improvement is expected over the coming years. The resulting fall in orders has caused a severe crisis in the European space industry which traditionally depends more than its competitors on commercial markets. In addition, the already high level of international competition in the launcher market from the US, Russia, China and Japan, is set to increase further now that the Delta 4 and Atlas 5 rockets that have been developed by the US military can be used to offer substantial numbers of launch services on the commercial market.

Overall consequences

Significant further progress in building a strong European dimension in important market segments, such as defence and space, is still needed to maintain a competitive European aerospace industry in the long run. The positive Airbus experience in the civil aircraft market should serve as the benchmark for other parts of the business. Industrial restructuring combined with the development of relevant common programmes within a coherent political framework across European borders is essential for future success in all aerospace sectors.

3. The STAR 21 initiative

Creation of the Aerospace Advisory Group

The European Advisory Group on Aerospace was set up in 2001 to analyse the political and regulatory framework for aerospace in Europe, to highlight deficiencies and to make proposals for further improvement. It comprised seven aerospace industry chairmen, five European Commissioners, the Council High Representative for Common Foreign and Security Policy and two Members of the European Parliament. The Group presented its findings to the President of the Commission in July 2002. A review of progress was made by the Group in June 2003.

STAR 21 findings

STAR 21, while acknowledging the progress made in a number of areas such as transport policy, comes to the primary conclusion that the current political and regulatory framework needs to be much improved in order to bridge the gap between Europe's political and economic ambitions and the capacity to deliver the required results. It highlights a number of areas in which the European Institutions, the EU Member States and the industry itself should act to maintain Europe's position as a world-class aerospace producer.

STAR 21 stresses the need for overall coherence and the integration of a variety of policy instruments. It calls for improved access to third markets and the proper application of trade agreements, greater mobility for aerospace workers, further coordination of R&D efforts, especially on the defence side, an EU lead in all areas of civil aviation regulation, the completion of the single European sky and a closer relationship between the EU and the European Space Agency in support of initiatives such as Galileo and the European space strategy.

In many of these areas, for example the coordination of civil aeronautics research and the regulation of civil aviation, the report identified solid progress that has already been made or will be achieved through the implementation of proposed measures.

STAR 21 identifies the most pressing need for change on defence issues, particularly regarding the added costs arising from Europe's fragmentation of policy decisions and use of resources on a national basis. Pointing out that the current situation negatively affects the competitiveness of Europe's aerospace industry and jeopardises the implementation of the ESDP, it calls for early progress in this area in particular in order to avert closing off future policy options in relation to Europe's long term security needs.

4. Key issues from the Commission viewpoint

The Commission welcomes the work of the Aerospace Advisory Group. Its report makes an important contribution in highlighting the deficiencies in the existing framework for aerospace in Europe and in identifying the means to ensure the industry's global competitiveness. While the STAR 21 recommendations cover a broad spectrum of issues that differ in impact and urgency, they give a clear orientation on the main areas that need to be addressed. The Commission fully endorses the report's main finding, namely that an aerospace industry which has consolidated on a European scale needs a coherent policy framework with a European perspective. Accordingly, within its competencies it will continue to contribute to the further development of such a framework and to advocate its development where possible.

There have been efforts and indeed considerable progress towards overcoming the historical national segmentation of the aerospace industry. The process of creating a European framework is, however, more developed on the civil than on the defence side. Yet as the STAR 21 report emphasised, the civil and defence sides of the business are interdependent and companies must be active in both if they are to be competitive. Faced with the lack of a unified market for defence-related aerospace equipment and research at home, there is a risk that European companies will be increasingly drawn to the much larger US market as a source of opportunities which will enable them to grow and sustain a broad range of capabilities.

To guarantee the long-term competitiveness of the European aerospace industry and to put in place a coherent framework, the Commission is convinced that effective action must be taken on the major STAR 21 recommendations, especially regarding defence, space, research, market access and European regulation of civil aviation.

Defence

The defence side of the business is the area where the scope and need for progress is greatest. It still lacks one of the basic foundations of a competitive European industry: an effective internal market.

There are many historic reasons why a national orientation is still dominant in defence:

- Governments are industry's sole customers. They alone determine the demand for defence products and define operational requirements and technical specifications. Any production or trade of armaments is subject to governmental authorisation.

- Long-term demand depends on the evolution and perception of threats, which influence the assessment of needs and budget planning. Governments perceive, react and implement their respective policies differently.

- Value for money is not the sole criterion for procurement policy - offsets (compensation), including industrial cooperation agreements, security of supply and strategic considerations can also be factors.

- The relationships between governments and aerospace companies differ considerably between Member States in the extent of state ownership, R&D funding, procurement policies, etc.

- Finally, defence interests require confidentiality regarding sensitive military information and security of supply which goes beyond the normal customer-supplier relationship.

Over the years, the reluctance of Member States to take a common approach at European level to improve the efficiency of the defence sector has however become a serious handicap with regard to industry's strong competitors especially in the US which arising from the structure and volume of the security and defence budget in the US have recourse to much greater opportunities to develop new products and to achieve important economies of scale.

This slowness in pooling resources at European level contrasts with Europe's ambitions in building an ESDP. Given the financial constraints on defence budgets in all Member States, the implementation of ESDP objectives depends, inter alia, on significant improvement concerning the procurement and production of defence equipment. Compared with the US, Europe not only spends much less on defence, but the market fragmentation further limits our resulting operational capabilities.

The rapid changes which must be achieved require the Member States to develop a more European approach given both their commitment to the ESDP and the transnational character of the industry. In the Commission's view significant progress depends on the development of a more coherent defence equipment market and procurement policy taking account of specific defence considerations as set out in the recent Communication of March 2003.

In this respect, the Commission notes that the increasing support for a greater European dimension was also reflected in the European Convention's draft constitutional treaty which calls on Member States to "undertake progressively to improve their military capabilities" and for the establishment of a "European Armaments, Research and Military Capabilities Agency to identify operational requirements, to put forward measures to satisfy those requirements, to contribute to identifying and, where appropriate, implementing any measure needed to strengthen the industrial and technological base of the defence sector, to participate in defining a European capabilities and armaments policy, and to assist the Council in evaluating the improvement of military capabilities."

In Thessaloniki, the European Council further developed this policy and endorsed the objective of setting up such an intergovernmental agency in 2004.

Space

The need for a European approach to space has long been recognised and led to the setting-up of the European Space Agency (ESA) in 1975. Within ESA, individual states have pooled important parts of their civil space activities. Through ESA programmes and via national efforts, it has been possible to develop considerable European space capabilities and a world-class industrial capacity in launchers and satellites.

However, defence space programmes have been generally conducted nationally or bilaterally in Europe, with some major successes but limited budgets (only about 7 per cent of the US total). There have been discussions aimed at gaining wider support for European collaborative projects, but these have yielded few results to date and their future remains uncertain. As a consequence, in contrast to civil programmes, there is as yet no structure at the European or multinational level to address security and defence space programmes.

Europe's space capabilities are now at risk because of the sharp and sustained downturn in the commercial (mainly telecommunications-related) market. In the past, the European industry's success in the then expanding commercial market allowed it to achieve sufficient critical mass and to compete with US companies despite the fact that the latter benefited from a much bigger, protected, institutional market. US space policy and legislation continue to affect the procurement of foreign launch services and launch vehicles in the US.

To maintain a European space industry and the freedom of action which it provides, Europe needs to develop a consolidated industrial and institutional approach to further integrate its space-related activities. In this context, the implementation of Galileo plays an important role. In order to successfully complete the development phase (2002-05) a single management structure has been established (Galileo Joint Undertaking). The Galileo project breaks new ground as the first major public-private partnership undertaken at EU level, as the first commercial operation of global satellite navigation and as a service firstly driven to meet civil users' needs. ESA is assuming the technical responsibility for installing the space infrastructure. A concession structure will provide for a clear legal relationship between the public sector and a new private sector company formed to deploy and operate the Galileo system.

Alongside the realisation of the Galileo programme and progress on the global monitoring for the environment and security (GMES) initiative, three key areas must be addressed in parallel: the ESA-EU relationship, better coordination of civil and defence-related programmes at a European level and the efficient allocation of resources which is also key to competitiveness.

The extensive stakeholder consultation process on the Green Paper on European Space Policy that was launched earlier this year placed these questions at the heart of a reflection on Europe's space needs in terms of wider policy objectives.

Research

There is a large consensus among all interested parties that the coordination of European aerospace research must be improved. In numerous statements, agreements and joint declarations, such coordination is seen as the natural corollary of greater industrial integration. However, experience has shown that recognition of the need for greater coordination is not in itself sufficient to bring about the required changes to Europe's complex system of aerospace technology acquisition. New mechanisms will, therefore, have to be developed to give practical effect to this common objective.

STAR 21 called for a better coordination of aerospace research activities between the different levels and actors involved (EU, national and regional; institutional and industrial). As far as civil aeronautics research is concerned, important progress has recently been made through the work of the Advisory Council for Aeronautical Research in Europe (ACARE). In October 2002, ACARE presented first results in the form of a Strategic Research Agenda to better coordinate European research activities. Further steps will follow to implement a European research area for the sector.

In the defence area the same problems exist and should be addressed in a similar fashion, suitably adapted to take account of the different roles and competencies of the various players in the defence field. This is of particular importance as European companies strive to compete with their US counterparts which benefit from much higher levels of defence research spending. It is also crucial as Member States endeavour to obtain the best value for money while also creating an environment which helps to retain R&D activities in Europe.

With this in mind, the Commission welcomes the decision of the Thessaloniki European Council to task the appropriate bodies of the Council to undertake the necessary actions towards creating, in the course of 2004, an intergovernmental agency subject to the Council's authority and open to participation by all Member States in the field of defence capabilities development, research, acquisition and armaments.

This agency will aim at developing defence capabilities in the field of crisis management, promoting and enhancing European armaments cooperation, strengthening the European defence industrial and technological base and creating a competitive European defence equipment market, as well as promoting, in liaison with the Community's research activities where appropriate, research aimed at leadership in strategic technologies for future defence and security capabilities, thereby strengthening Europe's industrial potential in this domain.

European Regulation of Civil Aviation

Today, both civil aircraft manufacturing and the air transport industries operate in a European or global market place. However, much of Europe's regulatory system is still organised on the level of Member States and coordinated between governments. This outdated approach prevents industry and its customers from enjoying the full benefits that the internal market can offer.

STAR 21 addressed particularly the deficiencies of the Joint Aviation Authorities (JAA) system and called for the early creation of the European Aviation Safety Agency (EASA). In the meantime, important progress has been made: Based upon a proposal of the Commission, the Regulation of the Parliament and the Council (1592/2002) establishing the legal basis for EASA was adopted and entered into force on 7 September 2002. The Commission is currently working on major organisational questions to make sure that EASA will be operational towards the end of 2003. In parallel, discussions with the US Federal Aviation Administration (FAA) will continue to ensure that the certificates provided by regulators on both sides of the Atlantic will be mutually accepted.

Aircraft certification is, however, only one element in building up a coherent framework for civil aviation in Europe. Progress in other key areas, such as aviation security, is still needed. Given the density and interdependence of the air transport network within Europe, security issues need to be addressed at a European level.

Active participation of the European Community in international organisations such as ICAO is key to guaranteeing an efficient match between the European regulatory system and global requirements. The current lack of effective mechanisms to promote European standards handicaps the competitiveness of the European aerospace industry. Such involvement is vital for programmes like Galileo and the development of air traffic management technologies.

The implementation of the Single European Sky will require significant technological change and investment in the modernisation and consolidation of the air traffic management infrastructure and related services. The development of an effective civil-military interface will be crucial to allow more flexibility in the use of Europe's airspace. Such developments might also facilitate the harmonisation of military requirements.

Environmental needs impose considerable pressure for the development of safer and less polluting aircraft. The European Commission and the Member States must strengthen their role in environmental discussions on a global level. The aerospace industry should also strive to improve existing technologies to strike the right balance between environmental needs and the expected growth in air traffic.

As far as air service agreements are concerned, the European Court of Justice recently concluded that the existing bilateral air service agreements of individual Member States were not compatible with Community competence in important areas. The Court identified three such areas of exclusive Community competence: airport slots, computer reservation systems and intra-Community fares and rates.

Taking account of these and other elements which strongly support a Community approach to air service agreements on 5 June 2003 the Council agreed on a package of measures that gives responsibility for conducting key air transport negotiations to the Commission, including in particular a mandate to begin negotiations on a new transatlantic air agreement.

The European aviation industry will have to consolidate to adequately compete on a global level. The new Community approach to redefine international relations for all Member States will facilitate the process of consolidation. Further liberalisation of aviation markets on a global level will also expand market opportunities for the European aviation industry. Increased competition will also add to pressure to reduce operational costs by, for example, using more efficient aircraft.

The Commission welcomes this development and will continue to pursue measures to ensure a coherent regulatory environment that will both provide a high level of safety and security and promote the competitiveness of European industry.

Market Access

Aerospace companies operate in a global market place and therefore depend on fair conditions in international trade and access to markets.

Trade in large civil aircraft is regulated by a system of bilateral and multilateral agreements. The bilateral 1992 EU-US Agreement on Trade in Large Civil Aircraft specifically regulates different forms of government support such as support for research and development or repayable launch aid for new programmes. While Europe has respected its obligations under the 1992 agreement and will continue to do so in the future, the levels of support provided in the US regularly exceed those permitted by the agreement. The Commission has criticised this violation in the bilateral consultations foreseen by the agreement and it will continue to monitor the situation closely in future in order to preserve open and fair competition in this important market.

Concerning access to defence equipment markets, two specific difficulties for European companies arise out of current US legislation: First, the US defence equipment market is itself very difficult to enter:

- US restrictions on the procurement of foreign defence equipment limit European industry's access to the US market. Recently, the US Congress proposed to further tighten these restrictions despite resistance from the Department of Defence. These amendments would be contrary to commitments undertaken by the US in the framework of the 1994 WTO Agreement on Government Procurement (GPA). In addition, the implementation of US security regulations imposes considerable bureaucratic burden. This weighs heavily on any participation of foreign contractors in US programmes.

- The US policy regarding any cooperation of US defence firms with foreign companies is very restrictive. Moreover, US security requirements put legal impediments in the way of mergers and other company tie-ups.

Largely as a result of these restrictions, the EU-US defence trade balance tilts very heavily toward the United States: 24% of European defence procurement is of US origin, whereas only 0.5% of US defence procurement is of European origin.

Second, US authorities can block exports of European equipment to third countries if the products contain components that are covered by US regulations. Compared with the European system, these regulations are wider in scope and more rigid.

The Thessaloniki Action Plan against the proliferation of weapons of mass destruction foresees a number of actions to increase the efficiency of Europe's dual-use export control regime. Early implementation of these actions is crucial to increase Europe's credibility with respect to the US. The Commission has already presented proposals to the Council on the implementation of the Thessaloniki Action Plan concerning export control of dual use products.

In its November 2002 report, the US "Commission on the Future of the United States Aerospace Industry" also highlighted the negative impact of this policy for the US industry. It called for some loosening of US restrictions on foreign companies that want to take over US companies involved in defence as well as concluding that "US government procurement rules should be revamped to support increased collaboration with, and in some cases procurement from, non US based companies". Concerning the integration of commercial components into military products the report called for a general permission "even if they are provided by non-US companies or worked on by foreign nationals".

The US Commission also addressed the problems the export control system creates for its industry. It stated that "export controls now provide too little security and impose enormous inefficiency" adding that they "are undermining the collaboration between companies in alliance countries on new system developments" and negatively affect "one of the central goals of military planning during the past 30 years - alliance interoperability". To overcome this situation, the US Commission suggested working "with our allies to identify critical technology and to come up with solutions on how to protect it".

Transatlantic cooperation in defence has been spurred by industrial consolidation and the development towards fewer, but technically more sophisticated and more costly programmes and closer transatlantic industrial cooperation is also the necessary outcome of implementing joint defence capabilities.

However, while welcoming the positive signals from the US and encouraging all transatlantic initiatives to work towards early changes, the Commission believes that the chances of obtaining better access to the US defence equipment market and improving their export control system, will be greatly enhanced if Europe can act from a position of strength where it has taken the steps needed to ensure the existence of a highly competitive and attractive industrial base inside Europe with its own strong design expertise and successful programmes.

5. Next Steps

STAR 21 has shown that the most significant progress has been made in areas in which an integrated European approach has been taken. The creation of EASA to overcome the drawbacks of the existing inter-governmental approach of the Joint Aviation Authorities is a good example.

This demonstrates how the EU can play an important role in providing an environment in which the aerospace industry can thrive as cross border integration and the needs of the global marketplace increasingly render the national context inadequate.

The Commission is aware that depending on the issue at stake, the most appropriate organisational and institutional approach can differ. Some of the problems might best be addressed by the development of Community policies while others might call for a solution using different EU structures.

On that basis, the Commission will continue its efforts to improve the political and regulatory framework for aerospace in Europe. However, the Member States will retain a crucial responsibility for providing support in terms of R&D programmes, repayable launch aid and contributions to ESA programmes, as well as remaining the industry's major customers through defence procurement. Significant progress therefore depends on their cooperation.

The Commission considers that three areas deserve particular attention: defence, space and research.

Defence

Regarding the defence aerospace business, the industrial consolidation process (primarily the responsibility of companies themselves) has advanced enormously; the key issue faced by the industry is the remaining fragmentation of defence equipment demand - single Member State programmes struggle to achieve production levels on an economic scale and multi-Member State programmes are handicapped by complex work-sharing arrangements which add to bureaucracy and costs.

Member States should foster harmonisation of the military and other security-related requirements with a view to overcoming the problems arising from the national orientation of today's defence framework by harmonising the planning and procurement of defence-related equipment. This is fully in line with the objective of the ESDP to foster a competitive defence industrial and technological platform and a concrete start has been made in the actions set out in the Commission's recent Communication 'European defence - industrial and market issues'.

This Communication focuses on the priority to be given to the establishment of a defence equipment market, i.e. an appropriate regulatory framework addressing both internal and external aspects, suitable rules for cost-effective procurement of goods and services by Member States and by any future European agency or agencies and economically efficient export controls, while also preserving ethical standards and promoting reciprocal market access. It also focuses on improved efficiency in research through cooperation and coherence in defence-related research at European level and the exploitation of civil-military synergies.

In addition, it should be recognised that the EU provides an appropriate framework for extending and developing some of the measures agreed in the aerospace and defence related field by the Ministers of France, Germany, Italy, Spain, Sweden and the United Kingdom through the Letter of Intent (LoI) and its Framework Agreement. The benefits accruing from agreements on intellectual property rights, common export rules and security of information would be greatly enhanced by covering the whole of the European Union.

Similarly, various Member States have already established joint procurement and research initiatives such as OCCAr (Organisme Conjoint de Coopération en matière d'Armement / Joint Armament Cooperation Body) and WEAO (Western European Armament Organisation) and the initiative of the European Council of 19 and 20 June 2003 to set up an agency in the field of defence capabilities development, research, acquisition and armaments.

As regards obstacles to trade in defence equipment, the Commission welcomes the approach of the US Aerospace Commission. It invites the US to work towards early implementation of necessary changes. This would encourage defence cooperation, improve interoperability and help to reduce the capabilities gap.

Space

Following the 2001 Communication "Towards a European Space Policy", which focused on cooperation with the European Space Agency, the Commission adopted a Green Paper on space to encourage further debate on the way forward with a view to producing a detailed White Paper later in 2003.

The absence of a comprehensive European space policy and the resulting lack of efficient coordination of space activities, is now giving rise to fears that, despite its technological excellence, the recent downturn in the commercial space market means that EU industry not only risks losing market share to the US and other space powers, but may even lose the ability to preserve acquired capabilities. In the long run this could lead to a situation in which Europe has no effective choices in a vital sector.

However, the economic stakes of downstream activities including satellite-based services for transport, electronic commerce, scientific highways, tele-working, leisure and culture services, financial services and of course, communications and security and defence activities, now go far beyond the initial investments in structures. Such services provide an added dimension and have become an important resource for various industrial capabilities.

Therefore the Commission will take the steps required to create the most favourable environment possible for industry to preserve and further develop its capabilities. That means setting out a comprehensive European space policy that takes account of the strategic character of this industry and provides a common framework under which the European industry and the different national and intergovernmental agencies involved can optimise their activities.

The wide-ranging discussions which took place during the consultation process organised under the Green Paper on Space have played an important role in this context and the Commission will develop these issues more fully in a White Paper to be presented later this year.

Research

Over the last decade the Union has increased its role in funding civil aeronautics research in Europe and industry has adapted its research structures to take account of this new support landscape. Given the long development cycles of aerospace it is important to maintain stability of research funding structures in the long run.

As in civil aeronautics with ACARE's Strategic Research Agenda, Europe would greatly benefit from the existence of a comprehensive European defence aerospace R&D plan. This requires the development of a system that brings together those who understand the strategic, technical and market issues that will determine the future of aerospace with those that have both the capabilities and a stake in the business - the companies themselves, including SMEs, research establishments and so forth - to allow the complex issues involved to be examined in depth.

The task would be to determine the priorities and objectives with a European perspective in order to influence all European stakeholders involved in the planning of defence-related research programmes to work towards a system that is more efficient, better focused and more competitive on a world scale. Individual Member State priorities might need to be adapted as a result of the overall plan so a sufficient level of commitment and independent resources would be pre-requisites for success.

Besides better coordination of activities between the Member States, new institutional structures will be needed to overcome the existing fragmentation. In its draft Treaty Establishing a Constitution for Europe, the European Convention called for the establishment of a "European Armaments, Research and Military Capabilities Agency" to "identify operational requirements, to promote measures to satisfy those requirements, to contribute to identifying and, where appropriate, implementing any measure needed to strengthen the industrial and technological base of the defence sector, to participate in defining a European capabilities and armaments policy, and to assist the Council of Ministers in evaluating the improvement of military capabilities." The Commission strongly supports this proposal. Such a body would help to overcome the existing fragmentation and to develop the equipment Europe will need for its security and defence needs in the future.

For its part, as stated in the recent defence Communication, the Commission plans to launch a preparatory action to increase Europe's industrial potential in the field of security research. This activity will aim at exploring the conditions and mechanisms to improve the environment for scientific, technological and industrial competitiveness in this area. A long term vision will be developed in close cooperation with relevant stakeholders. The Commission intends to present a further Communication on this issue by the end of this year.

6. Conclusion

The benefits of a strong European aerospace industry have been highlighted in past Communications. Millions of citizens depend on the sector for their livelihood and its EUR 80 billion turnover makes a substantial positive contribution to Europe's trade balance. The aerospace industry and its associated technologies also play a major role in maintaining Europe's strategic position and capacity for security and defence and are key contributors to the competitiveness of all sectors of the economy including the emerging businesses of the Information Society.

While it is true that since STAR 21 was presented, very real progress has been achieved in many areas including the adoption of the EASA Regulation, the relaunch of the defence debate, the broad consultation on space policy and the creation of the Galileo joint undertaking, the Commission is convinced, in line with its industrial policy strategy and its competitiveness policy, of the need to adapt and develop the existing framework to help preserve the benefits of Europe's aerospace capabilities for future generations.

To do this requires a continuing, coordinated effort which focuses on those areas where the European framework for aerospace is lacking or remains weak. That means that priority must be given to the effective creation of a European defence equipment market, the launching of a successful preparatory action on security research and strengthening defence research efforts through a European defence aerospace R&D plan and the establishment of an EU agency while also maintaining long-term stability in civil aeronautics research programmes.

The adoption of the space White Paper and the early implementation of an action plan which makes a reality of European space policy by dealing with all aspects of the business and fully exploiting the specific capabilities of all the institutions involved is also vital, as is completing the single European sky including external air transport agreements and a fully operational EASA.

Given the scale of the challenges, determined action is needed to allow European companies to further improve their competitiveness in global aerospace markets. The Commission therefore welcomes the STAR 21 recommendations as an important starting point to trigger the necessary changes and it calls on Member States and the other Institutions to support the thrust of the recommendations and seek actively to advance the key issues raised.

ANNEX

STRATEGIC AEROSPACE REVIEW for the 21st century

(STAR 21)

Creating a coherent market and policy framework

for a vital European industry

July 2002

A. MEMBERS

The European Advisory Group on Aerospace was set up in 2001 to analyse the adequacy of the existing political and regulatory framework for aerospace in Europe, to highlight deficiencies and to make proposals for further improvement. Chaired by Erkki Liikanen, Member of the European Commission responsible for Enterprise Policy, it comprises seven aerospace industry chairmen, five European Commissioners, the EU High Representative for the Common Foreign and Security Policy and two Members of the European Parliament.

Over the last 12 months the members of the Advisory Group have analysed this question, identifying the key areas which will determine the future competitiveness of the industry and its ability to contribute effectively to Europe's main policy goals. Their findings are presented in the attached report entitled Strategic Aerospace Review for the 21st Century (STAR 21), which the Group presented to the President of the European Commission, Romano Prodi on 16 July 2002.

Jean-Paul Béchat: Chairman & CEO SNECMA

Manfred Bischoff: Co-chairman EADS

Philippe Busquin: Member of the European Commission, responsible for Research

Sir Richard Evans: Chairman BAE Systems

Jean-Luc Lagardère: Co-chairman EADS

Pascal Lamy: Member of the European Commission, responsible for Trade

Erkki Liikanen: Member of the European Commission, responsible for Enterprise and the Information Society

Alberto Lina: Former President & CEO Finmeccanica (until April 2002)

Loyola De Palacio: Vice-President of the European Commission, responsible for Relations with the European Parliament, Transport & Energy

Chris Patten: Member of the European Commission, responsible for External Relations

Denis Ranque: Chairman & CEO THALES

Sir Ralph Robins: Chairman Rolls-Royce

Javier Solana: EU High Representative for the Common Foreign and Security Policy

Carlos Westendorp y Cabeza: Member of the European Parliament, Chairman Industry, Foreign Trade, Research and Energy Committee

Karl von Wogau: Member of the European Parliament.

B. EXECUTIVE SUMMARY

Europe's needs

In recent years Europe's leaders have defined far-reaching goals for the European Union which have major implications for the aerospace industry, setting, on the one hand, ambitious targets for Europe's competitiveness and, on the other hand, key objectives for the EU's foreign and security policy.

In its Strategic Aerospace Review for the 21st Century (STAR 21) the European Advisory Group on Aerospace argues that these goals can only be met if the economic and industrial structures in Europe are capable of responding to the new requirements. A flourishing and competitive aerospace industry is essential to ensuring a secure and prosperous Europe. Apart from its contribution to sustainable growth, the aerospace industry is a home to key skills and technologies and an important driver of innovation; it guarantees the means for delivering services from space, and makes an essential contribution to security and defence, thereby helping to safeguard Europe's freedom of action in its external policies.

Industry characteristics

The European aerospace industry is a world leader in several key market sectors, accounting for one third of the world's aerospace business in terms of turnover, compared with almost one half for its US counterpart.

The wellbeing of the industry depends on twin pillars, namely, civil and defence. They are both complementary and mutually dependent. Operating in civil and defence markets means sharing skills and technologies and enjoying economies of scale and the benefits from a broad product range. Civil and defence requirements both rely on the application of advanced technologies, while serving private and public customers with different needs.

Entry for newcomers to the aerospace industry is very difficult, especially at prime level. This stems from the interdependence of the civil and defence sectors as well as the highly cyclical and capital-intensive nature of the industry. This means also that once the technology, skills and infrastructure are eroded or disappear, they are extremely difficult to re-create.

As regards international competition, US companies operate in the world's single largest home market and benefit from a highly supportive operating framework which is designed to underpin a declared policy aim to maintain US supremacy in aerospace. The direct linkages between defence and civil uses, and the heavy investments in defence to fund research and innovation bring clear advantages to the US industry in terms of beneficial spin-off effects in non-defence aerospace applications. This situation poses a constant challenge to European industry and cannot but affect its competitive position.

Since for most markets, US and European companies will continue to supply the needs of customers worldwide, strong European aerospace capabilities are indispensable to maintaining competition for a wide range of civil and defence products.

Within Europe major restructuring has taken place in recent years, leading to an industry organised on a European scale, as a competitor and partner of its powerful US counterpart. Yet, the policy framework which governs its activities is too fragmented. It is appropriate that, as the aerospace industry itself has restructured on a European level, the issues that will determine its future competitiveness and contribution should be addressed from a European perspective.

Key findings

In considering the issues from a European perspective, STAR 21 has identified four key findings:

1. Aerospace is vital to meeting Europe's objectives for economic growth, security and quality of life. It is directly associated with, and influenced by a broad range of European policies such as trade, transport, environment and security and defence.

2. A strong, globally competitive industrial base is essential to provide the necessary choices and options for Europe in its decisions as regards its presence and influence on the world stage.

3. European aerospace must maintain a strong competitive position if it is to play a full role as an industrial partner in the global aerospace marketplace.

4. Europe must remain at the forefront of key technologies if it is to have an innovative and competitive aerospace industry.

STAR 21 notes that while some progress has already been made in a number of areas, the current political and regulatory framework is insufficient to bridge the gap between Europe's ambitions and the capacity to deliver the required results

Policy recommendations

A coherent, long-term perspective is essential for planning and investment by the aerospace industry. STAR 21 identifies a number of areas in which the European Institutions, the EU Member States and the industry itself must act to maintain Europe's position as a world-class aerospace producer and to provide the capabilities in defence, security and space which will allow Europe to make essential political choices and to be an effective partner for friends and allies.

The main recommendations of STAR 21 cover world markets, the operating environment, governance of civil aviation, European security and defence, and space capabilities. In many of these areas, for example the coordination of civil aeronautics research and the regulation of civil aviation, solid progress has already been made or will be achieved through the implementation of measures already proposed. In other areas, for example defence, space and the level and structure of research and technology in all market segments, which are vital for the development of industry, early decisions are required to avert a closing off of policy options for the future.

As far as access to world markets is concerned, Europe's goal should be to secure a level playing field which will favour competitive enterprises. This will require pushing for further market opening, especially by seeking changes to 'Buy America' practices and convergence in export control policies. At the same time Europe should build and develop its relations with third countries, including through international cooperation programmes.

With respect to the operating environment, STAR 21 highlights the key role of research for industry's competitiveness. While welcoming the creation of the Advisory Council for Aeronautics Research in Europe (ACARE), STAR 21 draws attention to the huge challenge involved in mobilising the estimated EUR100 billion from private and public sources needed to fund a coordinated civil research strategy over the next 20 years. In a related area, the importance of the impact of tax incentives as a driver for research is acknowledged and more detailed analysis of this aspect is called for. As regards human resources, STAR 21 stresses the need for appropriate actions, especially at the level of Member States, to ensure the availability of a highly skilled and mobile workforce.

As regards areas in which good progress is being made the report cites in particular the issue of governance of civil aviation, adding, however that the full benefits from relevant developments will only be obtained by allowing the EU to become the policy-maker and regulator. This requires a wider role for Community bodies including the European Aviation Safety Agency (EASA), as well as the development and implementation of a master plan for air traffic management in Europe. It also leads to the Community becoming a member of the International Civil Aviation Organisation (ICAO) alongside the Member States.

It is in the areas of security and defence and related research that the most pressing need for added efforts to secure the future of the European industry is identified.

- Such efforts are needed to ensure a highly capable European industrial and technological base which is an essential prerequisite to guaranteeing the industry's overall future competitiveness. Yet the mismatch between, on the one hand Europe's goals and requirements and, on the other hand, the policy framework within which the aerospace industry is called upon to contribute to the delivery of the necessary capabilities, needs to be addressed urgently.

- Putting in place the arrangements for delivering the agreed capabilities requires commitment, resources and coherent organisation. There has recently been encouraging progress in defining and agreeing capability requirements as part of the European Security and Defence Policy. Bearing in mind that this is only a first step towards meeting the future requirements of the new European security policies, it is essential that adequate financial resources be committed to enable plans to be realised, and that necessary rules and procedures be put in place to ensure that such resources are spent efficiently. This will also require a more coordinated approach to armament at European level, leading eventually to a European armament policy.

- But while there is still some reticence about agreeing that key questions such as defence procurement and associated research - traditionally matters for national decision - should also be addressed at a European level, there is growing recognition that decisions on the level of spending on defence equipment, re-setting priorities within existing defence budgets and the appropriate response to new threats need to be approached in a European context. Thus, welcome efforts to improve the coordination of research programmes and towards more cost efficient procurement arrangements, mainly through more intensified cooperation among certain Member States, are now being formalised through a number of different agreements.

Independently of the overall level of ambition which must necessarily be determined at the highest political level, failure to optimise expenditure on aerospace including its key components, research and defence, will limit future political options for Europe. Apart from the overall level of resources, fully coordinated investments in research and development and efficient procurement are key to delivering the necessary European capabilities, and to ensuring the contribution of a competitive aerospace industry.

Despite recent advances, progress is insufficient. To help overcome this problem, all available means have to be explored, including action, where appropriate at Community level, in order to remove the impediments to the competitiveness of European industry. Taking due account of the special characteristics of the defence and security sector, Community experience should be utilised in the situation in which the products and processes derived from technological development and innovation in practice do not distinguish between civil and security and defence applications.

On space capabilities, STAR 21 welcomes moves to develop a consolidated European space policy and a European space plan with adequate resources, in line with the joint strategy between the European Space Agency (ESA) and the European Commission (EC). The Galileo satellite positioning system must, however, be deployed on schedule with development of downstream activities, providing opportunities for early involvement of the private sector. Development of Global Monitoring for Environment and Security (GMES) must be continued with support from ESA and EC programmes. Equally important is the need for early action to sustain European launch capabilities and to explore applications of space technologies especially for communication and monitoring, including those required for security and defence.

Europe's political leaders are invited to seriously consider how to bring about the needed commitment to the increased resources and more coherent European framework required to meet Europe's existing and future political goals.

The European Advisory Group on Aerospace invites the widest possible response to its analysis and recommendations. It looks forward in particular to the reaction of those parties which are best placed to give effect to its recommendations, namely, the Member States and the Community Institutions. In the light of these reactions and other relevant developments, the Group stands ready to further contribute to the discussion.

C. Strategic Aerospace Review for the 21st Century

1. Achieving Europe's long-term goals

Europe faces the 21st century with high ambitions. It aims for a better quality of life and higher living standards, which in turn depend on its competitive strength. Its citizens are aware that events far from their own borders can have a profound effect on their lives, and they wish to exert greater influence for good in world affairs, as valued partners to friends and allies.

A flourishing aerospace industry is a key component in enabling Europe to realise its political and economic ambitions. Strong European aerospace capabilities have become indispensable to maintaining competition in world markets for a wide range of civil and defence products and safeguarding Europe's freedom of action in its external policies. The aerospace industry itself has restructured on a European level, so the issues which affect it should also be addressed from a European perspective.

Over the last few years European leaders have defined far-reaching goals which have major implications for the aerospace industry, setting targets for Europe's economic competitiveness and for the EU's foreign and security policy.

1.1. Competitiveness

The Lisbon Summit in 2000 set the ambition for Europe to become the most competitive knowledge-based economy in the world, achieving new levels of competitiveness by 2010. The 2002 Barcelona Summit took stock of progress in implementing the Lisbon Strategy and gave it new impetus. The development of the European Research Area following the Lisbon Council testified to Europe's continuing commitment to strengthening its technological capabilities by undertaking more effective research in common. This was also reaffirmed in Barcelona.

"The Union has set itself a new strategic goal for the next decade: to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion"

Lisbon European Council conclusion, 2000

"In order to close the gap between the EU and its major competitors, there must be a significant boost of the overall R&D and innovation effort in the Union, with a particular emphasis on frontier technologies"

Barcelona European Council conclusion, 2002

1.2. Security and defence

Since the end of the 1980s the geopolitical situation has changed dramatically. The end of the Cold War, the impact of regional conflicts such as that in ex-Yugoslavia and the emergence of the global terrorist threat leading to the war in Afghanistan illustrate the new challenges confronting Europe.

The aim of strengthening Europe's role on a changing world scene was expressed in the Maastricht Treaty of 1994, which established the European Union's Common Foreign and Security Policy (CFSP). The structure was further refined in the 1997 Amsterdam Treaty.

A European Security and Defence Policy was launched at the Cologne European Council in 1999, with plans elaborated in subsequent Councils at Helsinki, Feira, Nice and Laeken. Today's agreed goal of the European Union is to build up capabilities for humanitarian assistance, rescue, civil protection, policing, peacekeeping and combat-force tasks related to peace-making. The immediate aim is the creation of sustainable forces capable of the full range of Petersberg tasks (up to 60 000-strong), deployable world-wide within sixty days by 2003.

The implementation of such ambitious goals will depend on the availability of adequate structures and access to the equipment required. To safeguard its political independence Europe's industrial and technological capabilities - specifically in aerospace - must be strengthened.

"The Union must have the capacity for autonomous action, backed up by credible military forces, the means to decide to use them, and a readiness to do so, in order to respond to international crises..."

"We recognise the need to undertake sustained efforts to strengthen the industrial and technological defence base, which we want to be competitive and dynamic."

Cologne European Council conclusion, 1999

1.3. Matching ambitions and capabilities

These ambitions can only be met if the European economic and industrial structure is capable of responding to the challenges that lie ahead. Fulfilling these ambitions means looking into the future, anticipating developments and taking the appropriate policy decisions in the near term that will enable Europe to meet medium and long-term needs. Much remains to be done if Europe's capabilities are to match its political goals.

Aerospace is an industry accustomed to looking far into the future: a new generation of aircraft can take a decade or more from conception to realisation; a space project may take even longer; research into a new composite may mean a generation of work before it is ready for practical application. By the same token a long-term policy framework is essential if the aerospace industry is to provide the capabilities which are required to match Europe's goals. This is especially true of the defence side of the business, where governments are the sole customers.

The wellbeing of the industry depends on the twin pillars, civil and defence. They are complementary to each other but mutually dependent. Operating in civil and defence markets means sharing know-how, skills and products, enjoying economies of scale and the benefits of a broad product range. Both rely on the application of advanced technologies while serving private and public customers with different needs.

1.4. The STAR 21 analysis

Over the last 12 months the European Advisory Group on Aerospace has analysed these questions in depth, identifying the key areas which will determine the future of the industry. The Group welcomes progress which has already been made, but the political and regulatory framework which currently exists cannot effectively resolve the wide disparities between Europe's aspirations and its capacity to deliver the required results.

Based upon an assessment of the strategic role of the aerospace industry (chapter 2) and its profile (chapter 3), the Strategic Aerospace Review for the 21st Centruy (STAR 21) has identified five main areas that deserve specific attention: competing on world markets (chapter 4), the operating environment for European aerospace (chapter 5), European governance of civil aviation (chapter 6), the vital need for European security & defence capabilities (chapter 7) and safeguarding Europe's role in space (chapter 8).

STAR 21 aims to broaden understanding of aerospace-related issues in Europe and trigger action which will ensure that its aerospace industry can play a full part in securing Europe's economic and political future. Some of its recommendations require quick policy decisions, while others will be seen in a longer time-scale, but it is important to ensure that the necessary measures are taken. The monitoring and periodic assessment of progress in the areas examined in this report should help identify where further action is needed.

The aerospace industry has a key strategic role in ensuring a secure and prosperous Europe:

2. Strategic role of the aerospace industry

2.1. A generator of wealth

In 2000, the European aerospace industry employed 429 000 persons directly and many more indirectly, with a consolidated turnover of EUR72 300 million. Almost 15 per cent of turnover was spent on research and development. Exporting more than half its output, the industry provided a positive trade balance of about EUR1 900 million for the EU as a whole. Aerospace depends on an extended supply chain, including many small and medium-sized companies located in all 15 countries of the Union. This complex industrial structure makes aerospace a leading contributor to wealth and employment all across the EU.

2.2. Maintaining global competition

Strong European aerospace capabilities have become indispensable to maintaining global competition across a wide range of products. The outstanding example is Airbus, in whose absence airlines would be left with no choice in the most important market segment of the civil aerospace industry. Choice of supplier is also vital for cost-effective government procurement programmes for defence and security.

2.3. Home to key skills and key technologies

Aerospace integrates and promotes the development of a wide range of skills, processes and technologies vital to maintaining a broad-based and prosperous economy. Prime manufacturers depend on a network of second and third tier specialist companies to meet their needs. These firms, operating at many different levels of the industry, are home to the key technologies essential for Europe's future.

2.4. Driver of innovation

The aerospace industry is a powerful driver of innovation in the economy as a whole. It makes extreme demands on its products, requiring simultaneously safety and reliability, low weight, good economics and minimal environmental impact, enhanced power and high efficiency. The technologies developed for aerospace products provide spin-off in many different sectors.

2.5. Services from space

European industry has played a leading role in developing new services which rely heavily on space infrastructures, ranging from telecommunications to navigation and earth observation. Transport, telecommunications, media and other sectors of the economy including public bodies benefit from these capabilities, stimulating in turn innovative downstream activities.

2.6. Security and defence

Aerospace is an essential contributor to any national or supra-national system of security and defence. Its products, which include aircraft, space technologies, electronics, engineering systems and sub-systems, are crucial for domestic security as well as providing the capabilities for realising policy aims in neighbouring and in more distant parts of the world. A competitive aerospace sector is vital for any nation or region wishing to maintain full sovereignty over its territory, to exercise political influence beyond its borders and to have available to it the necessary range of political choices and options.

Four governing principles for Europe's aerospace industry

2.6.1. Aerospace is vital to meeting Europe's objectives for economic growth, security and quality of life. It is directly associated with, and influenced by a broad range of European policies such as trade, transport, environment and security and defence.

2.6.2. A strong, globally competitive industrial base is essential to provide the necessary choices and options for Europe in its decisions as regards its presence and influence on the world stage.

2.6.3. European aerospace must maintain a strong competitive position if it is to play a full role as an industrial partner in the global aerospace marketplace.

2.6.4. Europe must remain at the forefront of key technologies if it is to have an innovative and competitive aerospace industry.

3. The aerospace industry profile

The European aerospace industry is one of the world's leaders in large civil aircraft, business jets and helicopters, aero-engines and defence electronics. It accounts for one third of all aerospace business world-wide in terms of turnover compared with almost half for US industry.

The industry is difficult for new participants to enter, especially at prime level. Where the technology, the skills and the infrastructure are eroded or disappear, they are extremely difficult to re-create. New entrants are not therefore expected to play an important role in the foreseeable future. In most markets it will be US and European companies which will continue to supply the needs of customers world-wide in what is a highly competitive marketplace.

Certain key factors give the industry its distinctive character:

- close links between civil and defence activities

- cyclical nature of the industry

- high level of capital intensity

- consolidation

- privatisation

- EU-US relationships

3.1. Civil and defence links

The two sides of the business are closely intertwined. Major components such as electronics, engines and materials, and also key processes, use similar technologies. The synergy between civil and defence work brings major industrial benefits, creating economies of scale through the absorption of high fixed and non-recurring costs. While the civil aerospace sector has traditionally been dependent on technologies developed for military applications, military technologies are increasingly being derived from the civil side, which has a much higher rate of new product introduction. Sustaining a viable aerospace industry to serve the needs of civil markets is intimately linked to maintaining its capabilities in the security and defence fields - and vice versa.

The links between the civil and defence aerospace sectors are poorly understood and recognised within Europe, especially compared to the US.

3.2. The industry's cyclical nature

Aerospace is a highly cyclical industry, dependent mainly on the investment decisions of the airlines and on the fluctuating patterns of defence programmes. The strong inter-relationship between the civil and defence sectors in many firms means that in addition to the technological synergies, the different cycles of civil and defence programmes allow companies to balance their development resources more effectively.

The development and increasing market penetration of the Airbus family was an invaluable counterbalance to declining defence budgets in the 1990s. The slump in air transport following 11 September 2001 may pose a similar but opposite challenge, with defence and security requirements offering de facto some counterweight to the slowdown in airline orders.

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3.3. A capital-intensive industry

Aerospace is a highly capital-intensive industry investing for the long term. The level of investment in research and technology, product development and capital facilities as a proportion of turnover for airframes, engines, ground and airborne equipment exceeds that in many other industries. At the same time, returns are inherently long-term and high risk, which restricts the appetite of the financial markets. As a result government support, including research and development funding, repayable loans and risk-sharing partnerships, has become an essential feature of the business world-wide.

3.4. Consolidation in the European industry

The aerospace industry continues to consolidate. The concentration process which began in the US, leaving Boeing, for example, as the only US manufacturer of large civil aircraft, has since extended to Europe, reflecting the call from French, German and British leaders in December 1997 for major industrial consolidation. Companies have seen the need to combine resources in new configurations to meet the challenges of global competition and to respond to orders for transnational projects, both civil and defence, which are increasingly being undertaken on a pan-European basis.

This process has resulted in significant industrial restructuring across European borders. Development and production of airliners, military aircraft, helicopters, missiles, satellites and aero-engines are now in the hands of major enterprises operating at the European level, such as Airbus, Astrium and MBDA.

3.5. Privatisation

In several countries relations between governments and aerospace companies have changed significantly. Formerly state-owned companies are now partly or wholly in the private sector, quoted on stock markets and committed to providing value for their private shareholders. These companies clearly cannot exist only on their restricted home markets and increasingly have developed long-term strategies that make best use of their resources and secure market access on a global scale. This will often lead European companies to strengthen their non-European links through takeover, merger or outward investment, which could in turn lead to the disappearance of European capability in some sectors and might even endanger European security of supply. Such action can be influenced strongly by access to more attractive funding or taxation regimes.

The mobility of research and industrial programmes in the face of differing international support regimes poses a major challenge for European policy-makers. Enterprises such as BAE Systems, Rolls-Royce, SNECMA and THALES provide examples of European companies undertaking major activities elsewhere in the world.

3.6. EU-US relationships

US aerospace companies account for about half of the industry's global turnover. The sales of Europe's industry are just over two-thirds those of US manufacturers. The global dominance of the US industry is particularly evident at prime contractor level.

This industrial structure reflects the advantages of the US aerospace environment. American companies operate in the world's single largest home market. They also benefit from a highly supportive operating framework, which is designed to underpin a declared policy aim which dates back many decades: to maintain US supremacy in aerospace.

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It is evident that Europe's policy aims are different from those of the US. This translates into fundamentally different levels of government purchases from the aerospace industry, with the US Department of Defense and government agencies buying $60 300 million of goods and services from US manufacturers in 2000 as against $15 900 million spent by the 15 EU governments on European contracts.

Another beneficial aspect of US policy is the spin-off from military research and development to civil aircraft programmes and in some cases the direct derivation of civil planes from military projects.

US spin-off from military to civil use

Examples of directly transferring design of military aircraft to civil projects are the B 707 and B 747, where the design teams which had worked on the KC-135 tanker and the C-5A military transport bid transferred to development of the civil aircraft. Another is the civil freighter MD-17, which was derived from the C-17. Design tools used by Boeing in preparing to bid for the Joint Strike Fighter contract were also to be used in civil programmes, according to the company's Chief Executive. In the aero-engine sector, US government-funded development of turbine technology applicable for both civil and military engines may well result in more civil than defence sales.

European companies cannot afford to ignore the tremendous potential that the American market offers. They have to rethink their own future investments. But intense transatlantic competition, especially between Airbus and Boeing, should not obscure the high degree of transatlantic co-operation. This is particularly true for civil aerospace products. Subcontracting and procurement, production, joint ventures and mergers across the Atlantic are natural developments in an industry serving global markets. It is expected and welcomed that such links will play an even bigger role in the future.

The Transatlantic Relationship

* Airbus procures a large amount of equipment in the US, including engines (GE and P&W) and systems. As a result, up to 40 per cent of a new Airbus may well be made in the US. Development of the A 380 could sustain up to 60 000 jobs there.

* European companies are developing and producing major components and sub-systems for Boeing aircraft.

* European engine manufacturers like Rolls-Royce , SNECMA , MTU and FiatAvio are involved in engine programmes in both the EU and the US, even on competing products.

* CFMI, which is a 50/50 subsidiary of SNECMA and GE, manufactures a highly successful range of aero-engines.

* THALES and Raytheon created a joint US-based, 50/50 company (TRS) in 2001.

* BAE Systems has an overall $4 billion business in the US. The company will also have an 8 per cent share in the Joint Strike Fighter (JSF) programme and its development.

* Rolls-Royce has significant operations in the US and will also be involved with the JSF development.

4. Competing on world markets

Fair conditions in international trade and access to markets are essential pre-conditions for ensuring competitiveness-based growth in aerospace.

4.1. Fair conditions in international trade: a level playing field

Operating in a global market place, the European aerospace industry faces strong competition from companies located in other parts of the world, mainly in the US. Given the profile of aerospace, governments have always played an important role in this business. Public support takes differing forms such as protection of domestic markets, support for exports, taxation or direct/indirect funding. Against this background, a fair balance in international support practices and rules is crucial to guarantee a level playing field.

International trade agreements play a key role in this respect. As far as civil aircraft are concerned, two agreements are predominant: The 1979 GATT Agreement on Trade in Civil Aircraft, and the (bilateral) 1992 EU-US Agreement on Trade in Large Civil Aircraft. This agreement regulates precisely the forms and level of government support for both sides, provides for transparency and commits the parties to avoiding trade disputes.

Mutual recognition and respect of international trade obligations, including the implementation of WTO rulings, is necessary to allow balanced competition among aerospace companies in different parts of the world.

Access to markets can be substantially hindered through import and export barriers for foreign companies. This is a particular problem if the protected market is a major one, such as the US defence equipment market. European manufacturers face two particular problems with US policy:

4.1.1. Due to restrictive rules which are embedded in many individual pieces of legislation at both federal and state level, such as the Defense Federal Acquisition Regulations, the US market is difficult to access. In practice this reflects a 'Buy American' policy.

In 2001, US Congress approved legislation in which it explicitly limited the procurement choice of the Department of Defense to commercial Boeing aircraft (Section 8159 of the Defense Appropriation Bill - HR 3338). This piece of legislation would effectively exclude the purchase of an Airbus air tanker even if the enterprise offered a competitive product.

For the foreseeable future, any US Government space payload will have to be launched on equipment manufactured in the US, unless it is exempted by the President or his designated representative.

4.1.2. The US has stringent export rules which forbid unrestricted export of equipment by foreign countries if this equipment includes components covered by the US military and dual use regulations. These export controls are being reviewed by the US authorities, but so far on a bilateral basis with selected countries like Australia, Canada and the UK.

As the European industry becomes increasingly transnational, US export control rules need to be relaxed through a dialogue which brings together as many European countries as practicable. This transatlantic dialogue should initially be based upon ongoing bilateral discussions at industry level with six European countries (UK, France, Germany, Italy, Spain and Sweden) which were signatories of the European Defence Industry Restructuring Framework Agreement established in 2000 by a Letter of Intent (LoI) for cooperation in the defence field.

* Shipment to China of an Astrium APR3 satellite for launch by a Chinese rocket in July 2001 was blocked by delayed provision of export clearance from the US authorities because the satellite included US components. Six receivers on the satellite were to be used by a Chinese operator.

* Exported US-built warplanes which are to be equipped with non-US Electronic Warfare Systems must have the equipment installed by the US contractor, which must also supply certain key components. The US Air Force must have insight into total system capabilities and approve the installation.

* Dassault Aircraft was denied the licence to integrate the AMRAAM air to air missile on the Rafale for sales to South Korea, thus weakening the offer in the ongoing competition with US competitors.

Although the European and American industry associations have been working together to resolve some of these issues, further progress can only be made with a clear political will and the involvement of governments. Wherever barriers to trade exist, they should be relaxed to guarantee fair reciprocal market access.

4.2. Developing international co-operation

Over the next decades, experts predict a significant change in regional demand patterns. Almost half the demand for civil aircraft over the next 20 years is projected to arise outside the large but relatively mature markets of the US and Europe.

Market access everywhere depends on commercial factors such as quality, price and service, but also on the building of more broadly based political and diplomatic relations. Given its role in international relations, a major responsibility for these issues rests with the EU. The aviation co-operation agreements between the EU and China and the EU and India are examples of strengthening relations. Another is the recently launched EU-Asian Civil Aviation Cooperation project.

Changing market patterns will have an impact on the structure of the aerospace industry. Achieving better access to growing markets may well require moving manufacturing capacity there. As mainly lower added-value manufacturing might move to these markets in the first instance, the established aerospace countries will need to concentrate on sophisticated technologies.

A joined-up approach, which links competitive products and effective marketing from industry with strengthening relationships at the political level, has proven important for aerospace to strengthen its position in world markets. European policies have a major role to play in this respect.

STAR 21 recommendations on world markets

* Ensure a level playing field so Europe's industry can compete fairly in world markets.

* Improve access to world markets, especially that of the US.

* Seek wider agreements to simplify export controls on products with US components.

* Ensure fair reciprocal market access.

* Continue developing international co-operation programmes.

5. The operating environment for European aerospace

A broad range of policies determines the operating environment for Europe's aerospace industry. Some emanate from the European Union, while others are largely determined at the national level. Areas of major concern for the industry are competition policy, taxation, skills and mobility, enlargement and research.

5.1. Competition policy

The process of restructuring in the defence and aerospace industries has led to an increasing number of mergers and other cooperative agreements between companies within the European Union. These industries have passed from a phase of consolidation at national level to a new phase of pan-European consolidation. This development enables European industry to meet the requirements of dynamic competition and increases the competitiveness of European industry, in both civil and defence areas.

European Union competition policy and in particular the Merger Control Regulation provides for a clear framework and quick decisions, facilitating those concentrations and cooperative agreements between companies which do not call into question effective competition. Moreover, EU control of state aids makes it possible to distinguish between those aids necessary for research and technology development and unlawful aids designed to protect uncompetitive firms.

In applying EU competition policy to aerospace there are particular features to be taken into account in individual cases. Such features concern specificities such as market definition, possible dominance, or negative influence on future innovation. In particular as far as defence-related activities are concerned, relevant aspects might include:

- National government limits on the geographical scope of the markets by procurement rules and administrative procedures (although competition may increasingly be at a European or even a global scale).

- Exercise of the countervailing power of the State as sole customer.

- Instances where Europe may only be able to sustain a single entity capable of competing globally in a phase of pan-European and world-wide consolidation.

5.2. Tax incentives for innovation

As part of a wider policy mix, tax incentives for research investment are a stimulus for innovative work which will not deliver immediate returns. Such tax concessions are part of national corporation tax regimes. They vary significantly, both within Europe and compared with other parts of the world. They are an important policy instrument to promote innovation in industries with high research and technology investments such as aerospace.

In Canada, qualifying R&D attracts a proportional tax credit, which is offset against the tax payable on that year's profits. Some provinces have additional incentives. For instance, Quebec gives a tax credit proportional to the amount spent on R&D spent on salaries in the Province.

European countries must recognise the impact which tax incentives for research have on industry's decision where and how much to invest.

A useful avenue would be to analyse the impact of different taxation schemes on aerospace within Europe and to compare them with jurisdictions outside Europe. The long lead times common to high-tech industries and the pan-European nature of aerospace should be taken into account, as substantial differences in European research tax regimes might also distort investment decisions. Possibilities for applying tax and other incentives to promote innovation on a Europe-wide basis should be considered, if necessary through coordinated national actions so as to avoid distortions of competition.

5.3. Safeguarding skills

A 'skills gap' in aerospace could prove a major obstacle to the industry's future growth and competitiveness in Europe. Rapid technological change and increased competition underline the need for a creative, innovative and adaptable workforce. Safeguarding and further developing a strong European skills base will be a key factor in maintaining global competitiveness and retaining investment in Europe. The overall performance of education and training systems must therefore be improved, within a lifelong learning perspective, to provide a better balance between initial and continuous vocational training, and to build bridges between different learning contexts. As such, full use should be made of knowledge and skills acquired in both formal and non-formal settings. Signs that highly qualified personnel are proving increasingly difficult to recruit raises particular concerns.

Initiatives to improve the aerospace skills base in Europe

Hamburg's 'Qualification Programme' Task Force: The regional aerospace and aviation industries, the federal employment office, educational institutions and the City of Hamburg have jointly developed supplementary aerospace training schemes to secure a long-term qualified workforce.

The Qualification Programme encompasses basic apprenticeship schemes ('aircraft electrician' and 'aircraft mechanic') and dedicated advanced vocational training programmes. In February 2002, the first class on aeronautic technology started at Hamburg's public vocational training school for product engineering and aeronautics technology. It has been designed for specialists who already have several years of experience in aerospace. A specific training programme on technical English, aviation law and aircraft technology - supported by the European Social Fund and the City of Hamburg - has been specifically developed for staff from small and medium sized suppliers. The Hamburg University of Applied Sciences offers various programmes on 'Aviation Construction', including a postgraduate programme for fully employed engineers not yet working within aviation. The Technical University Hamburg-Harburg has developed training modules for young professionals already working in aerospace with the support of the European Union.

In Italy similar initiatives have been developed between industry, universities and authorities, specifically in the areas around Turin, Naples and Pisa. They encompass both basic and vocational training schemes.

Actions to tackle the threat of a skills gap need therefore:

- Increased cooperation between a broad range of relevant actors, including public bodies and the industrial partners on different levels to develop and implement measures aimed at improving transparency and recognition of diplomas and certificates, as well as the overall quality of European vocational education and training in terms of standing and reputation. Such measures should include life-long learning schemes and vocational training programmes.

- An effective inter-link between research institutes and the training system.

5.4. Facilitating mobility

As the industry consolidates on a European scale, personnel mobility becomes a significant factor. Although workers may be asked to relocate to another country as the tasks move, the absence of a common set of labour laws and regulations in Europe and the limited recognition of foreign academic diplomas are serious obstacles to such cross-border mobility. European aerospace companies with activities in several Member States feel the effects of such inconsistencies. Cross-border programmes such as Eurofighter require considerable worker mobility between specialised production centres located in various European countries. Exemption periods are short and the bilateral character of the existing agreements does not reflect the reality of a truly European industry.

The European Commission addressed these issues in its recent Action Plan for Skills and Mobility and called for immediate action to remove practical, administrative and legal barriers to mobility. The need to improve recognition of qualifications through the development of mutual trust and transparency was highlighted as a priority for action at European level. Aimed at addressing this issue, a process of increased cooperation between the Member States, other European countries, and the social partners has been initiated following a mandate from the Barcelona European Council in March 2002.

The Commission also specifically pointed out the negative effect which the existing social security and pension schemes can produce.

However, as common European social security and taxation systems are not expected to emerge in the near future, targeted remedies which reflect the particular nature of the aerospace industry are needed to improve the existing situation. With regard to taxation systems, thus far only bilateral agreements between individual Member States (e.g. France-Germany) exist, and they are limited in time. They allow the transferred worker to pay taxes in her/his country of residence. With regard to social security systems a Community coordination system is in place guaranteeing social security rights for persons moving within the Union and determining the systems to which they are subject. This is in principle the system of the Member State where they work. There are however some exceptions, such as in case of posting staff from one Member State to another (up to 12 or 24 months). This coordination system is now under review and should be simplified and adapted to new situations.

Security clearance of staff working on defence programmes in different Member States imposes further problems. Existing national legislation has not yet been adapted to the cross-border nature of major aerospace programmes. Such regulation must be streamlined to prevent unnecessary bureaucratic burdens.

Security clearance for personnel working on multi-national programmes such as Eurofighter is complicated by different procedures and delays in their countries of origin, which have to provide the clearance for the individuals concerned. The LoI Framework Agreement for Defence Restructuring has provided some relief for visiting staff, but the clearance provided is still not sufficient to meet NATO requirements.

To facilitate the cross-border mobility of the European aerospace workforce several actions are needed:

- Posting periods for social security schemes need to be extended. Airbus experience suggests that at least 12 years would be appropriate.

- The existing bilateral agreements between the social security schemes of individual Member States should be broadened into a wider cross-border European context.

- European aerospace staff working on defence projects in different European countries should be subject to harmonised security clearance procedures.

5.5. Enlargement of the EU

Accession to the European Union of countries in Central and Eastern Europe will present challenges and opportunities for Europe's aerospace sector. There is an aerospace industry tradition in countries such as Poland, the Czech Republic and Romania. EU firms have already developed specific business relationships with local companies. Opportunities for risk-sharing and partnership in new programmes have also been discussed.

Sharing common standards is key to strengthening the dialogue. Work is already under way with the aerospace industries of Poland and the Czech Republic to share in-depth knowledge and best practices in areas such as quality control, standardisation and airworthiness. Mutual recognition in these fields and compliance with EU standards is a prerequisite to closer business relationships.

An initiative for training on European civil aviation legislation and Joint Airworthiness Requirements (JARs) in Central and Eastern European countries was launched with the support of the European Commission in March 2002.

The goal must be to develop fruitful long-term commercial and industrial partnerships, to pave the way for strong collaboration and integration with European industry and assist the industry in these countries to become effective partners in the aerospace business. The European Union should look at ways of further fostering this integration process, through, for example, support for training in foreign languages or management skills.

5.6. Civil aeronautics research : key to long-term viability

Aerospace requires significant, long-term research commitments, as today's innovation is key to future competitiveness. More than half of the EU Member States support national aeronautics research programmes while at the same time European funding has become increasingly important. European research framework programmes now account for about 30 per cent of all public spending on civil aeronautics research in Europe.

However, the pan-European structure of the aerospace industry and the importance of cross-border projects are not yet reflected in the approach to research funding in Europe. The 6th European Framework Programme, running over five years, proposes to allocate EUR1 075 million to aeronautics and space research, but Member States will also continue funding their national programmes. More coordination between all different research schemes is needed to overcome the current fragmentation of civil research activities in aeronautics and to minimise unnecessary duplication of effort. As funding levels are tight, such efforts are essential to guarantee the resources needed for major research projects.

In January 2001, a High Level Group led by Commissioner Busquin presented its analysis of the existing situation ("European aeronautics: A vision for 2020" - Vision 2020) stressing the need for action. The report called for the realisation of a European Research Area in aeronautics, based upon a common understanding of priorities between all stakeholders. First concrete steps have been taken through the work of the Advisory Council for Aeronautical Research in Europe (ACARE).

ACARE's mission is to establish and maintain a Strategic Research Agenda tha