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 Ares(2020)6881565 Ares(2020)2856338         - 18/11/2020 - 03/06/2020 Position Paper COVID-19: Proposals for EU Relief Measures for Aerospace, Defence and Security Industries 2 May 2020

Position Paper Executive Summary The COVID-19 pandemic represents an unprecedented crisis and has led to a sharp downturn of the world economy. In order to fight the spread of the virus, governments around the globe have put their economies and societies into an artificial coma, from which it will be difficult to awake and recover. In the past weeks, both the European institutions and Member States have taken important decisions to help industry in Europe to survive this shock. However, the way out of the crisis will be long, and much remains to be done to support the recovery process. Given the magnitude of the crisis, common European action is more important than ever. What we need is a European Union able to mobilise sufficient resources to support Member States, and able to deploy new and innovative instruments that meet the requirements of this historical challenge. All measures must be coordinated under a coherent and ambitious European Recovery Plan (ERP). To make a difference, this recovery plan needs to mobilise big money and focus on things that really matter for st Europe’s competitiveness in the 21 century. Aerospace, defence and security should qualify as strategic sectors in this Recovery Plan. Together, they form a truly European high-tech ecosystem that is not only a major contributor to growth and innovation, but also essential for Europe’s technological sovereignty and strategic autonomy. This ecosystem should therefore rank high on the priority list of the future ERP. Priority must be to ensure that aerospace, defence and security companies continue to operate during the height of the crisis and recover rapidly when things begin going back to normal. Support measures under the ERP should therefore have as Short term objectives: guarantee business continuity through protection of staff, transfer of components and subsystems, etc. and financial stability with dedicated guarantee schemes and direct state aid in particular for SMEs, continuation of procurement and research programmes, etc.; Long-term objectives: boost innovation, strengthen strategic value chains and foster technological sovereignty. This requires in particular a substantial increase of the MFF budget, major investments in key technology areas, an ambitious and comprehensive industrial policy and careful screening of Foreign Direct Investments. Since aerospace, defence and security markets are very different in nature, they are also affected differently by COVID-19. The ERP must take these specificities into account. We have identified the following sector-specific measures as particularly important: Civil aeronautics x   Financial support to customers (airlines, other aircraft operators and air navigation service providers) to avoid bankruptcies with knock on effects on the entire civil aviation value chain; x   Financial support to aeronautical supply chain companies through a specific equity based European Fund for civil aeronautics; x   Safeguard of European Financial Instruments like repayable launch aid Instruments to defend a level playing field vis-à-vis the US and China and preserve European industry’s ability to finance new civil aeronautics programmes; x   A European Aviation and Aeronautics “Marshall Plan” to support a sustainable aviation roadmap, consisting of three elements: o increased public funding of Research & Innovation in Clean Sky and SESAR; o a green incentive scheme for airlines and aircraft operators to replace older aircraft (fixed wing and helicopters) with more modern and environmentally friendly aircraft; o a European public investment plan for Sustainable Aviation Fuels (SAF); I

Position Paper x   Investment in the European Air Traffic Management system (ATM): make aid to air navigation service providers subject to continuous investment in technologies and infrastructure (SESAR), provide 100% public funding and implement incentives for SESAR deployment. Defence x   Continue PADR and EDIDP and be flexible in project management (extended timelines, pre- financing and accelerate payments wherever possible); x   Get the European Defence Fund ready for 2021 with an ambitious budget at least at the level initially proposed by the European Commission (€13bn); x   Use EDF strategically to support key capabilities and reduce technological dependencies; x   Facilitate uptake of emerging technologies through synergies with civil research programmes; x   Support strategic defence value chains with financial and regulatory measures; x   Facilitate access to finance under the InvestEU programme through the design of defence- specific financial products. Security x   Include a specific security dimension in the European Recovery Plan: Support public authorities and economic operators during the pandemic against security threats (cyberattacks, disinformation, etc.); use recovery to enhance resilience against natural and man-made disasters; x   Increase security budgets to address capability gaps that COVID-19 has revealed (common crisis management system, common equipment pool, unified standards…); x   Systematically include resilience as a priority in EU funding programmes; x   Implement the Cyber Strategy with an appropriate funding for the protection of digital systems; x   Develop a comprehensive and ambitious security industrial strategy that aims at European technological sovereignty in key security areas; x   Invest in research on low probability – high impact events; x   Establish a permanent European Security Board with experts from security industries and critical infrastructures to advice the European Commission on the entire security cycle (from prevention to containment, response and recovery). Space x   Mandate the European Space Agency (ESA) to implement its relief measures also for the EU programmes that are delegated to ESA (Galileo, Copernicus, EGNOS); x   Continue ongoing bidding processes for EU flagship programs (Copernicus, Galileo); x   Support the Space programme under the next MFF at least at the level initially proposed by the European Commission (€16bn) to allow for both full deployment, exploitation and evolution of the flagship programmes and launch of the new initiatives Govsatcom and SST; x   Devise, with industry, a recovery plan that would aim at developing new enabling space-based services contributing to the general European economic recovery (contribution of space infrastructures to a Digital Europe and to the Green Deal objectives); x   Support Space R&D and innovation via Horizon Europe with a significant dedicated budget and an efficient implementation mechanism (co-programmed partnership). Focus on Industry competitiveness and non-dependence of Europe, define work programmes on the basis of the Strategic Research and innovation Agenda supported by Industry. II

Position Paper Contents Introduction ................................................................................................................................................. 1 A.    Priorities of all ASD sectors ................................................................................................................. 2 1. Short-term priorities............................................................................................................................. 2 1.1 Business Continuity ........................................................................................................................ 2 1.2 Financial support ............................................................................................................................ 2 1.3 Public investment ........................................................................................................................... 3 1.4 Foreign Direct Investment .............................................................................................................. 3 1.5 REACH ............................................................................................................................................. 3 2. Mid- to long-term priorities ................................................................................................................. 3 2.1 A European Recovery Plan ............................................................................................................. 3 2.2 A European Union that delivers ..................................................................................................... 4 2.3 An ambitious Multi-Annual Financial Framework .......................................................................... 4 2.4 Review EU policies and programmes ............................................................................................. 4 B.    Sector specific priorities ...................................................................................................................... 5 1. Civil Aeronautics .................................................................................................................................. 5 1.1 Immediate and short-term (2020) ................................................................................................. 6 1.2 Mid- to long-term (2021+).............................................................................................................. 8 2. Defence ................................................................................................................................................ 9 2.1 Immediate and short-term (2020) ............................................................................................... 10 2.2 Mid- to long-term (2021+)............................................................................................................ 10 3. Security .............................................................................................................................................. 11 3.1 Immediate and short-term (2020) ............................................................................................... 11 3.2 Mid- to long-term (2021+)............................................................................................................ 12 4. Space .................................................................................................................................................. 14 4.1 Immediate and short-term (2020) ............................................................................................... 14 4.2 Mid- to long-term (2021+)............................................................................................................ 16 I

Position Paper Introduction The COVID-19 pandemic represents an unprecedented crisis and has led to a sharp downturn of the world economy. Air traffic was one of the first and hardest hit sectors: Flights have been reduced by more than 90% in Europe and worldwide, airlines grounded (almost) their entire fleets and suffer dramatic losses of revenue, with immediate knock on effects on the entire civil aviation value chain. It is totally unclear if and when air traffic reaches again pre-COVID-19 levels, and how many airlines will survive this crisis. As a result, the demand for new civil aircraft has slowed down enormously. This has dramatic consequences for the aeronautics industry, which is one of the European Union’s key high-tech sectors. It is important in economic terms, but also in strategic terms, as it is closely linked to the defence, security and space sectors, which are crucial for achieving Europe’s technological sovereignty and strategic autonomy. Civil aeronautics, defence, security and space have multiple strong links and form in many ways a common ecosystem. Many companies of this ecosystem have activities in more than one of these sectors and are part of a complex web of supply chains that spans across all EU Member States and beyond. Within this ecosystem, civil aeronautics is the economically most important pillar in terms of revenues and employees. It is also particularly hard hit by COVID-19, which has provoked a sudden and totally unexpected collapse of its worldwide customer base. Defence, security and space companies are concerned by supply chain disruptions and infection of critical staff. At the same time, they serve exclusively (defence) or to a considerable degree (security) public customers and have, therefore, not (yet) experienced a comparable market meltdown. However, the risk is real that defence and security will suffer severely from the economic fall-out of the pandemic when public budgets get under heavy pressure. This would be particularly dangerous as there are no indications that the security environment in and around Europe will improve after the COVID-19 crisis. The links between the four sectors offer both risks and opportunities: given its economic weight, a complete breakdown of civil aeronautics would undermine the basis of the ecosystem as a whole and, thereby, drag down defence, space and security as well. Europe would not only lose one of its few hi-tech sectors where it is a world-leader, it would also affect the industrial basis for its aspired technological sovereignty in key strategic areas. At the same time, the differences between the sectors of the ecosystem can be turned into an advantage. Defence and security markets are not big enough to compensate for the implosion of the commercial business. However, since they are (mainly) public markets, the EU and its Member States can use their procurement and research budgets to support these two strategic sectors directly. This would also contribute considerably to stabilising the civil aeronautics sector until the global commercial business recovers from this crisis. Since aerospace, defence and security industries are of strategic importance for Europe, it is an essential interest for the EU and its Member States to ensure their survival. Given the diversity of the ecosystem, specific measures are necessary for each of these sectors. At the same time, these measures should be coordinated and follow a holistic approach to exploit the opportunities that the different market conditions of each sector offer. Coordination between the EU and its Member States is crucial to ensure timely and effective implementation, and to ensure a level playing field within the EU. Over the last weeks, the European Commission, the European Central Bank and Member States have taken important decisions to protect European citizens and businesses in this unprecedented crisis. However, further action is needed, and time is of essence: Many companies, most notably SMEs, across Europe are struggling for economic survival and may have to close down before the anticipated recovery. Page | 1

Position Paper Therefore, it is essential that already agreed measures are implemented as fast as possible and without bureaucratic burden. At the same time, we must start immediately to prepare an ambitious recovery plan for the time after the general shutdown. In the first part of this paper, we have listed the most urgent immediate needs that are common to all ASD sectors and identified some general elements for a future recovery plan. In the second part, we have done a more detailed analysis of short-term and mid-term needs of each sector. We hope this contribution will be useful for decision-makers in the EU and Member States. ASD stands ready to support the EU institutions in their efforts to find the best way out of the COVID-19 crisis. A. Priorities of all ASD sectors 1. Short-term priorities 1.1 Business Continuity Aerospace, security and defence industries develop products and provide services that are used to fulfil the core functions of the state. It is therefore crucial to ensure that their production and maintenance, repair and overhaul (MRO) activities can continue during the COVID-19 crisis. Such continuity is essential to ensure that companies can support public authorities in their fight against the pandemic. It is also important economically, as it mitigates companies’ current cash-flow problems. The main precondition for business continuity is health and safety of staff. This necessitates, amongst others, rapid delivery of infection protection material and the use of new tools and processes for secure remote working. To ensure the functioning of cross-border supply chains during the crisis, the European Commission should coordinate measures taken by Member States. It could in particular issue guidance for infection protection protocols for on-site operations applicable throughout the EU to all companies of the same sector (e.g. use of masks, minimum distance between workers, cleaning and disinfection frequencies). The European Agency for Safety and Health at Work could play an important role here. Equally important for business continuity is the quick re-establishment of the single market for cross- border logistics (flight, land transport, shipping and personnel) and delivery flights. Derogations from travel restrictions for third country citizens should be granted for customers who need to enter the EU to take delivery of European products and/or get their products maintained. 1.2 Financial support With severe problems on both supply and demand side, companies face pressing liquidity shortages. Pressure is on the whole supply chain, but urgent support with dedicated guarantee schemes and liquidity is needed in particular for lower-tier companies and SMEs. Industry therefore appreciates the Temporary Framework for state aid measures to support the economy in the current COVID-19 outbreak. We welcome the flexibility that the Framework provides, and the fast clearance of state aid measures since then. At the same time, we believe that the limit of €800 000 for direct grants, tax advantages and advance payments should be increased, and the risk period covered by public export credits extended. Equally important is an effective coordination of national support at the EU level to avoid supply chain disruptions and negative effects on competitiveness. Given the gravity of the economic situation, we also appreciate the possibility to extend the Temporary Framework beyond 2020 if needed. Page | 2

Position Paper We expect the recovery of the European economy to be arduous and long. This is true in particular for our sectors, which will face even more pressure from heavily subsidised competitors in other parts of the world. We therefore encourage the European Commission to set up as soon as possible a watchtower on support measures taken in third countries. The European Investment Bank (EIB) and financial institutions are also crucial to provide liquidity to companies. The European Central Bank (ECB) should be as inclusive as possible when devising its eligibility rules for Euro-Commercial Papers issued by non-financial companies. The EIB instruments should be widened to direct equity participation, if relevant, or zero percent loans. It should also fully exploit its existing possibilities to financially support dual-use SMEs and revise its lending policy to allow the support of defence activities. 1.3 Public investment Both the European Union and Member States are important customers and sponsors of the European aerospace, defence and security industry. As such, they can contribute to mitigating companies’ current cash flow problems. Most important is therefore to maintain already planned and ongoing procurement and research projects during the COVID-19 crisis. At the same time, management of these projects should take into account the difficulties that companies currently face. This implies flexibility in terms of funding rates, deliverables and timelines, as well as the full use of pre-financing mechanisms, accelerate payments and advanced payments. 1.4 Foreign Direct Investment With stock market values low, and cash-flow problems ahead, European companies may become easy targets for undesirable takeovers by third-country investors who pursue a strategic agenda. This is particularly important in strategic sectors like aerospace, defence and security. ASD therefore fully supports the recent Guidance concerning enhanced scrutiny and vigilance toward foreign takeovers. We urge the Commission to accelerate the launch of the Cooperation Mechanism under the FDI Regulation and to rapidly engage with Member States on further EU measures for the protection of strategic European assets. 1.5 REACH ASD remains committed to the intent and relevant provisions of the REACH legislation. However, in light of the crisis and its impact on industry resources, there is a need to slow down the update of its Candidate List, the update of its Annex XIV, or the preparation of proposals for new substance restrictions. Separately from REACH, it would be beneficial for industry to have a deferral of the date for inputting data in the European Chemicals Agency Substances of Concern in articles as such or in complex Products (SCIP) th database, due on 5 January 2021 under the EU Waste Framework Directive (WFD). This database will require heavy data gathering and processing, costly IT infrastructures adaptation and dedicated human resources for it, which at the moment the industry cannot afford. 2. Mid- to long-term priorities 2.1 A European Recovery Plan At the time of writing, all efforts are focused on fighting the spread of the virus, reducing the number of fatalities, helping companies to survive the general shutdown and preparing a roadmap for lifting restrictions. The way back to normality will be long, and it will take a lot of time and efforts for the economy to awake from its current coma. This will be the case also for the aerospace, defence and security Page | 3

Position Paper sector. It is therefore essential to start immediately to develop a coherent and ambitious recovery plan for the years to come. 2.2 A European Union that delivers The European Union will play an essential role for the recovery of Europe’s economy. What we need now is a Union that is able to mobilise sufficient resources to support Member States, and to deploy new and innovative instruments that meet the requirements of this unprecedented crisis. The success of the recovery plan will depend on how much money is spent and under which conditions, but also on what. Here, it will be crucial to focus investment on key technologies and strategic areas that can strengthen Europe’s long-term competitiveness. Moreover, these investments must be accompanied with the appropriate legislative and regulatory measures to support trade, growth and employment. 2.3 An ambitious Multi-Annual Financial Framework The next Multiannual Financial Framework (MFF) must be a centrepiece of the European recovery plan and needs to be agreed as soon as possible. In order to cope with the economic and financial fallout of the COVID-19 crisis, the budget of the MFF must be much higher than Member States indicated before this pandemic. Moreover, it should focus investments on high-technology sectors, as they have the biggest added-value and multiplier effects. Those EU programmes that foster innovation and technological sovereignty are therefore key drivers for the recovery of Europe’s economy and must be funded at least at the level initially proposed by the Commission. 2.4 Review EU policies and programmes The EU budget must be adapted to the needs of the (post-)COVID-19 area, and so must be the policies the MFF supports and the programmes it funds. Lessons must be learned from the pandemic and Europe’s difficulties to cope with it. This does not necessarily mean to change completely previously defined priorities and instruments, but concepts and objectives, such as Strategic Value Chains and Technological Sovereignty, should be reviewed in the light of the crisis. For example, the COVID-19 crisis has further demonstrated the importance of digital technologies for industry and society. Digital transformation must therefore remain a top priority for the Union, and the fast and ambitious implementation of the EU Digital- and Data Strategy is more important than ever. This is true also for ASD sectors: Many technologies that are core to digitalisation (e.g. Cloud, High Performance Computing, Big Data, 5G, Artificial Intelligence) are by nature cross-sectorial and dual-use. Aerospace, security and defence industries can and will play a significant role for the development of these technologies with common research and deployment, but also by contributing to the security and continuity that these technologies must embed. Investments in digital development and transformation must be adequate, coherent and appropriately apportioned across all sectors. Ongoing and future EU programmes such as Digital European Sky, the European Defence Fund, the Integrated Border Management Fund, Factories of the Future or Digital Europe, play a crucial role here. They must avoid unnecessary duplication, foster technological sovereignty in key areas, and ensure that security and continuity are embedded in new digital endeavours. Security and continuity must be an integral feature of industrial digitalisation, as both are required to foster competitiveness, contribute to a level playing field (by protecting against unfair or malicious intrusions and actions) and strengthen resilience, which has been under severe pressure during the COVID-19 emergency. The increased importance of resilience, security and continuity for digitalisation is just one example of a possible adjustment of priorities. The same exercise should be run for all policies and programmes, in close consultation with all relevant stakeholders. ASD stands ready to support this endeavour with industrial know-how and expertise. Page | 4

Position Paper B. Sector specific priorities 1. Civil Aeronautics Civil aviation is a global sector. The fact that the COVID-19 crisis became a pandemic has therefore major impacts on the sector: Worldwide, airlines have grounded (almost) their entire fleets, requested to postpone deliveries of new aircraft to manage their cash situations, with some of them contemplating cancellations. Commercial aircraft manufacturers did not receive any new orders in February. All this creates financial stress and massive implications for aircraft production rates which will be cut increasingly rapidly as a result through 2020 and 2021. Airbus already announced a 30% cut in its production rate of its A320 single aisle product and bigger cuts at its long/medium haul products (A350, A330). Other manufacturers are expected to announce similar cuts. The pressure on airlines is also having a knock-on effect on the revenue of Air Navigation Service Providers (ANSPs) and airports. As such, it also puts investments in Air Traffic Management (ATM) and airport technology at risk with a possible negative impact on those ASD industries involved in these businesses. A key threat to the aeronautics business is that down payments (pre delivery payments) fail to arrive and deliveries can no longer take place, with corresponding impact on the cash situation. When it comes to helicopters, the enormous previous market crisis already led to a 40% drop of worldwide helicopter sales/deliveries since 2014. In this extremely challenging market environment, COVID-19 will drastically reinforce this downward trend. In particular, the dramatic drop in oil prices risks to create a negative impact on the demand for helicopters for the offshore sector. Additionally, suppliers might be financially distressed in countries where there is not enough government support. Some ASD members already secured credit facilities to help the supply chain with liquidity, but more support will be needed to support fragile suppliers, especially SMEs, along the way. Without proper government funding support, there is also a risk that industry, in order to save available cash, will be forced to slow down important R&T and digitalisation projects. Generally speaking, the aeronautics industry is more vulnerable to staff shortages than the automotive industry (mass production) due to lower automation and higher complexity in manufacturing, hence members are re-enforcing business continuity as much as they can to avoid any shortage. Health and safety of employees is the number one priority in this respect. Beyond general support measures for all sectors, a dedicated EU civil aviation relief programme is needed to ensure the survival of the entire civil aviation sector (industry, airlines/aircraft operators (including business-jet operators and civil rotorcraft operators), MRO providers, ANSPs and airports). There is in particular a need to provide support to the entire civil aviation value chain to avoid devastating economic knock-on effects due to widespread bankruptcies along different actors in the civil aviation value chain. th On 27 March 2020, the US President signed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This bill provides 2.2 US$ trillion in economic stimulus to the US economy including 61 US$ billion in grants and loans for the US aviation industry (airlines, MROs, manufacturing industry and other suppliers). In the meantime, the US has imposed 15% import tariffs on the European aviation industry. In addition, China and others are providing significant support to their industry. A common European response coordinated at international levels is essential to ensure a level playing field for EU industry and to avoid distortions of competition. Page | 5

Position Paper 1.1 Immediate and short-term (2020) Financial support to customers, manufacturers and suppliers: The best way to protect aircraft manufacturers is to support their customers (airlines and others) with cash. It is absolutely crucial that customers carry on accepting deliveries on time. In addition, aeronautical supply chain companies should receive financial support so that they can guarantee continued supply. To protect jobs, it is paramount to continue producing and delivering aircraft. The European Commission is encouraged to implement the following support measures: ●     Support the aeronautical supply chain with immediate funding needs. A potential solution could be to create an equity-based European Fund for civil aeronautics managed by the European Commission. ●     With a view to the public support that the US civil aeronautics sector could receive, it is particularly important for European industry to safeguard European Financial Instruments like repayable launch aid Instruments. The civil aeronautics industry needs to preserve its ability to finance new programmes in the future and receive the same level of support and funding as its main competitors in the US or in China. ●     Allow R&T projects to continue through an increased public funding share for projects both at EU as well as national levels while respecting WTO rules. In addition, a solution which would further reduce the pressure on industry cash levels could be to pre-finance the (reduced) industry’s funding share of R&T projects with zero interest loans to be repaid at a later stage when the industry has stabilised (2-3 years). This solution could in particular apply to SMEs but should not be limited to them. ●     Support ASD members’ customers with near term access to public and private funds. Air connectivity will be essential for the global economy to recover, but airlines and other aircraft operators, as well as ANSP, need short term assistance amid the worsening outlook for aviation. ○ ASD welcomes the European Commission’s planned ‘aviation emergency bill’, which will relieve pressure on our customers’ cash situation by dealing with deferrals of payments (e.g. emissions trading scheme, postponement of air navigation & airport fees) ○ Ensure regional air connectivity: air transportation – especially regional aviation – also play a key role in fostering connectivity and economic development in the most isolated territories. In these difficult times, it is, therefore, important to support regional/domestic companies and to protect public service operations routes. ○ Support civil rotorcraft operators: beyond financial support, regulatory and safety issues specific to rotorcraft operations during the COVID-19 crisis will also need to be addressed. ○ Any other stimulus package with eligibility for airlines/aircraft operators and ANSPs to get direct support from EU funds is encouraged. Measures to stimulate the recovery of air transport should be addressed. Ensure continued flight operations during the crisis ●     Ensure essential air cargo services and ferry flights keep operating. Temporary relief from EASA regulatory deadlines and fees x     Introduce some flexibility for EASA certificate and approval holders, which have a regulatory deadline which cannot be met due to the COVID-19 crisis hindering close interactions between industry, civil aviation authorities and EASA. In this context, we identified the following regulations/requirements: Page | 6