- Commercial aircraft production continues to fall short due to persistent supply chain bottlenecks
- In addition to rising aircraft utilisation, companies with greater aftermarket exposure are outperforming as airlines increasingly rely on older aircraft due to delivery delays
- Older aircraft have higher work content, while engine OEMs also benefit from increased demand for high-margin sales of spare parts/engines for previous-generation aircraft
- Lacklustre near-term earnings prospects for airframers, but the medium-term outlook remains positive due to strong order backlogs, with improved execution driving earnings growth
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Airframers continue to face significant challenges, while engine OEMs and MRO operators are thriving. In recent years, both Airbus and Boeing have consistently fallen short of production targets, with Boeing further hindered by quality issues that prompted the FAA to enforce a production cap of 38 B737-MAX aircraft per month. While Boeing's manufacturing has improved since early 2024, recent strikes at its West Coast facilities threaten to disrupt production for the rest of the year. In contrast, engine OEMs and MRO operators, despite facing similar disruptions, have been more resilient. Both engine OEM aftermarket and MRO demand are benefiting from airlines extending the life of previous-generation aircraft, which have higher work content, while continued strong air travel demand boosts flight hours across all aircraft types.
Engine OEMs and MRO operators outperformed in 2Q24, while aircraft OEMs struggled amid production issues. RTX and GE Aerospace delivered robust results, surpassing market expectations due to strong aftermarket demand and a favourable revenue mix that improved margins. Both companies raised their FY24 adjusted EPS guidance, with RTX expecting a 7% increase and GE Aerospace anticipating a 38% rise, up from earlier forecasts of 5% and 33%, respectively. Similarly, ST Engineering achieved a stellar 32% y/y increase in MRO revenue and remains upbeat on its near-term prospects. In contrast, Airbus has reduced its 2024 delivery guidance by 4% to 770 aircraft and now expects to generate an adjusted EBIT of EUR5.5bn, down from EUR6.5-7.0bn previously. Meanwhile, Boeing underperformed in 2Q24 due to a significant drop in aircraft deliveries, charges related to a plea deal with the Department of Justice, and the adverse impact of some fixed-price development programs.
Despite high valuations, we remain positive on the industry, favouring companies with greater exposure to the aftermarket. Engine OEMs are expected to exhibit stronger earnings momentum over the next two years, driven by a robust aftermarket, ongoing delays in aircraft deliveries, and increased aircraft utilisation. Similarly, MRO operators are set for solid earnings growth as airlines not only prolong the service life of older aircraft but also work them harder to meet capacity demands. However, the near-term outlook for aircraft OEMs is murky, with risks skewed to the downside due to persistent production bottlenecks, particularly for Boeing which is still dealing with a strike. That said, both major airframers are fully booked into the next decade and are expected to return to growth once execution improves. We believe the current high industry multiples are justified by strong defensive moats, and the sector being in the early stages of a growth cycle. However, we are more cautious on aircraft OEMs in the near term.
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