As is usual at this time of year, a number of key aerospace businesses reported on their situation in the third quarter of 2018 over the past two weeks. We have taken the opportunity, not to go through their numbers or even measure their performance individually, but instead (for the sake of brevity) to summarise the key areas of market strength, segment focus and forward-looking commentary, as well as pulling this together to outline what this means for the sector going forward. The key businesses covered are: Airbus, Boeing, General Electric, Safran and UTC.
- Civil Aerospace: Boeing continued to take in sizeable new orders in the quarter (171 net new orders) which led to a total of 630 for the first 9 months of 2018 (see Airbus for comparison).
- The company noted particularly strong global passenger and freight traffic, which in August was 6.8% higher for passenger traffic and up 4% for freight.
- Demonstrating the strength of Boeing’s performance, EBITDA margin improved from 9.8% to 13.2%.
- Defence: This segment was especially strong for Boeing largely as a result of improved market conditions, but especially given a number of key wins in defence aerospace for the defence business, namely the T-X trainer competition, MQ-25 and the KC-46 tanker contract.
- Services: Also, a strong showing up 12% y/y with the best performance being from defence services.
- Forward-looking comments: Boeing increased expected revenue growth and EPS for 2018. Furthermore, as the company in the civil aerospace unit looks to increase production of the key B737 from 47 aircraft a month in 2017 to 52 in 2018 and ultimately 57 monthly in 2019, the business stated that it was very focused on monitoring its supply chain and its efficiency. In terms of US defence, it commented that the macro defence environment was “strong right now”, and saw a, “… more and more sustained, long-term stable defence budget in the US” for the next few years.
- Civil Aerospace: While overall giving a generally stable picture, Airbus results were not as encouraging as Boeing’s. Orders for the 9 months to September stood at 256 in total, down 5.5% compared to the same period in 2017, although this meant that the total order book nevertheless grew 10%.
- However, Airbus saw considerable margin improvement at 7.7%, up from 2.9% in 2017.
- Defence: Here the picture was in complete contrast with orders down 12.7% and revenues flat with only a 3% EBITDA margin. Net order intake was down 13% and the total order book fell back by 7%.
- Forward-looking comments: Airbus maintained its profit guidance for the full year as well as maintaining its guidance of 800 total deliveries for the year, despite still “readjusting” on the A320 production line to recent “industrial challenges”.
- Civil Aerospace (engines): In a generally very positive release, Safran saw considerable market growth in its engines aftermarket business, a mixture of sales of spare parts and MRO services. These were up 14.7% for the 9 months to date and the third quarter saw an acceleration of 19.2% on Q3 2017.
- Civil Aerospace (Aircraft Equipment): This part of the civil aviation business was not so strong with only 7% revenue growth. OEM sales were especially weak as a result of a decrease in expected pull-through for A380 nacelles but again service revenue was especially strong at 22.1%, driven by demand for carbon brakes, spare parts and MRO for nacelles and landing gear.
- Defence: Defence was also strong for Safran in contrast to Airbus, growing 9.4% with the core propulsion business growing especially fast at 12.6%. In particular, the business has benefitted from stronger demand for optronics (especially in the US) as well as demand for Inertial Navigation Systems (INS), FADECs and defence-related optics.
- Forward-looking comments: Safran maintained its previous expectations but also saw the civil aftermarket demand staying firm at 10-12% up going forward.
4. General Electric
- Aerospace: Amid other woes at the company as well as a contrasting disappointment at the Power division (essentially the same engine technology as aerospace but sold for power generation), the aerospace engines business (civil and defence) performed well. Engine orders grew 35%, equipment revenues were up 12% and services grew 12%.
- Forward-looking comments: GE sees a growing increase in aftermarket parts and services as aircraft utilisation rates rise to peak levels and also saw defence enjoying stronger demand going forward.
- Aerospace: UTC, as the largest systems and component supplier in the aerospace market, saw aerospace as an area of ‘partciualr strength’ citing passenger load data at 85.2%, an all-time high, which indicates high levels of utilisation.
- Business jets continued to recover and there was particular strength in aerospace engines. UTC own Pratt & Whitney, where again mention was made of a strong aftermarket.
- Defence: Here UTC saw a noticeable “ramp-up” in demand from that quarter.
Key Themes from Q3 2018
1. Utilisation and Passenger rates underpin market for the short and long term.
- These were referred to across the board as passenger traffic of 6.8% in August as well passenger load rates of 85.2% show that the underlying demand for aerospace remains intact, giving some considerable confidence that exceptional back-logs are underpinned by real market demand, at least for the time being.
2. Wide-body issues over
- The issues with production within the wide-body segment of civil aircraft appear to be over and the emphasis is back on the narrow-body production rates and efforts to increase those. As a result, the performance of the supply chain for OEMs will continue to be of vital importance to both production timescales and share prices.
3. Engines strong
- The better performance of Safran, GE and P&W shows again that demand for new and efficient engines remains strong and that profitability is good in this area.
4. Aftermarket recovery continues to strengthen
- Further to the above, aircraft utilisation as well as the slow maturity in service of new engines that have been coming into service over the past 2 or 3 years are translating into an increasingly strong recovery in aftermarket spares and services which are essential for overall profitability.
5. Business Jet market recovery continues
- Several mentioned a good to reasonable performance of business jet related business, which had long been a lag on aerospace.
6. US defence strong
- Whereas there appears to be no immediate increase in demand in Europe, despite new increased spending plans, the impact of an increased budget in the US already seems to be being felt and is likely to get stronger. How long that lasts depends on wider budgetary considerations based on wider fiscal and interest rate decisions being taken in the US at this current time. But for now, it is a real area of strength and, again, supportive of good profitability.