Interactive Investor

Airbus optimism boosts Rolls-Royce and Melrose

27th May 2021 13:54

Graeme Evans from interactive investor

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Planemaker expects full sector recovery as soon as 2023.

Airbus suppliers including Rolls-Royce (LSE:RR.) and GKN owner Melrose Industries (LSE:MRO) have been given a major lift by the planemaker's upbeat guidance on production over the next few years.

The Toulouse-based firm continues to expect the commercial aircraft sector will recover to pre-Covid levels between 2023 and 2025, with its single-aisle planes leading the rebound.

The production rate for the best-selling A320 family is well in excess of analysts' forecasts, prompting Airbus to ask suppliers to guarantee a rate of 64 planes a month by the middle of 2023. This compares with the anticipated 45 per month towards the end this year.

Its guidance should give suppliers the visibility they require to make necessary investment and secure long-term capacity for the recovery in commercial aviation.

Airbus spends more than £5 billion every year with UK suppliers, supporting more than 2,500 companies including hundreds of SMEs. It estimates that it backs about 110,000 UK jobs.

Airbus CEO Guillaume Faury said: “The aviation sector is beginning to recover from the Covid-19 crisis. The message to our supplier community provides visibility to the entire industrial ecosystem to secure the necessary capabilities and be ready when market conditions call for it.”

London-listed aerospace shares were buoyed by the update, with Rolls and Melrose up 4% and 3%, respectively, in the FTSE 100 index and Meggitt (LSE:MGGT) ahead 4% in the FTSE 250 index.

Trent engines made by Rolls are not in A320s, but its Spanish subsidiary ITP Aero is involved in the short-haul jets through a partnership with US manufacturer Pratt & Whitney.

Rolls engines are found in the wide-body A330, which Airbus said today would remain at an average production rate of two a month. They are also in the A350 long-range aircraft, which is set to increase output by one to six a month from autumn 2022.

The reliance of Rolls on large engine flying hours includes Boeing's 777 and Dreamliner, highlighting the importance of a rebound in long-haul travel from the pandemic.

Airbus is so far backing shorter routes in its latest production guidance, but its overall optimism should still be taken positively by Rolls CEO Warren East as he looks to return the company to cash generation later this year after burning through £4.2 billion in 2020.

The potential order book boost for ITP Aero also raises the chances Rolls can proceed with ongoing plans to sell the business to reduce debt. It is thought to be worth about £1 billion, with a number of private equity firms reportedly interested.

Rolls shares recovered to 127p in March, but the slow return of global air travel has sent the battered blue-chip back to just above 100p. The shares were trading at 107p today.

Civil aerospace accounts for 54% of Meggitt's revenue, with products and sub-systems installed on almost every jet airliner, regional aircraft and business jet in service. GKN's role in the A320 includes the manufacture of lightweight windshields.

Shares in GKN's owner Melrose have risen 8% in a fortnight, albeit still within their trading range of 156p-186p so far this year. It's been a similar story for Meggitt, although shares are now close to their high for this year at about 505p.

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