Rolls-Royce to be boosted by Chinese and African plane demand

The global air travel recovery has sent airline and plane manufacturer shares soaring. Passengers have felt it too, with the demand increase and higher oil prices sending fares way up. New research from Boeing (US:BA) indicates that the industry's strength may continue for some time, driven by new demand from China and Africa. This is good news for sector providers such as Rolls-Royce (RR.), in the midst of its own rebound year. 

China’s centrality to the growth narrative is certainly borne out in Boeing's recently published Commercial Market Outlook. The US jet manufacturer predicts that China will need 8,560 new commercial aeroplanes and that its domestic airline fleet will more than double to nearly 9,600 jets over the next 20 years. That’s equivalent to “one-fifth of the world's airplane deliveries in the next two decades”. 

Darren Hulst, Boeing vice-president for commercial marketing, highlighted the fact that “domestic air traffic in China has already surpassed pre-pandemic levels and international traffic is recovering steadily". Most of the demand is linked to single-aisle aeroplanes, with deliveries pitched at 6,470 aircraft. Boeing will deliver around 400 737 Max planes this year, so this is a tall order, even including Airbus (FR:AIR) output and potentially locally made Comac planes. 

Domestic travel volumes continue to ratchet up in a country with approximately the same land mass as Europe, but Chinese carriers will also require 1,550 widebody aeroplanes to support a growing network of international routes. 

Perhaps even more revealingly, the Boeing analysis posits that intra-African passenger traffic will more than quadruple over the same period. That equates to 7.4 per cent growth in air traffic volumes, the “third highest among global regions and above the global average growth of 6.1 per cent”. Boeing predicts that Africa will require 1,025 new aeroplanes – again with a bias towards single-aisle models – over the next two decades. This not only points to the growth potential of the continent’s economies, especially in view of demographic changes under way, but it also indirectly reflects the growing commercial ties with China.

A costly upgrade

It's certainly conceivable that increased investment capital will find its way into the sector given that air travel is predicted to grow at a faster rate than global economic activity, with traffic numbers expected to double through to 2042. Utilisation rates are expected to increase, along with ‘densification’ – essentially packing more punters into the same cabin space – while airlines will increasingly need to take account of their environmental impacts.

That last point is highly significant where Rolls-Royce is concerned. Last year, the group successfully entered the final testing phase of its ALECSys (Advanced Low Emissions Combustion System) demonstrator engine. The development of the engine is part of the UltraFan engine demonstrator programme, which is aimed at producing jet engines that deliver a 25 per cent fuel saving over the first generation of its Trent engines. Earlier this year, at about the same time the group was revising its profits estimate, the group completed initial testing of its UltraFan technology using 100 per cent Sustainable Aviation Fuel (SAF), as it seeks to steal a march over rivals in the pursuit of sustainable air travel modes.

At the end of July, Rolls-Royce raised its estimate for 2023 underlying profit from a range of £800mn-£1bn to £1.2bn-£1.4bn. The scale of the increase was impressive enough, but any positive trading update was to be welcomed in the wake of the Trent 1000 recalls and the pandemic disruption.

It may be premature to laud the early efforts of the group’s new chief executive, Tufan Erginbilgiç, as his predecessor, Warren East, had initiated meaningful remedial measures prior to the new man’s arrival, not least of which the 9,000 job cuts that were central to a cost-cutting drive in 2020. Yet Erginbilgic’s much-publicised “burning platform” comments to Rolls-Royce staff underlined the urgency of the situation.

So, even though Rolls-Royce controls about 18 per cent of the engine market share globally, it wouldn’t be unreasonable to suggest that the engineering group remains a work in progress. Happily, there are signs that market conditions may at last be working in its favour. The latest flying hours tracker published by UBS shows that for the month of August, Rolls-Royce engines flew around 1.36mn hours, equivalent to 88 per cent of 2019 levels. UBS analysts indicated that earlier modelling for flying hours in the second half of the year “now looks potentially 2-3 per cent too low, with positive implications for full-year cash flow estimates”.

Indeed, Erginbilgic struck an uncharacteristically upbeat note during the second quarter of this year when it emerged that demand for large long-haul aircraft, the group’s key market, was rebounding more strongly than anticipated, precipitating a raft of orders from major airlines across the globe.