With Covid-19 wreaking havoc on international travel, the woes of the airlines are having knock-on effects for aerospace companies. It’s especially bad news for engine maker Rolls-Royce (RR.) which derives just over 50 per cent of its revenue from civil aerospace. The group is paid by airlines according to how many hours its engines fly and also sells spare parts and accessories as part of its higher margin aftermarket services. It’s not ideal, then, that half the world’s aircraft fleet has now been parked, the highest level in history. Widebody aircraft flying hours plunged by 50 per cent year-on-year in March and Rolls expects further deterioration in April and beyond.
Looking beyond the pandemic, Rolls’ focus on widebody engines will likely prove detrimental as long-haul travel is expected to take longer to recover than domestic and short-haul flights. Airlines are also projected to curtail orders for new planes and retire older aircraft earlier than anticipated. With a cost-cutting regime already in place before the crisis struck, the group is now squeezing out a further £750m of savings. The final 7.1p dividend declared for 2019 has also ended up on the chopping block, conserving £137m.
The future of Boeing’s (US:BA) 737 Max jet is now even more up in the air with coronavirus thrown into the mix. That makes for a more uncertain outlook for Meggitt (MGGT) and Senior (SNR), both of which feed into the plane’s supply chain.
Things are more stable in the defence industry, where earnings tend to be underpinned by long-term government contracts and rising defence budgets. There are questions over whether the economic shock of Covid-19 will see countries row back on their military spending as they prioritise other parts of the economy. But countries have committed to investing more in defence in recent years “because we live in a more uncertain, more unpredictable world”, says secretary general of the North Atlantic Treaty Organisation (NATO), Jens Stoltenberg. “That hasn’t changed.”
The signing of the National Defence Authorisation Act in the US will see the top-line defence budget rise by 3 per cent to $738bn (£603bn) in 2020 and the Pentagon is proposing to lift this to £740.5bn in 2021. That bodes well for BAE Systems (BA.), which will see funding support maintained for key programmes such as its combat vehicles and the F-35 jet. The US Department of Defense (DoD) is Avon Rubber’s (AVON) largest client. Thanks to its $91m acquisition of 3M’s (US:MMM) ballistic protection business, Ceradyne, the group recently secured a $333m framework to supply body armour plates to the US army. The aerospace industry may be floundering, but defence still looks robust.
See below for our entire FTSE350 review:
FTSE350 profitability: the direction is clear but not the severity
FTSE350 Review: Coronavirus and the dividend dilemma
FTSE350 groups scramble for cash
Aerospace on the descent as defence stays on course
Construction hits the brakes once again
Coronavirus threatens electronics and technology
Engineering and industrials braced for a downturn
Few guarantees for financial services
Coronavirus slams high street doors shut
Insurers stuck between policies and politics
Miners hold on to their hats in Covid rout
Supermarkets thrive but coronavirus harms other personal goods
Oil companies suffer Covid-19 crunch
Pharma giants entering the testing fray
Property income prospects dimmed by Covid-19
Subscription-based models make for sturdy businesses
Downturn threat obscures outlook for outsourcers
Are telcos still a defensive play?
