BREAKINGVIEWS-Trade spats give repair giants narrow flight path

By Oliver Taslic

LONDON, May 2 (Reuters Breakingviews) - Donald Trump’s trade war risks throwing a spanner in the works for high-flying engine companies. Groups such as $220 billion GE Aerospace GE.N and $115 billion Safran SAF.PA have seen revenues and profits soar in recent years as older aircraft flew longer – a result of snags in the production of fresh jets from Airbus AIR.PA and Boeing BA.N. The president’s tariffs – and an insistence from airlines that they won’t pay duties on new planes – could extend this trend. The risk, however, is prolonged uncertainty hits appetite for flying altogether.

Tariffs are a shock to the system for the aerospace sector, which has largely operated free of duties since a 1979 treaty. Shortly after Trump’s “Liberation Day” announcement on April 2, Reuters reported, citing industry sources, that firms were combing through billions of dollars’ worth of contracts to check their exposure to tariffs. On the airline side, U.S. carrier Delta declared it “will not be paying tariffs on any aircraft deliveries”. The anti-tariff sentiment was echoed by American Airlines and Ireland’s Ryanair, which Reuters reported on Thursday threatened to “reassess” its Boeing orders if tariffs were to materially affect the price of the U.S. company’s aircraft exports to Europe.

Still, refusing deliveries could provide a boost to companies that repair planes. Given that engines suffer especially during day-to-day flying, this tends to mean propulsion specialists such as GE, Safran and Rolls-Royce RR.L, which can provide spare parts, undertake repairs, and negotiate contracts with airlines that reward engine makers as their in-service products fly more. This, after all, has already been a theme of the last few years, as soaring travel demand and a shortage of new jets meant airlines were willing to splash out to keep ageing planes airborne. Safran’s spare parts revenue, for instance, increased over 16% year-on-year in 2024, while its broader “Propulsion” division expanded operating margins by 50 basis points to almost 21%.

This assumes, however, demand holds up. Though heavyweights such as Emirates and Deutsche Lufthansa struck optimistic tones this week, U.S. airlines have recently sounded the alarm on domestic demand, while Virgin Atlantic in late March flagged a slowdown in demand for travel from the U.S. to Britain. In a downturn, airlines can trim the number of seats on offer to defend margins – but slowdowns in flying hours, or suddenly unnecessary aircraft being retired early, do few favours for engine companies.

The maintenance specialists are sanguine for now. Though GE last week trimmed company-specific expectations of 2025 traffic growth from mid to low single digits, it maintained its full-year operating profit guidance, arguing it had a healthy backlog of work. Safran, meanwhile, told analysts last Friday it hadn’t seen signs of a slowdown in demand for its maintenance services, noting that airlines were still “starving” for working jets. With leading engine groups trading around 22 times forward operating profit, per LSEG data, investors are betting on a relatively smooth flight path. But navigating the skies ahead will require skilful piloting.

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CONTEXT NEWS

Jet engine specialist Rolls-Royce on May 1 maintained its 2025 guidance of underlying operating profit of between 2.7 billion pounds and 2.9 billion pounds and free cash flow in the same range.

In a first-quarter trading update, the British company said all of its divisions had been performing well. In its civil aerospace unit, Rolls flagged “strong” aftermarket revenue growth as long-haul flying hours continued to tick upwards.

France’s Safran reported on April 25 that its first-quarter revenue had come in at 7.3 billion euros, beating analyst expectations. The company’s “Propulsion” division, its largest by both sales and profit, grew organically by 16.4% year-on-year, driven by strong spare parts sales.

Safran confirmed its full-year guidance, but said its forecast did not include the potential impact of tariffs, arguing it would be “premature to quantify” their effect at this stage given the fluidity of the situation.

GE Aerospace, Safran’s joint venture partner in engine giant CFM International, announced first-quarter results on April 22. Revenue in its key “Commercial Engines and Services” division grew 14% year-on-year. Though the company trimmed its full-year forecast for growth in “departures” – an internal measure of departures of aircraft powered by GE and CFM engines – to low-single digits from mid-single digits, it maintained its 2025 target of low-double-digit adjusted revenue growth.

GE said on the same day that heightened tariffs would result in additional costs for it and its supply chain. The company calculated a cost headwind from announced tariffs, net of actions it can take such as duty drawbacks – a mechanism whereby duties paid on imported goods can be refunded if those goods are subsequently exported – and other optimisation measures, of around $500 million. It said its guidance included this impact, but did not include further tariff escalation or a global economic recession. The company said it would continue to advocate for a return to zero-for-zero tariffs in the aviation sector.