BREAKINGVIEWS-Europe’s airborne groups weather tariff turbulence

By Oliver Taslic

LONDON, Aug 8 (Reuters Breakingviews) - When U.S. President Donald Trump unveiled his “Liberation Day” tariff plan in early April, investors in Europe’s airline and aerospace sectors braced for turbulence. The fortunes of carriers like British Airways owner IAG ICAG.L tend to correlate with consumer confidence, while the global supply chains of aerospace firms – like $140 billion Safran SAF.PA – are conspicuously vulnerable to trade disruptions. Shares in the French firm fell almost a fifth in the three trading days following April 2 and IAG dropped 14%, compared to 12% for the STOXX 600 Index .STOXX. Yet four months on, things look much better.

IAG, Air France-KLM AIRF.PA and Deutsche Lufthansa LHAG.DE all unveiled relatively cheery half-year results last week. A key driver is lower oil prices, which reduce operating costs: Lufthansa calculated this year’s fuel bill would be around 600 million euros lower than 2024’s, despite an increase in capacity. The trio also flagged strength at the front of the cabin, with flyers in premium seating – for instance on North Atlantic routes – helping offset weakness in economy. Air France-KLM said revenues for its business class and “La Première” offerings – where a return trip can cost $20,000 – were up 11% year-on-year in the first half.

Aerospace companies were also sanguine. Shares in engine specialists Safran and Rolls-Royce RR.L are up 4% and 9% respectively since their results last week, while Melrose Industries MRON.L is up around 15%. Delays in the delivery of new aircraft from Airbus AIR.PA and Boeing BA.N mean airlines have had to rely on older jets that may otherwise have been retired, benefiting firms that sell spare parts, undertake maintenance, and profit as mature engines fly more. At Safran, sales of spare parts for civil engines grew almost 22% year-on-year in the first half.

Meanwhile, the push to render civil aviation tariff-free is bearing fruit. Both the European Union and UK flagged a return to zero levies on aircraft and parts in their respective U.S. trade pacts, while Reuters reported that Trump also backed off 50% levies on regional jets from Brazil’s Embraer EMBR3.SA, whose popular E175 plane has no clear substitute for U.S. airlines.

While European carriers’ summer performance will hinge on hard-to-predict last-minute bookings, a weaker U.S. dollar will also help with leasing, maintenance and fuel expenses, which tend to be paid in the world’s reserve currency.

There could still be bumpiness. The weaker greenback that helps airlines is a headwind for aerospace companies, which generally offer their wares in U.S. dollars. Air traffic growth, though still there, is slowing following a post-pandemic boom. Finally, Trump’s trade war could deteriorate, risking hits to stock markets and the “wealth effect” that helps drive holiday demand. Still, with IAG currently trading around 6 times forward earnings, per LSEG data – in line with its level before U.S. carrier Delta DAL.N sounded the alarm on travel demand in March – Europe’s groups have found themselves on a much comfier flight path than feared.

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CONTEXT NEWS

President Donald Trump has exempted aircraft from a 50% tariff on U.S. imports from Brazil, Reuters reported on July 30, removing a key threat to Embraer, a leading manufacturer of regional jets.

Embraer and its U.S. partners had argued that the 50% tariffs threatened by Trump earlier in July would cause disruptions to deliveries and local businesses, and that the Brazilian firm’s jets are essential to regional flights in the United States.

Embraer still faces a 10% duty imposed in April, Reuters reported on August 6.

Earlier in July, European Union officials announced a return to zero levies on trade in aircraft and parts as part of the bloc’s framework trade agreement with the U.S.