Fitch Ratings-London-21 September 2023: A solid recovery in air traffic, expanded commercial airlines’ fleet-modernisation programmes, as well as increased defence spending spurred by geopolitical events, support order growth in the EMEA aerospace and defence (A&D) sector, Fitch Ratings says.

The commercial aerospace recovery is helped by airlines’ growing traffic, the need to modernise ageing fleets with more fuel-efficient units, and improving airline profitability. We expect deliveries in the sector to fully recover to pre-pandemic levels by end-2025. Within the sector, the narrow-body segment has been growing faster, although its growth in 2022 was slower than expected. Full recovery of the wide-body segment is likely to take until 2026.

Our outlook for the A&D sector is ‘Improving’. However, we now expect growth in aircraft deliveries by Airbus and Boeing in 2023 to be in low-teen percentages compared to our expectation of about 20% at the start of the year. Fitch forecasts Boeing to deliver slightly less than 600 aircraft in 2023, including 425-460 of the 737 MAX. We now expect a lower proportion of 737 MAX deliveries in 2023 to be from inventory following the Spirit Aerosystems fuselage issue that will require the rework of inventoried aircraft.

We expect that production and delivery rates for European commercial aerospace companies will remain constrained by supply-chain disruptions until at least mid-2024. Such pressures have eased from their peak in 2021 but have persisted for longer than expected. Supply-chain bottlenecks have been registered in several parts of the aircraft value chain. Key pressure points relate to the shortage of parts such as engines, forgings and electrical components. Aircraft manufacturers and suppliers are also exposed to shortages of experienced engineers following job cuts during the pandemic.

A partial recall of some in-fleet GTF engines used primarily in the A320 family aircraft is the most recent setback in the commercial aerospace sector. This will likely affect the cash flow and liquidity of the programme’s minority European partners, MTU Aero Engines and GKN Holdings, although the full impact of the recall is yet to be assessed.

Increased defence spending, triggered in Europe by geopolitical events, including Russia’s war in Ukraine, is likely to support revenue for the vast majority of European A&D manufacturers and service providers. Orders rose significantly in 1H23 and we expect them to continue growing for most companies in the coming years.

Still, some defence contractors will benefit sooner than others. Those companies that make munitions and armoured vehicles or provide related services, such as MBDA and BAE, have already seen an increase in projected volumes. Companies focusing on longer-cycle equipment, such as fighter jets and submarines, will likely see a more pronounced benefit only in the later part of this decade. This includes the Eurofighter consortium, thyssenkrupp and Thales.