If tensions in Iran cool, aerospace benefits and defense remains resilient

Overview

This report discusses the impact on North American aerospace and defense coverage if military operations involving Iran cool down or end in the near term. The core view is that de-escalation would benefit aerospace through lower oil prices and reduced airline cost pressure, especially commercial aerospace aftermarket; defense would be broadly neutral to slightly positive, because the conflict has already exposed investment gaps in ammunition inventories, missile interceptors, and low-cost countermeasure technologies.

Core views

On aerospace, the recent decline in commercial aerospace aftermarket stocks reflects more of a sentiment and timing concern tied to rising oil prices than a structural destruction of demand. The report argues that only if oil prices remain above $100 per barrel for more than a year would airline capacity, fleet renewal, and aftermarket demand likely change materially. On defense, even if the Iran conflict cools, missile restocking, expansion of THAAD and PAC-3 capacity, and investment in new technologies such as directed energy will continue to drive medium-term spending. Geopolitical risk, higher defense spending in China and Russia, and the future warfare requirement for hardware, AI software, autonomy, cyber capabilities, and scaled manufacturing continue to support structural opportunities in the defense industry.

Analysis framework

The report uses a scenario analysis framework, evaluating the relative effects on aerospace and defense through the lenses of an Iran operation ending or not, oil price trajectories, airline cost pressure, aftermarket demand timing, defense restocking needs, procurement framework agreements, and FY27 budget expectations.

Methodology notes

• scenario_analysisIran conflict de-escalation scenario

  Impact of geopolitical conflict de-escalation on industry demand and valuation sentiment

  Treats a potential ceasefire as an exogenous scenario and compares its transmission effects on oil prices, airline costs, commercial aerospace aftermarket demand, and expected defense spending.

• sector_viewMorgan Stanley industry rating framework

  Attractive / In-Line / Cautious industry rating framework

  Attractive indicates the analyst expects the covered industry basket to be attractive relative to the relevant broad market benchmark over the next 12 to 18 months.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Commercial aerospace aftermarket names (GE, TDG, LOAR, FTAI, HEI, SARO, etc.)

  Sensitive beneficiaries of oil prices and airline capacity expectations

  Strengths

  Limited new aircraft supply, high utilization, low retirement rates, and aging fleets support a multi-year aftermarket cycle.

  Weaknesses

  Short term may be pressured by higher oil prices, airline cost pressure, and deferred maintenance.

  Comparison

  Since the conflict began, commercial aerospace aftermarket names are down about 15%, versus about 4.4% for the S&P 500.

  Risks

  If oil stays above $100 per barrel for more than a year, airlines may reduce capacity and accelerate fleet renewal, which would pressure aftermarket demand.

• Defense primes and missile defense supply chain

  Beneficiaries of ammunition restocking, missile interceptor capacity expansion, and rising defense budgets

  Strengths

  Framework agreements to expand THAAD, PAC-3, missiles, and interceptors improve long-term visibility.

  Weaknesses

  Production of some high-end interceptor systems is constrained by supply chain and capacity limits.

  Comparison

  Defense primes are down a median of about 3.3% since the conflict began, showing greater resilience than the S&P 500's approximately 4.4% decline.

  Risks

  The legislative feasibility of FY27 budget, supplemental funding, and procurement reform may depend on the outcome of the midterm elections.

• High-energy lasers and directed energy technologies

  A new technology direction to counter low-cost drone and missile threats

  Strengths

  Could counter incoming threats at a lower marginal cost and improve defense economics.

  Weaknesses

  Technology maturity, scaling of deployment, and procurement cycles remain uncertain.

  Comparison

  Compared with traditional high-end interceptors, directed energy is viewed as a potential path to lower countermeasure costs.

  Risks

  R&D, testing, budget appropriations, and military procurement pace may lag market expectations.

Key data

• Commercial aerospace aftermarket stock performanceApproximately -15%Commercial aerospace aftermarket stocks covered in the report have fallen about 15% since the Iran conflict began.
• S&P 500 performance over the same periodApproximately -4.4%Used to compare the magnitude of the broad market pullback since the conflict began.
• Broader commercial aerospace coverage performanceApproximately -11%The decline in commercial aerospace aftermarket names has been larger than that of the broader commercial aerospace coverage.
• U.S. defense prime contractor performanceMedian approximately -3.3%Down less than the S&P 500's approximately -4.4% since the conflict began.
• Example cost of Iranian weaponsMissiles: approximately $1 million to $2 million; Shahed drones: approximately $20,000 to $50,000Used to illustrate the mismatch between low-cost threats and high-cost defenses.
• High-end interceptor deployment costUp to approximately $13 million per successful deploymentThe report says some U.S. and allied countermeasure weapons can reach this level in high-end cases.
• Potential Iran-related supplemental defense fundingApproximately $200 billionThe scale of Iran-related supplemental funding highlighted by the market.
• FY27 defense budget expectationsThe market expects at least about $1.2 trillion; Trump previously proposed about $1.5 trillionThe final budget outcome may be influenced by the November midterm elections.

Impact & implications

If tensions in Iran cool, the most direct beneficiaries are likely to be the aerospace aftermarket chain, because lower oil prices would ease airline cost concerns and support a rerating of the sector. The defense investment thesis, by contrast, is driven more by inventory replenishment, capacity expansion, missile defense, and new technology upgrades; a ceasefire does not change medium-term demand. Real upside depends on changes in procurement structure, long-term funding visibility, and FY27 budget implementation.

Risks

• The Iran situation may continue to evolve, and the timing and scope of any ceasefire or end to operations remain uncertain.
• If oil stays above $100 per barrel for an extended period, airlines may cut capacity, accelerate fleet renewal, and pressure aftermarket demand.
• U.S. defense budgets and Iran-related supplemental funding face political and legislative uncertainty, and the November midterm elections may affect the final outcome.
• Expansion of missile interceptor capacity may continue to be constrained by supply chain challenges.
• Morgan Stanley has investment banking, ownership, market-making, or other business relationships with several covered companies, which may create potential conflicts of interest.

What to watch

• Whether military operations involving Iran materially cool down or end within the next 2 to 3 weeks.
• Whether oil prices decline and improve airline cost expectations.
• The White House's FY27 'skinny' defense budget on April 3 and the full budget details on April 21.
• Whether the roughly $200 billion in Iran-related supplemental funding is included in the budget or gains congressional support.
• The pace of THAAD, PAC-3, and related component expansion under framework agreements with Lockheed Martin, RTX, and Boeing, among others, with the DoW.
• Whether airlines show signs of maintenance deferrals, capacity adjustments, or accelerated fleet renewal.