Reopening of the Strait of Hormuz may ease jet fuel pressure, while the European aerospace aftermarket remains resilient

Overview

This report discusses the impact of reopening the Strait of Hormuz on global aerospace and defense, especially the European aerospace aftermarket. The report argues that the strait's closure had pushed up jet fuel prices and disrupted Middle East traffic, putting Q2'26 air traffic and airline earnings under pressure; but if the conflict ends and a sustainable agreement is reached, aero engine aftermarket demand could normalize quickly and sector valuations could gradually recover.

Core views

The core judgment is that airline earnings are deteriorating in the short term due to high oil prices, but aftermarket demand has not weakened materially. Post-pandemic shortages of new aircraft, insufficient production capacity at Airbus SE and Boeing Co, and airlines' desire to preserve capacity for a potential recovery are keeping demand for maintenance, spare parts, and life extension of older aircraft strong. The report expects Q2'26 results could still be strong and may lead to upward revisions to 2026 guidance. On individual stocks, Safran SA is listed as the top pick; Rolls-Royce Holdings PLC is seen as more resilient due to its younger fleet and defense and power systems businesses; MTU Aero Engines AG is a high-beta recovery play, but concerns around the GTF recovery, management changes, and cash conversion still need time to be absorbed.

Analysis framework

The report mainly uses flight volumes, differences between widebody and narrowbody flights, engine fleet age, airline profit margins, jet fuel costs, retirement rates, grounded aircraft counts, maintenance backlogs, and EV/EBITDA valuation multiples to assess aftermarket demand, earnings risk, and valuation recovery potential.

Methodology notes

• Valuation MethodForward Terminal Value EV/EBITDA Method

  Based on enterprise value about four years in the future, applying an EV/EBITDA multiple and adjusting for net debt and shareholder cash distributions, then discounting back to the valuation date to derive a 12-month target price.

  The report discloses that Safran SA uses 16x EV/EBITDA discounted at a 10% cost of equity to derive a €350 target price; Rolls-Royce Holdings PLC uses 16.9x to derive £1.15; MTU Aero Engines AG uses 11x to derive €350; GE Aerospace uses 30.5x to derive $405; Airbus SE uses 13.6x to derive €234; Boeing Co uses 16.7x to derive $298.

• Demand TrackingFlight Volumes as an Aftermarket Demand Indicator

  Engine aftermarket demand is more directly driven by the number of flight takeoffs and landings, rather than just flight hours.

  The report emphasizes that the takeoff phase places greater stress on engines, making flight volumes a key indicator for spare parts and maintenance demand. YTD flight volumes rose slightly by +0.4%, but the Middle East declined -24%, with widebody aircraft more heavily affected.

• Risk AssessmentAirline Earnings and Jet Fuel Cost Pressure

  High jet fuel prices compress airline profits and may eventually affect maintenance spending and aero engine aftermarket growth.

  The report notes that energy costs usually account for about 20%-25% of airline revenue. In Q1'26, most major airlines expanded margins year over year, but the market expects earnings to deteriorate starting in Q2'26.

Asset mapping & comparison

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

• Safran SA

  The report's top pick, benefiting from aero engine aftermarket demand and workscope intensity.

  Strengths

  Q1'26 aftermarket sales growth was +32%, with the report expecting another acceleration in Q2'26; better parts availability and airlines optimizing engine shop-visit timing support stronger workscope.

  Weaknesses

  Older engine programs such as CFM56 are in cyclical decline, and weaker commercial aviation traffic would affect spare parts demand.

  Comparison

  Compared with MTU Aero Engines AG, the report believes Safran SA has a cleaner story; compared with Rolls-Royce Holdings PLC, it believes Safran SA has greater upside.

  Risks

  Commercial traffic growth weaker than expected, LEAP engine performance and profitability risks, and supply chain disruptions.

• Rolls-Royce Holdings PLC

  Has higher exposure to widebody aircraft and the Middle East, but a younger engine fleet and diversified businesses provide resilience.

  Strengths

  Trent XWB and Trent 1000 flight volumes remain in positive growth; defense and power systems businesses supported relative outperformance during the war period.

  Weaknesses

  A slower recovery in widebody aircraft would create pressure, and the report believes its further upside is smaller relative to Safran SA and MTU Aero Engines AG.

  Comparison

  Theoretically the most exposed to widebody and Middle East disruption, but its younger fleet has made actual business performance more stable.

  Risks

  Widebody recovery slower than expected, weaker competitive position in future programs, and less-than-expected improvement in losses on new engine deliveries.

• MTU Aero Engines AG

  A high-elasticity recovery play, with commercial aviation contributing about 90% of profit.

  Strengths

  Valuation discount is relatively large, and if conditions continue to improve, short-term performance could be strong.

  Weaknesses

  Management changes, GTF recovery, cash conversion, and restoration of long-term confidence still need time.

  Comparison

  Short-term upside elasticity is higher than Safran SA's, but before challenges are resolved, the market may prefer Safran SA.

  Risks

  GTF engine cost and market share risks, deterioration in V2500/PW2000/CF6 aftermarket programs, slower air traffic and rising retirements, and MRO margins below expectations.

• GE Aerospace

  A relevant name in the aero engine and aftermarket value chain, with the report disclosing its target price and valuation methodology.

  Strengths

  The target price is based on a 30.5x EV/EBITDA multiple, indicating the report applies a higher valuation multiple to its long-term earnings power.

  Weaknesses

  Sensitive to the supply chain, production cadence at Airbus SE and Boeing Co, and airlines' financial conditions.

  Comparison

  Its valuation multiple is higher than other aerospace companies in the report, reflecting higher expectations for quality and growth.

  Risks

  Supplier shortages, aircraft manufacturer output below plan, and significant deterioration in airline finances affecting engine aftermarket growth.

• Airbus SE

  A key original equipment manufacturer amid new aircraft supply shortages, also influencing airline maintenance and older-aircraft life-extension decisions.

  Strengths

  Tight aircraft delivery supply and order backlogs support visibility on industry aftermarket demand.

  Weaknesses

  Execution difficulty in production ramp-up and cost pressure could weigh on margin expansion.

  Comparison

  Like Boeing Co, insufficient production capacity makes it difficult for airlines to replace older aircraft quickly, indirectly supporting the engine aftermarket.

  Risks

  Weaker commercial aircraft demand, production ramp-up execution risk, rising supply and labor costs, satellite program risk, and unfavorable cash use or large acquisitions.

• Boeing Co

  A key company on the global new aircraft supply side, with capacity and certification progress affecting industry supply and demand.

  Strengths

  Insufficient new aircraft supply and long-term order backlogs keep support in place for older-aircraft life extension and aftermarket demand.

  Weaknesses

  There are execution challenges in both commercial and defense businesses.

  Comparison

  Together with Airbus SE, it forms the source of new aircraft supply constraints, indirectly strengthening stickiness in the engine aftermarket.

  Risks

  Prolonged strikes, worsening supply chain issues, execution challenges in commercial and defense, and timing risks around 777X and 737MAX-7/10 certification.

Key data

• Change in traffic growth from Q1'26 to Q2'26+4% to -2%The report says overall traffic growth fell sharply from +4% in Q1'26 to -2% in Q2'26, mainly due to high oil prices and the Middle East conflict.
• YTD flight volume growth+0.4%The report sees this as a key indicator for the aero engine aftermarket, with most regions still positive except North America being flat and the Middle East declining.
• Change in Middle East flight volumes-24%The Middle East is the region with the clearest traffic disruption and an important reason why widebody aircraft are under pressure.
• YTD flight growth for widebody vs. narrowbody aircraftWidebody -2.5%; Narrowbody +0.9%Widebody aircraft have greater exposure to Middle East routes; Rolls-Royce Holdings PLC is theoretically more affected, but its younger fleet provides protection.
• 2026 scheduled flight growth+2.8%Airline schedules still point to positive full-year flight growth, slowing from +3.7% in Q1'26 but remaining positive.
• European A&D valuation14.8x EV/EBITDA vs. pre-war 16.4xThe report believes valuations remain below pre-war levels, and if conditions stabilize, the sector has room for gradual recovery.
• Safran SA Q1'26 aftermarket sales growth+32%The report expects Q2'26 aftermarket sales growth to accelerate again and believes the workscope risk narrative lacks sufficient basis.
• Jet fuel/energy costs as a share of airline revenueabout 20%-25%High oil prices are one of the biggest risks to airline earnings and aftermarket stocks.

Impact & implications

If the Strait of Hormuz reopens and helps ease oil price pressure, airline earnings expectations and the risk premium on aviation aftermarket stocks could improve. Since new aircraft supply remains tight and airlines are unwilling to cut maintenance spending or accelerate retirement of older aircraft, visibility on aftermarket revenue and profits remains relatively high. From an investment perspective, the report favors names with strong aftermarket fundamentals, room for valuation recovery, and cleaner narratives, especially Safran SA; at the same time, MTU Aero Engines AG may have greater upside elasticity if risk appetite rebounds.

Risks

• If high oil prices persist, airline earnings could deteriorate significantly starting in Q2'26, thereby affecting spending on maintenance and spare parts.
• If the Middle East conflict recurs or the reopening of the Strait of Hormuz proves unstable, the recovery of widebody aircraft and Middle East routes may fall short of expectations.
• Cyclical declines in older engine fleets such as V2500 and CFM56 may weaken aftermarket profits for Safran SA and MTU Aero Engines AG.
• Supply chain disruptions could affect both OEM deliveries and aftermarket sales.
• Issues such as GTF recovery, cash conversion, and management changes may suppress valuation recovery for MTU Aero Engines AG.
• Airline bankruptcies or major cost cuts are among the biggest tail risks for aftermarket stocks.

What to watch

• Whether the Strait of Hormuz reopening agreement is sustainable and whether jet fuel prices decline.
• Whether Q2'26 airline margins deteriorate as the market expects, and management commentary on the short-term recovery.
• Global flight volumes, especially the recovery pace of Middle East, widebody, and narrowbody flights.
• Grounded aircraft counts, retirement rates, maintenance backlogs, and changes in engine workscope.
• Safran SA Q2'26 aftermarket sales growth and whether it raises 2026 guidance.
• Progress at MTU Aero Engines AG regarding GTF recovery, cash conversion, and management stability.
• Production ramp-up, delivery cadence, and certification risks at Airbus SE and Boeing Co.