Global aerospace and defence Report Interpretation

Overview

BofA reviews second-quarter results across global aerospace and defence and argues that the civil aerospace cycle remains strong. Commercial aftermarket activity is the principal source of upside to earnings and cash flow, while better original-equipment execution could broaden upgrades into the second half.

Core views

The report’s central conclusion is that second-quarter aerospace results reinforce a positive view of the cycle. Earnings and free-cash-flow generation were stronger than expected, led by civil aftermarket businesses. Safran beat expectations through Civil aftermarket and Propulsion, with management becoming more constructive on the aftermarket cycle and medium-term earnings. Rolls-Royce delivered EBIT beats across all three divisions and free cash flow materially ahead of consensus. MTU raised FY26 cash-conversion guidance to 50–60% from 45–55%. The notable exception was Melrose: underlying performance was solid, but disruption at Garden Grove weighed on results. Aftermarket demand remains the main driver of upgrades and appears broad-based. BofA’s aftermarket proxy expanded 20% year on year in Q2, versus 19% in Q1. GE reported 32% growth in H1 CES services revenue, record internal shop-visit output in Q2, and raised FY26 CES-services growth guidance to about 20% year on year from the mid-teens. RTX reported 18% commercial-aftermarket growth, including 25% at Pratt & Whitney. In Europe, Safran benefited from better-than-expected CFM56 workscope as material availability improved, while MTU’s commercial-MRO revenue rose 37% in Q2 versus 19% consensus; organic spares growth accelerated to the high teens from 10% year on year in Q1. BofA sees a durable CFM aftermarket runway. Improving materials availability should lift near-term throughput, and the ageing CFM56 fleet should support richer workscope through 2027–28. This prompted BofA to raise Safran’s mid-term free-cash-flow estimates by about 4–10%. The mix becomes less favourable after that as high-value third CFM56 visits decline, but rising LEAP first visits are expected to provide the next volume leg. BofA expects LEAP activity to more than offset the eventual decline in CFM56 visits, lifting total CFM ecosystem shop visits from about 2,400 currently to more than 4,000 by 2035. For Rolls-Royce, H1 free cash flow was almost £2 billion against £1.15 billion consensus, leading BofA to raise mid-term free-cash-flow estimates by about 6–8%; the report notes that sizeable Civil Aerospace LTSA catch-up benefits are unlikely to repeat, although they demonstrate installed-base margin potential. Original-equipment trends were also more encouraging, but shift attention to delivery execution, cash conversion and supply-chain resilience. Airbus delivered a strong Q2 with adjusted EBIT and free cash flow ahead of consensus, increasing BofA’s confidence in the production ramp. To meet FY26 guidance of about 870 aircraft, however, Airbus still needs to deliver roughly 519 aircraft in the second half. BofA believes the debate is increasingly moving toward the medium-term outlook and possible upside to Airbus’s €10 billion Commercial Aircraft EBIT target. Boeing delivered 171 commercial aircraft in Q2, its highest quarterly volume since Q4 2018, and generated $631 million of free cash flow, its highest quarterly output since Q4 2023. MTU expects OEM growth to improve as comparisons normalize and GTF deliveries increase, while Safran indicated improving LEAP original-equipment profitability. The report also places the results in a sector valuation and estimate-revision context. European civil aerospace traded at a 65% premium to the SXXP and European defence at a 78% premium as of 30 July 2026. Over the prior month, sector FY26 EPS declined 0.2% overall: civil-OE estimates rose 0.2%, civil-aftermarket estimates rose 1.2%, and defence estimates fell 0.5%. SAAB had the largest estimate increase at 4%, while Kongsberg saw the largest decrease at 5.1%. BofA notes that European defence has retained its premium since February 2022, whereas US aerospace and defence names have not re-rated as significantly relative to Europe. The report attributes several individual re-ratings to backlog visibility, aftermarket growth, recovering widebody activity, or rising defence budgets, while highlighting margin, capital-allocation and GTF-related concerns for selected names.

Analysis framework

BofA combines second-quarter company results with comparisons against consensus, free-cash-flow and earnings-estimate revisions, production and delivery data, aftermarket shop-visit trends, and relative valuation comparisons. It then links operating evidence—such as parts availability, fleet age, maintenance demand and production ramps—to medium-term cash-flow expectations and peer valuation multiples.

Methodology notes

• Industry AnalysisSupply-demand framework

  Aftermarket demand and shop-visit outlook

  The report uses maintenance volumes, material availability, fleet age and engine-transition trends to assess the demand and capacity drivers of aerospace aftermarket revenue and cash flow.

• Industry AnalysisVolume-price decomposition

  Aftermarket pricing, workscope and shop-visit volume

  BofA separates the effects of pricing, maintenance scope and shop-visit volumes to explain why aftermarket performance exceeded expectations.

• Valuation methodsFCFF/FCFE Free Cash Flow

  Free-cash-flow multiple and yield valuation

  The report’s company price-objective discussions value forecast free cash flow using peer or through-cycle multiples, then discount future estimates back to 2026.

• Valuation methodsP/E and PEG Valuation

  Forward P/E relative valuation

  The report compares 12-month forward P/E multiples with the broader market and industrial indices to assess sector and company re-rating or de-rating.

Asset mapping & comparison

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

• Safran

  Covered civil-aerospace aftermarket and propulsion beneficiary

  Strengths

  Better-than-expected CFM56 workscope, improving material availability and improving LEAP OE profitability.

  Weaknesses

  Elevated near-term capacity risk.

  Comparison

  BofA uses a 28x target multiple on 2029–30E average unhedged FCF, above its 2007–19 average 22x FCF multiple.

  Risks

  USD weakness versus the euro, missed LEAP delivery guidance, LEAP execution or product issues, accounting-rule changes and narrow-body groundings.

• Rolls-Royce

  Covered commercial-engine aftermarket beneficiary

  Strengths

  EBIT beat across all three divisions and H1 free cash flow almost £2bn versus £1.15bn consensus.

  Weaknesses

  LTSA catch-up benefits in Civil Aerospace are unlikely to repeat.

  Comparison

  BofA values 2030 operational FCF at 26x, versus a peer range of 22–28x, plus V2500 royalty-payment NPV and an SMR-business valuation.

  Risks

  Reduced flying after an exogenous event, Trent XWB issues and accelerated parking of widebody aircraft with Rolls-Royce engines.

• MTU Aero Engines

  Covered commercial-MRO and engine-aftermarket beneficiary

  Strengths

  Commercial MRO revenue rose 37% in Q2 and FY26 cash-conversion guidance increased to 50–60%.

  Weaknesses

  Slightly weaker mid-term FCF conversion than peers and GTF concerns.

  Comparison

  BofA applies a 25x multiple to its 2030 FCF estimate, at a slight discount to peers.

  Risks

  USD weakness, slower passenger traffic, cargo-market weakness and higher GTF durability provisions.

• Airbus

  Covered original-equipment producer benefiting from improving execution

  Strengths

  Q2 adjusted EBIT and free cash flow beat consensus; high backlog visibility supports the medium-term case.

  Weaknesses

  Needs about 519 deliveries in H2 to meet FY26 guidance of about 870 aircraft.

  Comparison

  BofA’s €258 price objective uses a 20x FCF-based multiple, a 25% premium to the 16x through-cycle P/E.

  Risks

  A350/A320 order risk, A350XWB in-service disruption, supply-chain delays and USD weakness versus the euro.

• Boeing

  Covered original-equipment producer showing improved delivery and cash execution

  Strengths

  Q2 deliveries reached 171 and free cash flow was $631m, both the strongest quarterly readings in years.

  Weaknesses

  Production-ramp and new-program execution remain material issues.

  Comparison

  BofA’s $270 price objective is based on normalized FCF of $11 per share and a 1.0x relative value to the S&P 500.

  Risks

  Program cost overruns, labour competition, trade-policy disruption, high oil prices, commercial-aviation weakness, currency moves, 787 fixes and reputational risk.

• RTX

  Covered commercial-aftermarket and defence-exposed company

  Strengths

  Commercial aftermarket grew 18%, including 25% at Pratt & Whitney.

  Weaknesses

  GTF issues and defence-program execution remain potential constraints.

  Comparison

  BofA’s $235 objective uses 18x 2027E EV/EBITDA versus 11x for the S&P 500.

  Risks

  Commercial-aviation downturn, GTF powder-metal complications, global economic weakness, defence-program cancellations and uncertain international order timing.

Key data

• BofA aftermarket proxy growth20% YoY in Q2Up from 19% YoY in Q1, confirming broad-based commercial-engine aftermarket strength.
• Rolls-Royce H1 free cash flowAlmost £2bnCompared with £1.15bn consensus.
• MTU FY26 cash-conversion guidance50–60%Raised from 45–55%.
• MTU Commercial MRO Q2 revenue growth37%Compared with 19% consensus.
• Airbus FY26 delivery requirementAbout 519 aircraft in H2Required to reach FY26 guidance of about 870 aircraft.
• Boeing Q2 commercial aircraft deliveries171 aircraftHighest quarterly total since Q4 2018.
• Boeing Q2 free cash flow$631mHighest quarterly output since Q4 2023.
• Total CFM ecosystem shop visitsMore than 4,000 by 2035BofA expects growth from about 2,400 currently as LEAP first visits expand.
• European sector valuation premiumEU Civil 65%; EU Defence 78%Premium to the SXXP as of 30 July 2026.

Impact & implications

BofA argues that aftermarket strength continues to support earnings and free-cash-flow upgrades, particularly for companies exposed to commercial engine maintenance. Improving aircraft-production execution could add another source of upgrades in the second half, but the durability of the case depends on supply-chain performance, delivery ramps and the transition from CFM56 to LEAP maintenance activity.

Risks

• Supply-chain disruption could delay aircraft-production rates and undermine original-equipment cash conversion.
• The CFM56 mix is expected to become less favourable after 2027–28 as high-value third visits decline.
• Company-specific engine durability, product-execution and delivery-ramp issues remain material risks across the covered aerospace complex.

What to watch

• Whether Airbus can deliver about 519 aircraft in H2 to achieve FY26 guidance of about 870 aircraft.
• Commercial engine aftermarket growth, material availability and CFM56 workscope through 2027–28.
• The pace of LEAP first visits and its ability to offset eventual CFM56 volume declines.
• Boeing delivery and free-cash-flow progression, and execution on production ramps.
• Weekly consensus EPS revisions, particularly for civil aftermarket, civil OE and defence names.