European commercial aerospace aftermarket: European aerospace aftermarket remains resilient, but high fuel costs are raising downside-tail risks

Overview

Bernstein reviews the European commercial-aerospace aftermarket amid elevated oil prices and continuing conflicts in Iran and Ukraine. It concludes that underlying aftermarket conditions remain supportive because traffic, backlogs and retirement trends are resilient, but worsening airline economics raise a low-probability downside scenario in which repair demand, legacy-engine profitability and valuation multiples weaken sharply.

Core views

Bernstein's central conclusion is that commercial-aerospace aftermarket equities are being penalized for a high-oil-price environment despite very strong operating results. The sector has de-rated by 12% on average year-to-date, with US stocks most affected, even as Rolls-Royce reported 31% profit growth, Safran 29%, and GE 21%. The firm expects another round of third-quarter beats and guidance increases, particularly at Safran, but judges sector visibility insufficient for a broad near-term call. Current operating indicators remain more resilient than the share-price backdrop suggests. Global traffic is flat year-on-year, with Middle Eastern traffic the exception at down 18%. Legacy-engine utilization has weakened as airlines seek fuel efficiency and favor newer engines: CFM56 cycles are down 6% year-to-date and V2500 cycles are down 10%. Both improved during the summer. Bernstein attributes the larger V2500 decline partly to falling GTF groundings, which redirect aircraft use away from V2500-operated fleets. Crucially, retirement rates remain abnormally low at about 2%, broadly in line with 2025, and the number of stored aircraft—usually a leading sign of retirement—is lower year-on-year. These indicators support continued repair demand. The pressure point is airline profitability. Jet fuel is now 74% above 2025 levels and at its highest level since April. Bernstein says airlines have passed through part of the increase through higher yields, but margins have fallen at almost every airline and some carriers are unprofitable. Consensus expects profitability to deteriorate further in the third quarter and full-year 2026, while expected airline profitability has worsened across regions since the Iran war. Higher fuel costs alone need to coincide with an economic downturn to derail the aftermarket cycle in Bernstein's view. In its high-probability base case, Bernstein expects the crisis to be resolved in coming months, with little or no effect on underlying aftermarket demand. Airlines removed capacity too aggressively during Covid and subsequently struggled with reduced fleets, making them reluctant to defer or cancel maintenance. Safran, Rolls-Royce and MTU have sufficiently rich backlogs to support strong results over the next 12 months and well into 2027. In a recovery, MTU is viewed as the highest-beta exposure; investors could subsequently rotate toward higher-quality Safran and Rolls-Royce. The lower-probability but rising downside case is that airlines become unable to afford repairs. Higher retirements would expand the availability of spare parts, reducing profits from legacy engines, which Bernstein describes as the main profit pool for most companies, and compressing valuation multiples. The firm does not expect this scenario in the short term, but says the likelihood rises as the wars continue and could result in double-digit estimate downgrades and de-rating. Bernstein updates Safran and Rolls-Royce estimates after second-quarter results, recent commentary and aftermarket trends. For Safran, it increases forecasts but reduces the EV/EBIT target multiple to 19.0x from 20.9x, lifting the target price to €420 from €410 and reiterating Outperform. Its 2026 estimates are above company guidance and consensus in several measures, including €6.8 billion recurring operating income versus €6.45 billion guidance midpoint and €6.5 billion consensus, and €5.7 billion free cash flow versus €4.8 billion guidance midpoint and €4.9 billion consensus. For Rolls-Royce, Bernstein raises forecasts but cuts the EV/EBIT target to 19.0x from 23.2x while updating its sum-of-the-parts valuation; the target price rises to £16 from £15 and the Market-Perform rating is reiterated. Its 2026 operating-profit estimate of £4.58 billion is below the £4.80 billion guidance midpoint and £4.85 billion consensus, while its £4.08 billion free-cash-flow estimate is modestly above both the £3.90 billion guidance midpoint and £4.07 billion consensus. For positioning, Bernstein continues to favor MTU in the short term because it offers high recovery sensitivity and a company-specific potential catalyst at its November capital-markets day if the environment remains difficult. When visibility improves, it would favor the sector overall, with Safran preferred for what it sees as the greatest scope for earnings upgrades and a valuation that can at least hold. It rates MTU, GE, Airbus and Boeing Outperform, RTX Market-Perform, and Rolls-Royce Market-Perform.

Analysis framework

Bernstein combines aircraft-traffic and engine-cycle data, retirement and grounded-aircraft indicators, airline-margin trends, company results and management commentary. It then frames a base case and a downside scenario, updates company forecasts, and applies EV/EBIT and sum-of-the-parts valuation assumptions to its target prices.

Methodology notes

• Industry AnalysisSupply-demand framework

  Aftermarket supply-demand analysis using traffic, engine cycles, aircraft retirements, stored aircraft and repair backlogs.

  The report treats flight activity and maintenance backlogs as demand indicators, while retirements and spare-parts availability affect supply and legacy-engine profitability.

• Valuation methodsSOTP (Sum-of-the-Parts) Valuation

  Sum-of-the-parts valuation for Rolls-Royce.

  Bernstein updates Rolls-Royce's target price by reassessing the value of its component businesses in the current aftermarket environment.

• Other

  EV/EBIT target-multiple valuation.

  Bernstein lowers the valuation multiples used for Safran and Rolls-Royce to reflect reduced aftermarket visibility, even while raising operating forecasts.

Asset mapping & comparison

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

• Safran (SAF.FP)

  Covered aerospace aftermarket company with expected third-quarter upside and the greatest scope for earnings upgrades when visibility improves.

  Strengths

  Rich backlog, strong results, Bernstein's 2026 estimates above guidance midpoint and consensus for recurring operating income and free cash flow.

  Weaknesses

  Target valuation multiple reduced because of the aftermarket environment.

  Comparison

  Preferred by Bernstein over the sector when visibility improves.

  Risks

  A severe airline repair-spending downturn could weaken legacy-engine profit and valuation.

• Rolls-Royce Holdings (RR/.LN)

  Covered aerospace company benefiting from a rich backlog but exposed to the sector's visibility concerns.

  Strengths

  Reported 31% profit growth; backlog is expected to support results into 2027.

  Weaknesses

  Bernstein's 2026 operating-profit estimate is below guidance midpoint and consensus; target multiple was reduced.

  Comparison

  Identified as a higher-quality company likely to be favored after a recovery alongside Safran.

  Risks

  Lower airline repair affordability could pressure aftermarket demand and multiples.

• MTU Aero Engines (MTX.GR)

  Bernstein's favored short-term aerospace stock and high-beta recovery exposure.

  Strengths

  Potential recovery sensitivity and a specific positive catalyst at its November capital-markets day.

  Weaknesses

  High-beta positioning implies greater sensitivity to the sector environment.

  Comparison

  Preferred near term over broader sector exposure; Safran becomes preferred when visibility improves.

  Risks

  A prolonged challenging environment could undermine recovery expectations.

• GE Aerospace (GE)

  Covered commercial-aerospace company rated Outperform.

  Strengths

  Reported 21% profit growth.

  Comparison

  Rated Outperform alongside MTU, Airbus and Boeing.

  Risks

  Sector downside from airline repair deferrals and multiple compression.

• Airbus (AIR.FP)

  Covered aerospace company rated Outperform.

  Comparison

  Rated Outperform alongside MTU, GE and Boeing.

  Risks

  Sector downside from weaker airline economics.

• Boeing (BA)

  Covered aerospace company rated Outperform.

  Comparison

  Rated Outperform alongside MTU, GE and Airbus.

  Risks

  Sector downside from weaker airline economics.

• RTX (RTX)

  Covered aerospace company rated Market-Perform.

  Comparison

  Rated Market-Perform, unlike MTU, GE, Airbus and Boeing, which are rated Outperform.

  Risks

  Sector downside from weaker airline economics.

Key data

• Commercial aerospace sector de-rating-12% year-to-dateAverage change in 12-month forward EV/EBIT since the start of 2026.
• Jet fuel price change+74% versus 2025Highest level since April, according to the report.
• CFM56 cycles-6% YTDLegacy-engine flight cycles; improved over the summer.
• V2500 cycles-10% YTDDecline partly linked to lower GTF groundings and resulting fleet-use shifts.
• Aircraft retirement rate~2%Still abnormally low and broadly in line with 2025.
• Safran target price€420Raised from €410; EV/EBIT target reduced to 19.0x from 20.9x.
• Rolls-Royce target price£16Raised from £15; EV/EBIT target reduced to 19.0x from 23.2x.

Impact & implications

Bernstein believes strong backlogs, low retirement rates and constrained airline fleet capacity should keep the aftermarket cycle intact in its base case. However, prolonged high fuel costs and weaker airline margins could eventually force maintenance deferrals and higher retirements, exposing legacy-engine profits and sector valuation multiples. The firm therefore favors MTU near term and would prefer Safran when sector visibility improves.

Risks

• Sustained high oil prices and continued conflict could further erode airline profitability.
• If airlines cannot afford repairs, maintenance deferrals and higher retirements could increase spare-parts availability and reduce legacy-engine profits.
• The downside scenario could produce double-digit earnings downgrades and valuation de-rating across aftermarket stocks.

What to watch

• The duration of the Iran and Ukraine conflicts and whether oil prices recede in coming months.
• Airline fare pass-through, margins and the incidence of unprofitable routes.
• Legacy-engine cycle trends, especially CFM56 and V2500 utilization.
• Aircraft retirement rates, stored-aircraft levels and GTF-grounding recovery.
• Third-quarter results and potential beat-and-raise outcomes, especially at Safran.
• MTU's November capital-markets day.