European Aerospace & Defence Weekly: Civil aviation rebounds, while drone and SMR themes heat up; defence performance diverges
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European Aerospace & Defence Weekly: Civil aviation rebounds, while drone and SMR themes heat up; defence performance diverges
In this weekly report, Goldman Sachs emphasizes that European civil aviation stocks rebounded strongly after geopolitical risks eased, while Airbus delivery momentum, Rolls-Royce SMR orders, drone and counter-drone capabilities, and differences in defence budgets and fiscal capacity are the key near-term focal points.
- European civil aviation stocks rose about 6%-8% this week; Rolls-Royce is up about 22% year to date, Safran about 11%, while MTU Aero remains down by a mid-single-digit percentage year to date.
- Airbus shares rose about 6% this week, and its June delivery pace is viewed as broadly consistent with what is needed to achieve the FY26 target of about 870 deliveries; the July Airbus Business Update will be an important catalyst.
- Rolls-Royce SMR secured three small modular reactor projects in Sweden, seen as evidence that it has established an early leading position in the European SMR space, though near-term earnings contribution is limited.
- On the defence side, investors are focused on drones, counter-drone systems, and the impact of Ukrainian defence companies; the report argues this is not a replacement of land systems but an evolution in capability form.
- Rheinmetall was the best-performing defence stock in coverage this week, up about 7%, but the sector overall remains constrained by the U.S. defence budget, differences in European fiscal capacity, and political uncertainty in the UK.
Report interpretation
Overview
This report is Goldman Sachs' weekly radar update on the European aerospace and defence sector, covering industry news, share-price performance, investor focus areas, positioning data, and recent research threads from June 15 to 21. The report centers on the civil aviation recovery trade, the evolution of defence capabilities, long-term optionality in SMR, drones and counter-drone systems, and European defence cooperation.
Core views
Goldman Sachs believes European civil aviation stocks performed strongly this week, mainly driven by investor buying on the narrative of easing geopolitical risk. Airbus delivery recovery and the July business update are key near-term catalysts. After strong year-to-date performance from Rolls-Royce and Safran, the market may revisit the catch-up trade in MTU Aero, but from a free cash flow yield perspective, the valuation gap is not as straightforward as the share-price divergence suggests. Long-term demand in defence remains supported, but near-term performance is more uneven due to budget expectations, fiscal headroom, and political uncertainty.
Analysis framework
The report combines weekly event tracking, relative stock performance, investor feedback, delivery data, industry cooperation, and policy news, distinguishing among the different drivers of civil aviation supply-demand repair, long-term technology optionality, and defence capability building.
Methodology notes
Growth, financial returns, valuation multiples, and composite factor comparison
Goldman Sachs Factor Profile compares stock characteristics relative to the market and industry peers across growth, financial returns, valuation multiples, and composite indicators; growth uses forward sales, EBITDA, and EPS growth, financial returns use ROE, ROCE, and CROCI, and multiples use indicators such as P/E, P/B, EV/EBITDA, and EV/FCF.
Tiered probability of being acquired
Goldman Sachs' M&A framework classifies covered companies into three tiers based on the probability of being acquired, where 1 represents high probability, 2 medium probability, and 3 low probability; companies with high or medium probability may have M&A factors incorporated into their target prices.
Database for financial history, forecasts, and ratio analysis
Quantum is Goldman Sachs' proprietary database, which can be used for in-depth single-company analysis as well as cross-company, cross-industry, and cross-market comparisons.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- European Aerospace & DefenceCore sector under coverage
- Strengths
- Recovery in civil aviation deliveries, long-term defence demand, expansion of drone and counter-drone capabilities, and long-term support from European security spending.
- Weaknesses
- Performance is differentiated within the sector, some companies' valuations already reflect substantial positives, and fiscal and budget constraints remain.
- Comparison
- Civil aviation is more strongly driven in the short term by easing geopolitical tensions and delivery data, while defence has steadier long-term demand but more short-term policy variables.
- Risks
- Changes in the U.S. defence budget, differences in European national fiscal capacity, political uncertainty in the UK, delivery execution falling short of expectations, and excessive valuation.
- AirbusCore civil aviation name and delivery-cycle monitoring target
- Strengths
- June delivery pace appears broadly consistent with the FY26 target of about 870 aircraft, and the second A320 Family final assembly line in Toulouse boosts confidence in the medium-term narrowbody production ramp.
- Weaknesses
- The delivery target still depends on the supply chain, production ramp-up, and second-half execution.
- Comparison
- Relative to engine and defence companies, Airbus' near-term catalysts are more concentrated in delivery data and the July business update.
- Risks
- June delivery data weaker than expected, lack of incremental confidence from the July business update, and ongoing supply-chain constraints.
- Rolls-RoyceCivil aviation rebound and long-term SMR optionality play
- Strengths
- Up about 22% year to date, with the stock at a historical high; SMR projects secured three reactor contracts in Sweden, reinforcing the narrative of an early leadership position in European SMR.
- Weaknesses
- SMR is not currently a near-term earnings driver, and the market still gives limited valuation credit to it.
- Comparison
- Compared with other civil aviation names, Rolls-Royce has more prominent long-term SMR optionality.
- Risks
- The stock already reflects substantial optimism, while SMR commercialization progress and regulatory approval cycles are lengthy.
- SafranCivil aviation and defence-related aerospace supply chain name
- Strengths
- Up about 11% year to date, having recovered most of the conflict-related decline, and supported by defence field-research-related coverage.
- Weaknesses
- Still slightly below its prior peak, and further upside may depend on delivery, margin, and supply-chain signals.
- Comparison
- Like Rolls-Royce, it has shown strong year-to-date performance, but its SMR optionality is less prominent than Rolls-Royce's.
- Risks
- Aerospace supply-chain bottlenecks, valuation digestion, and volatility in delivery cadence.
- MTU AeroPotential catch-up trade discussion target
- Strengths
- After strong performance from Rolls-Royce and Safran, the market may revisit a catch-up trade in MTU Aero.
- Weaknesses
- It is still down by a mid-single-digit percentage year to date, with investors concerned about mid-term cash generation and GTF aircraft-on-ground levels.
- Comparison
- Its share price lags Rolls-Royce and Safran, but Goldman Sachs believes the relative value case is more complex when viewed through free cash flow yield.
- Risks
- Persistence of GTF aircraft-on-ground issues, mid-term free cash flow below expectations, and failure of the valuation gap to converge.
- RheinmetallBest-performing defence name in coverage this week
- Strengths
- Up about 7% this week, and it showcased the Skyspotter counter-drone system, reinforcing its capabilities in drone defence and critical infrastructure protection.
- Weaknesses
- The broader defence sector backdrop is uneven, and investors still need to assess the impact of different drivers.
- Comparison
- Relative to the broader defence sector, Rheinmetall outperformed this week, but the sector did not rise uniformly.
- Risks
- Changes in defence budget expectations, differences in European fiscal capacity, political uncertainty, and the pace of order conversion.
- Leonardo, Baykar and EDGE GroupEntities related to European defence cooperation and drone capability building
- Strengths
- The Leonardo and EDGE Group joint venture targets more than €4bn of orders over the next five years; the Leonardo-Baykar joint venture targets a roughly $100bn drone market over the next decade.
- Weaknesses
- Joint venture approvals and sales scope are constrained by policy conditions, with significant restrictions around technology classification and exports.
- Comparison
- This reflects Europe's effort to fill capability gaps in drones, airborne radar, and sales platforms through cross-border cooperation.
- Risks
- Regulatory restrictions, technology confidentiality requirements, export approvals, and execution complexity in cooperation.
- Renault Group and ThalesCase study of dual-use industrial capacity and land-system capability evolution
- Strengths
- The 4 TROOP prototype combines Renault's industrial manufacturing capability with Thales' secure communications, tactical connectivity, and mission systems; the TOUTATIS loitering munition targets first-year production capacity of about 1,000 units/month.
- Weaknesses
- The path from prototype and industrialization target to actual large-scale delivery still needs validation.
- Comparison
- This shows that defence capability building is combining low-cost scalability with high-end systems integration, increasing the importance of dual-use industrial capacity.
- Risks
- Mass-production ramp-up, cost control, military procurement pace, and system integration difficulty.
Key data
- Report date2026-06-22The report was published at 10:05AM BST on 22 June 2026.
- Weekly performance of European civil aviation stocksup about 6%-8%The report says investors bought into the narrative of easing geopolitical tensions, driving strong gains in civil aviation stocks this week.
- Rolls-Royce year-to-date performanceup about 22%The stock price is at a historical high and is supported by the theme of long-term SMR optionality.
- Safran year-to-date performanceup about 11%It has recovered most of the conflict-related decline, but remains slightly below its previous peak.
- MTU Aero year-to-date performancedown by a mid-single-digit percentageThis reflects investor concerns about mid-term cash generation and the level of GTF aircraft on ground.
- Airbus weekly performanceup about 6%June delivery progress is viewed as broadly in line with the pace needed to achieve the FY26 target of about 870 deliveries.
- Airbus FY26 delivery targetabout 870 aircraftJune delivery data will be an important monthly delivery signal ahead of the July Airbus Business Update.
- A320 Family production targetup to about 75 aircraft/monthAirbus has launched a second modernized A320 Family final assembly line in Toulouse to support global production ramp-up.
- Rheinmetall weekly performanceup about 7%It was the strongest-performing defence stock covered by Goldman Sachs this week.
- Leonardo-Baykar drone market opportunityabout $100bn over the next decadeItaly conditionally approved the 50:50 joint venture, with sales and international expansion restricted to aligned EU/NATO countries.
- EDGE Group and Leonardo target ordersmore than €4bn over the next five yearsThe two parties formed a joint venture focused on next-generation airborne radar and also serving as a sales platform for the M-346 aircraft.
- Renault Group and Thales production targetabout 1,000 units/monthThe two parties plan industrialized production of the Thales TOUTATIS loitering munition, targeting that monthly capacity in the first year of production.
Impact & implications
The investment implication of this report is that the European aerospace and defence sector is not a one-way trade: civil aviation is more positively supported by delivery recovery, easing geopolitical risk, and earnings normalization, while defence has clear long-term demand but greater short-term differentiation due to budget, fiscal, and political variables. SMR, drones, counter-drone systems, and dual-use industrial capacity may become differentiated medium- to long-term themes, but their near-term valuation contribution and order conversion still need to be validated.
Risks
- Valuations in the European aerospace and defence sector may already reflect part of the positive news after the strong rebound.
- If Airbus delivery recovery falls short of expectations, it may weaken the positive trading thesis ahead of the July business update.
- MTU Aero still faces concerns related to mid-term cash generation and GTF aircraft-on-ground levels.
- U.S. defence budget expectations, differences in European national fiscal headroom, and political uncertainty in the UK may continue to drive divergence in defence-stock performance.
- While SMR, drone, and counter-drone themes have long-term appeal, there is uncertainty around commercialization, regulatory approvals, export restrictions, and order-conversion cycles.
- If geopolitical risks heat up again, the trading logic that benefited civil aviation stocks this week from easing conflict may reverse.
What to watch
- Airbus June delivery data and its consistency with the FY26 target of about 870 aircraft.
- Guidance from the July Airbus Business Update on H2 delivery normalization and narrowbody production ramp-up.
- Regulatory, financing, and construction milestones for the Rolls-Royce SMR Sweden project, and whether the market begins to assign valuation credit.
- Follow-up updates from MTU Aero on free cash flow and GTF aircraft-on-ground issues.
- The impact of European defence budgets, the U.S. defence budget, and UK political uncertainty on the relative performance of defence stocks.
- Order or cooperation progress related to drones, counter-drone systems, loitering munitions, and dual-use industrial capacity after Eurosatory 2026.
- Commercialization progress of counter-drone systems such as Rheinmetall Skyspotter in airports and critical infrastructure protection scenarios.
- Orders, export licenses, and technology boundaries for the Leonardo-EDGE Group and Leonardo-Baykar joint ventures.