Edison Investment Research

Airbus CEO says “he is not close to retirement”

Succession planning is proof that Airbus is a changed company

In a Reuters interview after the Airbus AGM yesterday CEO Tom Enders said he has no intention of retiring when his current term ends in 2019 and that “it is up to the board and shareholders to decide” if they want him to stay. Mr Enders’ comments yesterday are the first insight to what is likely to be fascinating succession planning at Airbus. It is interesting for two reasons; firstly the company’s history of the management team being chosen by the French and German governments and secondly what the future holds for Fabrice Bregier who currently runs Airbus Commercial Aircraft and has recently been appointed Chief Operating Officer of the newly integrated Airbus SE.

All eyes on the Geared Turbofan

2017 is a make or break year for Pratt & Whitney’s beleaguered engine programme

The Geared Turbofan (GTF) engine is proof that innovating in aerospace is never an easy task. When Airbus and Boeing first introduced the concept of their new re-engined narrowbodies (A320neo and 737MAX) they were quick to reassure airlines and investors that this was a simple development proposition - a design modification rather than a clean sheet aircraft. I remember noting at the time that Airbus and Boeing were cleverly transferring the majority of engineering risk to the engine original equipment manufacturers (OEMs), and it has proved to be ever thus.

2017…the year of the rooster, Trump and flying cars

What does the year have in store for Aerospace & Defence stocks?

The Aerospace & Defence sector has two distinct sides to it, with civil aerospace and defence often proffering very different investment narratives. Historically, terrorism and political instability have tended to cause the two sides of the sector to diverge, with defence valuations surging and civil valuations falling. This happened most notably after 9/11 in 2001. At the end of 2016 though, a year defined by terror attacks and political turmoil, the situation was quite different. Defence stocks were the stand out performers during last year, driven initially by the fact global defence spending is now growing, having been in decline from 2011 – 2015, and more latterly by Donald Trump’s US election victory. However, civil stocks have also performed well. Although there have been a high number of terror attacks during 2016, improved airport security measures have forced terrorists to seek new targets and so aerospace stocks have been largely unaffected, and in fact have continued to benefit from the structural growth of passengers numbers which continues to drive output growth. So what does 2017 have in store for aerospace and defence?

SFO shows its metal with £497m fine for Rolls-Royce

Black cloud over engine manufacturer should now start to lift

The Serious Fraud Office’s (SFO) five year investigation of Rolls-Royce has finally come to a conclusion, with a verdict that shows the SFO is getting tough on corruption, but one which should hopefully allow the dark cloud over Rolls-Royce to start lifting.

Cyber wars

Will Russia’s attempt to influence the US election change global cybersecurity policy?

The news this week that Russia tried to influence the outcome of the US election is likely to have elevated cybersecurity up Mr Trump’s ‘to do’ list for when he takes office next week. The report from the Intelligence Agencies stated that “Russia’s effort the influence the election represented a significant escalation in directness, level of activity and scope of effort compare to previous operations.” Cyber is not a new topic, and has been a buzz word in the defence industry over the past five years as companies sought exposure to what has been seen as a growth market. However, cyber is still a very small percentage of revenues for the defence primes and the market has been very fragmented. In today’s blog, I ponder what impact Russia’s meddling in the election will have on cybersecurity.

Trump wants to defeat ISIS and eliminate budget caps

Leaked memo outlines the President Elect’s defence priorities

A leaked Pentagon memo has given us a fascinating insight into President Elect Trump’s approach to US Foreign Policy. It suggests that Mr Trump is going to take a very different approach to handling Russia compared the current administration. His top four priorities are reported to be; defeating ISIS, eliminating budget caps, developing a new cyber strategy and finding greater efficiencies in the US Department of Defense (DoD). You will note that controversially Russia does not feature in this list. In today’s blog we examine what this new approach could mean for the defence industry.

Airbus is cutting it fine

Record breaking December needed to meet guidance

I highlighted last month that Airbus had its work cut out to meet its 2016 delivery target of 670 aircraft, needing to deliver 154 in two months. Well the latest statistics show 61 aircraft were delivered in November, leaving 94 to be delivered in December. I previously said that “I am not generally predisposed to bet against Airbus when it comes to them achieving delivery targets” and I think I still feel the same as their track record is strong, but it feels as though the risk is increasing of Airbus not meeting FY16 guidance.

Trump’s new security team

Gen Flynn and Gen Mattis make a fiery and intriguing cocktail

I have resisted commenting on Mr Trump’s election victory until now, because I wanted to let the dust settle and see whom he appointed as National Security Advisor and Defense Secretary. With General (Rtd) Michael Flynn and General (Rtd) James Mattis now confirmed respectively (pending Congressional approval for Mattis), today I take a look at what these appointments signal for foreign policy, and therefore the defence industry, during Mr Trump’s tenure as President of the United States.

Who’s the daddy?

Airbus, Boeing, the WTO or the lawyers

As the latest round of chest beating by Boeing and Airbus dies away until the next round of appeals, I really start to wonder why the finger pointing and name calling persists. It seems to me that only one group of people are directly benefiting from the “discussion”, and I do not mean Joe public.

Is the last bastion of the UK Defence Industry at risk?

Urgent decisions are needed about UK shipbuilding

Naval Ships and Submarines are forecast to consume 40% of total UK defence equipment spending over the next decade, so you would think it is a safe assumption that shipbuilding is an excellent market for the likes of BAE Systems, Babcock and Rolls-Royce?  Last week’s report by the House of Commons Defence Committee suggests otherwise. MPs highlighted that decisions made over the next year about the Type 26 and Type 31 are critical in establishing whether skills can be maintained, budgets can be met and ships can be delivered on time.

It pays to be civil in the long run

Backlog execution should enable improved investor returns

By the end of September, Boeing and Airbus had surpassed an aggregate of 1,000 aircraft deliveries as previously announced product introductions and rate increases continue to drive up demand across the aerospace supply chain. By the year end the two companies are expected to deliver an aggregate of around 1425 aircraft, slightly higher than in 2015.

Innovation in the defence industry

Is it industry or the the MOD that is too old to innovate?

There is uproar in the upper echelons of the defence industry. Last month Tony Douglas, CEO of the government’s Defence Equipment and Support group (DE&S) reportedly berated senior defence industry executives for all being over forty-five, implying that they are too old to be innovative. Ironically, in my previous blog ‘Brave new world for defence industry’ I highlighted that it is the Government’s cost cutting that is jeopardising long term innovation. So is Mr Douglas’ criticism fair? 

Heathrow vs. Gatwick?

The airport expansion debate rages on

Are we finally about to get an answer to the Heathrow vs. Gatwick airport expansion question? MPs are scheduled to debate the question of UK airport capacity next Tuesday (18 October) as the Prime Minister has indicated a desire to finally make a decision on an issue the Conservative Government has thus far managed to sweep under the carpet. Interestingly, the debate will be set against the backdrop of new research which shows that it is the road traffic in and around the airport that is the main contributor to emissions, not the aircraft themselves.

Are airlines weathering the impact of Brexit and terrorism?

Passenger traffic growth analysis

In my 27 July blog ‘The Summer of Hate’ I espoused that summer 2016 could be a defining moment for the aerospace industry. I questioned whether the new wave of terrorism on mainland Europe would lower our propensity to travel by air and therefore encourage more people to holiday closer to home. The IATA passenger data is now in for July so what does it show?

Do tanks have a future?

A look at how armour is evolving

Last month the British Army caused traffic chaos in London by driving a replica First World War tank and a modern Challenger tank around Trafalgar Square. This impressive, yet slightly anti-social display was to commemorate one hundred years of tank service. Seeing these two goliaths of warfare side by side, it struck me that whilst major technological advances have been made over the past century, a modern tank still looks remarkably similar to its predecessor. It made me question whether tanks one hundred years on will still look so similar? Or whether in fact modern warfare no longer needs tanks? These are questions that are likely to be preoccupying the military vehicle manufacturers such as General Dynamics, BAE Systems and Nexter.

The debate about the A380 rages on

Singapore Airlines will not extend lease on first A380

The A380 programme has taken another blow with the news that Singapore Airlines (SIA) – the aircraft’s first buyer and currently its second largest customer - will not renew the lease for its first A380. My 19 July blog ‘The end of the road for the A380’ highlighted that the future of the aircraft looks uncertain, with one of the issues being the unknown shape of the market for second hand A380s. The end of this first lease marks a new chapter for the aircraft and so far the outlook does not look that positive. 

The ‘special’ relationship?

Carter and Trump's speeches raise big questions about US and UK defence

Events of the past week have raised some fascinating questions about the ‘special relationship’ between the United States and the United Kingdom. Firstly we saw Ash Carter (US Secretary of Defense) hold Theresa May and Michael Fallon’s feet to the fire to ensure the UK supports the US in its role as global policeman, and continues to spend 2% of GDP on defence. Subsequently Donald Trump set out his plans to increase the size of the US military without any explanation of how he would fund it. So what do these two acts of showmanship actually mean for the defence landscape?

August deliveries at Airbus

Slow progress on A320neo

In my blog on 4 September I said I would be watching Airbus’ August delivery numbers with interest. Well they were released last week and despite Airbus CEO Fabrice Bregier saying that staff on the A320neo programme have been working overtime to catch up on deliveries, not much progress appears to have been made so far.

Safran and Zodiac - do opposites attract?

A look at two very different French Aerospace companies

Safran and Zodiac are both French, both exposed to the structural growth of the civil aerospace industry, and both have world class products. But it is there the similarities end. Over the past five years, Safran has proved itself to be a well-run company with strong project execution. Zodiac’s management and execution has been found sorely wanting as it struggles to keep pace with the production ramp ups at Airbus and Boeing. Last week saw Zodiac’s ninth profit warning in two years, but interestingly over the past couple of months there has been a resurgence in market rumours that Safran is potentially interested in acquiring the company. Why are the two companies such a different investment proposition, and do they really have a future together?

Does a smaller military present an opportunity for industry?

MOD statistics show significant troop shortfall

Last month’s UK Ministry of Defence (MOD) personnel statistics show the UK Armed Forces have a personnel deficit of 4.1%, and strikingly the number of trained soldiers in the Army is at its lowest since 1750. The doomsayers note that this recruitment crisis means the UK would struggle to respond to a major crisis. However, could this not provide an interesting opportunity for the defence industry to show how the right equipment means you do not need as many troops?

Busy summer at Airbus

Record breaking number of deliveries in August

In last week’s blog I highlighted that Boeing and Lockheed Martin had been busy over the traditionally quiet month of August. A recent Reuters interview with Airbus CEO Fabrice Bregier suggest that engineers in Toulouse have also been unusually industrious this summer. Airbus has not yet published official orders and deliveries data for August, but Bregier said “I can already tell you is that it will be the best month of August in Airbus’s history, in terms of the numbers of planes delivered”.

New tanker and fighter jet ready for take off

F-35 declared combat ready and KC-46 ready to enter production

August may traditionally be the month of days spent by the beach and long summer evenings, but it seems life has been somewhat busier at Lockheed Martin and Boeing in August 2016. Last month saw the companies achieve major milestones for the F-35A and KC-46 tanker respectively.  The F-35A has now reached Initial Operating Capability (IOC) and the KC-46 has been approved to enter production. These are significant achievements because the products have both had eventful development phases and both aircraft should be important drivers of profitability going forward, at not only the prime manufacturers but for suppliers as well, notably BAE Systems with its significant programme share.

Boeing struggling to meet 2016 orders target

Is the 777 going the way of the A330?

Aviation Week last week published data that suggest Boeing will struggle to meet its widebody order target in 2016. It appears the American aircraft manufacture is suffering from the same phenomenon as its European rival Airbus where sales of the legacy A330 dropped sharply once the newer and more fuel efficient A330neo was an option. Boeing has only booked 8 orders for the classic 777 in 2016, due in part to the re-engined 777X which is due to enter service in December 2019. So what is happening and is this cause for concern?

A New Year’s resolution for Cobham?

CEO and CFO to move on from the struggling Aerospace & Defence company

Three years ago I, and many others, expected Cobham to be given a fresh lease of life by its new CEO Bob Murphy and CFO Simon Nicholls who joined the company in 2012 and 2013 respectively. Mr Murphy was the first American to take the helm of a business whose largest customer is the US Department of Defence (DoD), and Mr Nicholls was the highly respected CFO of Senior, where he had a reputation for cost cutting and attention to detail. Whilst Cobham has made some progress under their stewardship, the past three years have also been turbulent for the company. Here we stand in 2016; a year which has seen the company profit warn, require a £500m rights issue and the CFO resign. To cap it off, it was announced last Wednesday that Mr Murphy is to leave the company in order to ‘pursue other opportunities’, ending months of speculation over whether he would remain as CEO. So what has gone wrong and what does this change in management mean for the company?

The rise of the activists

A look at the impact of activist investors on the Aerospace and Defence sector

Last week it emerged that the activist investor, Elliott Capital Advisors, now holds a 5% stake in Meggitt. This makes Meggitt the third European Aerospace & Defence company to have such an investor on its shareholder register and it led me to ponder what is driving these activists? Why the interest in Aerospace and Defence? And what are they trying to achieve?

Geared Turbofan engine too hot to handle?

Teething problems for Pratt & Whitney's new narrowbody engine

Pratt & Whitney’s struggles to deliver correctly functioning Geared Turbofan engines for Airbus A320neo aircraft is a reminder that aircraft development is always fraught with risks. Airbus clearly signposted in January that 2016 neo deliveries would be back loaded into the second half of the year. It is targeting 56 aircraft this year but as of the end of July has only delivered 11, so it has its work cut out in Toulouse. Where has it gone wrong?

Common sense in UK defence?

The UK MOD is to buy its new fleet of Apaches directly from Boeing

In my blog last week I highlighted the calamitous processes, and often illogical decisions that characterise defence procurement. However, the announcement during the Farnborough Air Show that the MOD will buy 50 AH-64E Apache Guardian helicopters from Boeing may well be turn out to be one of the Ministry of Defence’s (MOD) most sensible decisions yet.

Have you heard of GKN?

Making things work for more than a quarter of a millennium

Watching a BBC documentary of a behind the scenes look at the opening ceremony of the 2012 Olympic games reminded me of how the industrial revolution was a centre piece of the performance, creating the illusion of the Olympic rings being forged from steel. Had it happened back in the latter part of the 18th century as new processes changed Britain for ever, those rings may well have been forged in iron by one of the UK’s greatest global brands. GKN’s forebears have been making things happen for over 250 years and the company Guest, Keen & Nettlefolds was formed via merger in 1902. The company is one of our leading global manufacturers, and yet it is hardly a household name.

Lockheed Martin names and shames the US DoD

Funding for the F-35 is "insufficient"

Lockheed Martin depends on the US Department of Defense (DoD) for c.80% of its revenues. Therefore for Lockheed Martin’s CEO Marillyn Hewson to name and shame the DoD as having overdue bills at Q2 results last week is not a decision she would have taken lightly. It caused me to wonder, what was Hewson trying to achieve?

The summer of hate

The impact of terrorism on the Aerospace & Defence sector

An article in the press today described the summer of 2016 as the “summer of hate”.  The relentless pace of the attacks has invoked terror into the minds of ordinary people and politicians have been forced to make frequent declarations of their determination to protect their citizens.  It therefore seems logical to me that the summer of 2016 will be one which shapes the near term future for Aerospace and Defence companies.

Inside the White House

A guide to the US budgetary process

Last week I wrote about what Donald Trump as President of the United States might mean for the US Defence Budget and I noted that in an election year, the President’s ability to alter the budget is quite limited. Today I look at why that is the case by unpicking the rather confusing and protracted US budget process.

The end of the road for the A380?

A look at why the business case for the A380 has gone wrong

Airbus launched the A3XX aircraft (which would become the A380) in 1997 based on winning 650 orders over the next twenty years. It claimed to be in consultation with 20 leading airlines about their requirements for a new double-decker aircraft. Nineteen years on, the A380 has won just 319 orders from 18 airlines. So where has it all gone so wrong for what is Airbus’ flagship aircraft? In addition, with the announcement last week at the Farnborough Air Show that the production rate has been cut to twelve per year, what does the future hold for the programme?

The rain fell mainly on the planes

Farnborough Airshow 2016 rant, sorry round up

When considering my view on the Farnborough International Airshow 2016 it is tempting to focus on the chaos of the first couple of days at the show. Monday’s washout was spectacular, and when we were eventually cleared from the site at around 5.30pm there was hardly anybody left. Even the ice cream van had gone home!

Full speed ahead for Successor

UK's nuclear deterrent looks assured with May as PM

On Wednesday evening, Theresa May was asked to write her orders for how the military should react in the event of nuclear war. Not exactly the easiest first few hours in a new job and probably cause for a sleepless night. However, the executives at the top of the UK defence industry will probably have slept a little more soundly as the future of Trident finally looks secure under her leadership.

Trumping Clinton on defence spending

A look at the potential impact of Donald Trump as President on US defence spending

“I’m gonna build a military that’s gonna be much stronger than it is right now. It’s gonna be so strong, nobody’s gonna mess with us. But you know what? We can do it for a lot less.” (Donald Trump)

Donald Trump is somewhat of an enigma when it comes to his military strategy. On the one hand he seems to have the US defence primes in his crosshairs. He frequently criticises politicians and defence contractors for colluding to build costly and unnecessary weapons systems, and he is determined to reduce the procurement budget. On the other hand he has spoken of wanting to increase troop numbers, buy new equipment and bolster the US military presence around the globe, particularly in the Middle East and China.

Civil wars abating

Farnborough Airshow Preview 2016

Next Monday sees the start of the week long Farnborough Airshow which typically heralds a flurry of news in the sector. We expect the main talking points to be:

- A lack of headline grabbing aircraft orders

- Will Airbus and / or Boeing commit to a new aircraft?

- Airbus’ production issues to come under scrutiny

- F-35B to be the highlight of the flying display

- A focus on innovation

- Will Farnborough survive in a post Brexit UK

Can aerospace & defence weather Brexit

Impact of lower GDP growth on the aerospace & defence industry

I am a firm believer that GDP growth is the most important driver behind the health of the aerospace & defence sector. A strong economy increases people’s propensity to travel, and defence budgets are set as a percentage of GDP. I acknowledge that the two sides of the sector are both affected by a number of other factors (the oil price, new technologies, geopolitical tensions, etc) and both industries are global. However, the Treasury’s projection that in two years’ time UK GDP will be 3.6% lower than if we had remained in the EU forces me to pause for thought as to the possible impact of Brexit on the sector over the long term.