Broker Panmure Gordon has reduced its earnings per share (EPS) forecasts for engineers Rolls-Royce (RR.), Meggitt (MGGT), GKN (GKN) and Senior (SNR) as a stronger US dollar adds to headwinds in the commercial aerospace sector from which they derive a good chunk of earnings.
Analyst Sanjay Jha believes a 2% to 10% rally in the dollar since Donald Trump’s election win is making it harder for non-dollar earners to afford new deliveries.
OVERCAPACITY ISSUES
Overcapacity is also an issue as too many planes are being ordered and lower yields are resulting in a smaller return on investments.
Rolls-Royce has suffered the biggest earnings per share (EPS) downgrade of 45% in 2017 and 49% in 2018. It is further impacted by accounting changes from 2018 onwards.
EPS forecasts for GKN, Meggitt and Senior are cut between 3% and 4% next year and up to 8% in 2018.
Panmure Gordon estimates the airline industry needs to spend $120bn annually to maintain current delivery rates. It doesn't think this investment will be forthcoming and anticipates rates declining by 5% between 2015 and 2018
Rather than building lots of new planes, Jha thinks airlines will focus on fitting more people into the same space, known as seat densification, to boost revenues and reduce unit costs, as well as protect high load factors.
MORE WITH LESS
Analysis from Panmure Gordon has revealed that airlines can increase capacity of their existing fleets by up to two-fifths, with the biggest gains available in wide-body aircraft.
Jha argues that several companies, including Air Canada and Air France, are making progress, while others such as British Airways owner International Airline Group (IAG) are following suit.
