Melrose flags a way through aerospace turbulence
The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Refiles to fix link paragraph three.
By Oliver Taslic
LONDON, Nov 18 (Reuters Breakingviews) -Melrose Industries MRON.L has located a tailwind in an otherwise bumpy sector. Prior to its latest trading update on Monday, the $8 billion London-listed aerospace supplier had seen its shares slump by a quarter since April, as leading sector lights Boeing BA.N and Airbus AIR.PA encountered turbulence. Luckily, its business does more than supply parts for new planes.
Melrose, a former industrials M&A machine that became a more streamlined, aerospace-focused player last year, now comprises two main segments: “Structures”, which supplies everything from wiring to wing parts for aircraft including the ubiquitous Boeing 737 and Airbus A320 family; and “Engines”, which contributes both to the production of new kit and to providing repair and overhaul services. In the four months between the start of July and the end of October, structures revenue only rose 1%.
The problem with being beholden to the production of new aircraft is that the industry is experiencing wide-ranging supply chain problems following a stronger-than-expected post-pandemic bounce-back in demand. European giant Airbus was forced in June to downgrade its full-year delivery target from around 800 commercial aircraft to around 770, as it grappled with shortages of everything from engines to seats. Production at Boeing – which has other issues including a recent machinist strike and increased regulatory scrutiny following a mid-air door plug blowout in January – is tracking below last year’s figures.
One effect of this is that airlines aren’t getting the planes they need. That’s contributing to a slew of weak results over the summer as increased maintenance and fuel costs from flying older aircraft – as well as staff inefficiencies from hiring personnel for aircraft that didn’t arrive – weighed on bottom lines.
It’s less bad for those who also provide such overhauls and repairs. Melrose reported that “aftermarket” revenue in its engines division rose 32% year-on-year between the start of July and the end of October, helping lift overall revenue in its engines arm 17%. Shares in Germany’s MTU Aero Engines MTXGn.DE, another repair specialist, are up almost 60% this year.
That’s a hedge of sorts in an otherwise turbulent industry. Perhaps emblematically, Lufthansa LHAG.DE itself, while reporting nine-month results for the group in October, noted that Lufthansa Technik, its maintenance, repair and overhaul (MRO) division, grew revenue 14% year-on-year and sported an 8.9% adjusted operating profit margin – far ahead of the broader company. Though industry players would probably prefer to get back to pre-pandemic normality, it’s a way through the storm.
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CONTEXT NEWS
Melrose Industries announced in a trading update on Nov. 18 that revenue had risen 7% year-on-year in the four months between the start of July and the end of October.
Revenue in the London-listed company’s engines division was up 17%, while sales in its “structures” unit were up 1%.
The engines division’s performance was helped by a 32% year-on-year rise in revenue from “aftermarket” services, which includes repairs.
The company also reaffirmed its full-year operating profit forecast of between 550 million pounds and 570 million pounds.
Shares in Melrose were up 6.5% by 1110 GMT on Nov. 18, having previously risen 9%.
Melrose shares’ turbulent ride https://reut.rs/3Oc6Twy
Editing by George Hay and Streisand Neto
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