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Summary of Jefferies Equity Research Report: Aerospace & Defense Electronics, June 16, 2025

This report analyzes key developments in the European Aerospace & Defense Electronics sector, highlighting updates from major companies and market conditions. Below is a concise summary of the main points.

Key Highlights

• Airbus Ahead of Paris Airshow: Management noted improvements in the supply chain, with the capacity to reach a monthly rate of 60 units on the A320. However, CEO Guillaume Faury cautioned against increased output, and CFO Thomas Toepfer indicated reduced enthusiasm for buybacks due to market volatility. Contradictory messaging on production targets and supply chain progress was emphasized.
• A220 Stretch Consideration: Airbus is evaluating a simpler, wing-and-engine unchanged variant of the A220 (A220-500). This approach could expedite development but may not enable coast-to-coast US operations, potentially facing pressure given limited 2024 order momentum despite A320 backlogs.
• Market Flight Data: Commercial flights remain at 139.5k/day, stable year-over-year but 15% above 2019 levels. Concerns about macroeconomic weakening are noted, with softness slightly more apparent than before.
• Company Valuations and Risks:
  • Airbus: Buy rating with upside potential linked to supply chain improvements but risks from ramp-up constraints and airline bankruptcies.
  • MTU Aero Engines: Buy rating, valuing based on SOTP, with risks including ramp-up delays and potential declines in aftermarket demand due to retirements.
  • Rolls-Royce: Buy rating; valuation driven by free cash flow yield, with upside from traffic recovery and cost improvements, but downside from persistent air traffic weakness and balance sheet challenges.
  • Safran: Buy rating, with risks from cost inflation and air traffic disruptions, offset by potential aftermarket demand growth.
• Investment Outlook: The report underscores the importance of monitoring supply chain improvements and macroeconomic impacts on flight data for aftermarket companies like Rolls-Royce and Safran. Airbus's strategic decisions and potential A220 outcomes are key for sector growth.
• Ratings Summary: All covered companies are rated Buy, reflecting positive outlooks amid risks, with Jefferies advising investors to focus on evolving market conditions and company-specific factors.

Overall, the European A&D sector shows balance between operational improvements and external risks, with buy recommendations reflecting confidence in long-term growth despite near-term volatility.