Rolls-Royce seen resilient to airline downturn but cash flow risk flagged by UBS Proactive uses images sourced from Shutterstock
Rolls-Royce Holdings PLC (LSE:RR.) is seen by UBS as relatively resilient if the jet fuel crisis stemming from the war in the Middle East leads to the aviation cycle weakening, though the share price target was cut to reflect slightly lower forecasts.
The Swiss banks said the engine maker’s exposure to widebody aircraft offers some protection, as airlines tend to cut long-haul capacity more slowly than short-haul routes, with current supply constraints also driven more by narrowbody shortages.
Around 60% of Rolls’ flying hours come from newer engines, which UBS says lowers the risk of early retirements compared with peers.
That said, the analysts flagged a more immediate sensitivity to engine flying hours as airlines axe thousands of flights.
Much of Rolls’ aftermarket revenue comes through long-term service agreements, where cash is received over time rather than at the point of maintenance. This creates negative working capital and leaves cash flow more exposed if flying hours disappoint.
UBS now models 2026 flying hours at 111% of 2019 levels, below the company’s guidance of 115-120%.
The bank has trimmed its forecasts to reflect this caution, with free cash flow now expected to land at the lower end of guidance, though operating profit forecasts remain ahead of consensus in the medium term.
Rolls’ Power Systems arm is still seen as a source of upside.
Despite near-term pressure, UBS retains a ‘buy’ rating, pointing to the ongoing turnaround story driven by pricing and margin gains, and notes investor positioning remains supportive. However, the price target is cut to £14 from £15 following the trimmed estimates and weaker peer valuations.
Rolls shares were down 2% to 1,137p on Friday, down 15% since the start of the US and Israel’s attacks on Iran at the end of February.