So Europe is home to some of the largest and [most] famous aerospace companies, including names like Airbus and Rolls Royce.  Over the long term it has been a great sector to invest in; however, the COVID pandemic really was a disaster, both for airlines and aerospace suppliers. In 2020, passenger traffic fell by 66 per cent, and airlines really went into full cash protection/cash conservation mode. This meant deferring new aircraft deliveries and also delaying critical maintenance on things like engines and equipment, just to survive.

Airbus, which is one of Europe’s largest aerospace company, reduced aircraft deliveries by 300, and their profits fell by 75 per cent. So really big numbers. As the world developed vaccines and travel restrictions started to ease, the snapback was very sharp, particularly in leisure travel. People wanted to go back on holiday. And more recently, we have started to see business travel starting to recover.

So entering 2024, we have seen most of the bounce-back from COVID. But investors are still very positive on the medium-term prognosis for this sector. Air traffic grew around 4 per cent from 2010 to 2019. But that is expected to accelerate post-COVID, particularly driven by emerging markets. In India, for example, the average person takes 0.1 flights per year. That compares to 2.3 here in the UK. So there is a massive penetration opportunity in a very large market of over 1 billion people. Indian air traffic is expected to grow at double the rate of the rest of the world over the next 10-20 years.

All this extra demand for emerging markets is producing significant new orders for Airbus. In 2023, they booked over 2,000 new orders, and their backlog is now over 8,000 aircraft, which is giving them really an unprecedented level of revenue visibility, up to seven, eight, nine years of visibility, which we do not really see in any other industrial end market in Europe.

The pandemic unfortunately forced a lot of people in the aerospace industry to lose their jobs. We saw tens of thousands of people leave Airbus and the big suppliers in Europe. Re-hiring those people is taking some time, and that is creating a lot of tightness in the supply chain. Airbus’s A320 backlog – if they could produce at maximum speed, they could do 75 per month until 2030. Today, they are struggling to get above 50 or 55 per month. So a lot of tightness, but a lot of long-term demand.

Simultaneously, Airbus’s chief rival in the US – Boeing – is facing new FAA safety probes and that is just creating additional tightness for new aircraft. So all this supply chain pressure means that if you are an airline, you have having to run your oldest planes for even longer. So traditionally, a new aircraft would last 20 years. Some of these are staying in the air for 25 or even 30 years, and the longer they stay in the air, the more old spare parts they need to keep the engines running and to keep the aircraft running. This has been really helpful for demand and for pricing for spare parts, for suppliers like Safran and MTU, that have been growing very strongly.

The aerospace sector has split opinion on ESG. It is responsible for 3 per cent of global carbon emissions. But they are also investing quite significantly in decarbonisation. So Airbus’s new product – the A320 Neo – that has a 15 per cent lower fuel burn than the previous generation, and they are planning to launch a successor to that platform in the mid-2030s. Airbus is also working on green hydrogen planes, with entry into service perhaps in the 2030s, at small scale initially. So overall, this is a sector that faced a lot of drama during the COVID pandemic. It managed to survive through cost-cutting and cash preservation. But the mid-term outlook looks very supportive.

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Market tightness: in this context refers to when demand for a product is strong and supply is limited, which can lead to higher prices.