For the likely thousands of new investors that have climbed aboard Rolls-Royce Holdings PLC (LSE:RR.) during the tenfold surge over the past three years, UBS had some reassuring words on Thursday, saying the engine maker remains well-positioned if the airline aftermarket cycle turns downwards.
The Swiss bank on Thursday put out two separate notes of interest to investors in the FTSE 100 giant.
One on the general aerospace sector suggested that the aftermarket cycle "could turn as soon as 2026", with risks seen to be building after strong sales were enjoyed by aftermarket operators in the years since COVID, driven in large part by Airbus and Boeing supply side challenges.
Market data signals give analysts confidence that upside remains in the second half of 2025 "and possibly into 2026, but we see risks building", with significant pent-up replacement demand for aircraft to boost Airbus and Boeing, but potential for the aftermarket cycle to turn.
History shows that demand crises can see sales fall around 20% from peak to trough, UBS said, "largely driven by volumes rather than price," resulting in engine aftermarket margins falling circa four percentage points at most.
"We believe that the cycle will start to turn once Airbus and Boeing start to increase production rates," the analysts wrote, predicting that 2027-28 will see aftermarket growth rates return to circa 6%, "with risk of negative revenue growth thereafter in a hard landing scenario".
Benefitting Rolls-Royce is a comparatively young fleet of engines, however, with around 60% of flying hours now delivered on new generation engines such as the Trent 1000, 7000 and XWB, compared to 40-50% of the total for peers Safran, MTU and GE.
UBS said older engines are likely to be retired first as airlines look to improve fuel efficiency.
Rolls is also taking market share, with engine flying hours up 7% over the past six months compared to around 5% growth at peers, with this higher share of new deliveries potentially supporting faster volume growth through the cycle.
Crucially, analysts described the Rolls story as "idiosyncratic", centred on cultural change under CEO Tufan Erginbilgic, which they believe has brought better pricing discipline and improved cost efficiency across the group.
That said, Rolls situation is not without risks, as UBS highlighted its relatively large long-term service agreement creditor position, which boosts cash during upswings but has historically been a "significant cash sink".
The stock’s exposure to momentum trading and uncertainty over recently renegotiated contracts, were also flagged as potential headwinds.
UBS has trimmed earnings forecasts by up to 2% and now models free cash flow of £5.1 billion in 2028, the low end of investor expectations.
The bank cut its price target to 1,375p for Rolls, while also cutting price target for rival Safran and downgrading MTU to 'neutral', with an upgrade on Airbus to 'buy'.