Airlines Over Engines?

Research evidence excerpt

Airlines Over Engines?

IdeaMExhibit 2: Engine OEMs observed a greater valuation de-rating vs. EU airlines on

an EV/EBITDA multiple (rebased = 100)

EU Airlines Engine OEMs

01-2026 01-2026 01-2026 01-2026 01-2026 02-2026 02-2026 02-2026 02-2026 03-2026 03-2026 03-2026 03-2026 04-2026 04-2026 04-2026 04-2026 04-2026 05-2026 05-2026 05-2026 05-2026 06-2026 06-2026 06-2026 06-2026 07-2026 07-2026 07-2026

Source: Bloomberg, Morgan Stanley Research

Fare strength across airlines offset fuel inflation: EU airlines initially lagged as jet

fuel crack spreads widened in March but rebounded on resilient fare pricing. Legacy

carriers have successfully passed through higher fuel costs, supported by strong

demand in APAC/Africa, reduced Middle Eastern capacity and disciplined pricing by

US airlines. While European LCCs have seen softer leisure fares, investors have

largely looked through higher fuel costs, underpinning earnings expectations over

the next 2-3 quarters. Recent management commentary (DAL/UAL) suggests fares

could remain elevated if fuel prices stay high, supporting the sector's resilience. The

key question is whether pricing can be sustained without weakening demand as

Middle Eastern capacity returns, and whether Lufthansa's >100% fuel cost pass-

through in 2H26 is achievable.

Exhibit 3: De-rating from engine OEMs on EV/EBITDA multiple at -7% vs YTD

average (+3%)

Engine OEMS Premium (Discount) vs EU Airlines Average

15%

10%

5%

0%

-5%

-10%

Engine OEMs Top Pick Overweight – Rolls Royce: We forecast continued strength

in profit and cash generation, underpinning further confidence in meeting FY26 and

medium-term guidance. This reflects ongoing momentum in the delivery of

management's transformation strategy, despite EFH (engine flying hours) tracking at