Podcast: Are Tariffs Affecting Aviation Aftermarket Earnings?

Second quarter and first half results are out for OEMs and publicly held aviation aftermarket companies. Hear Aviation Week editors discuss what’s behind the numbers for European and U.S. aviation companies—and what could be store for the rest of 2025.

Lee Ann Shay (00:16): Welcome to the latest edition of the MRO podcast. I'm Lee Ann Shay, executive editor for MRO and Business Aviation for Aviation Week and today's topic: earnings. Companies recently have released the second quarter and first half of the year earnings, at least those companies that are reporting on a January-December calendar basis. So we're going to be discussing what those numbers mean and the insights behind those. My aviation colleagues, James Pozzi, MRO editor for Europe, the Middle East and Africa, and Sean Broderick, our senior air transport and safety editor, join me, James and Sean, welcome.

James Pozzi (00:57): Thanks, Lee Ann.

Sean Broderick: Good to be back.

Lee Ann Shay (00:59): So James, let's kick it off with you. What are the big things that stand out overall in the European earnings?

James Pozzi (01:08): Okay, so Europe as a continent in regards of MRO, many MRO providers over here have been improving, albeit from quite a low base since about 2023, but many now are beating their pre-pandemic performance. There's been that gradual increase every year, and I'd say it's, I said gradual, but probably quite a healthy increase in terms of percentage numbers. Of course, Europe maybe was slower to recover a few years ago than North America post-pandemic, but there is a lot of demand there. The growth is pretty consistent, albeit maybe a bit more modest than other regions where the growth numbers are higher. Obviously there's aftermarket capacity issues, too, that have impacted on that. And of course we've talked many times this year alone on this podcast about dry rides to address them where European MROs have featured heavily in that. So let's start with Lufthansa Technik, of course, widely recognized as one of the largest MROs in the world.

(02:14): Certainly to be the biggest in Europe, I think it's fair to say. So for the first half of the year, they had some very interesting things to say. Results wise, it seemed pretty healthy looking at some of the numbers. So turnover increased just over 13% to 4 billion euros for the half of 2025, the first half, which is about 4.5 billion U.S. dollars. And then there's adjusted earnings for interest in taxes, and that stood at 310 million euros with an increase there year-over-year of 1.7%. So that was actually a new company record for the first six months of the year. And the third-party sales grew as well. They were up considerably, and engine and components services were big drivers towards those. Of course, the engines especially has long been a higher margin segment for repair providers. So on the surface, very positive, but there were some interesting caveats in that.

(03:14): So percentage margins for that half fell. There was 7.8% for the year so far, and that's a decrease of 0.9% year-over-year. and I'm sure we'll come on to it later. But LHT, the topic of tariffs, of course I know we're going to talk about later, but LHT did highlight the tougher environment and the new challenges that they faced, and they did mention tariffs, which is obviously causing uncertainty, but costs are high at the moment across the continent, and they're sometimes being passed on to the customers midterm. Think material costs, supplier costs and workforce as well. Labor costs in Europe have really increased across the whole continent. Western Europe, of course, where traditionally costs were higher anyway, but also going into Eastern Europe, which did have the benefit of being a lower-cost region, those advantages are slowly diminishing over time because costs are increasing there, and it's almost catching up to Western Europe.

(04:19): So that was very interesting. LHT said they're going to stay the course with some of their investments. There's a lot going on there at the moment, of course, that we've reported on. There's the engine operation in Calgary for LEAP-1B. They've got planned for quick-turn services in Canada, which we'll see Canada's first test cell being built, and obviously their aircraft and engine component repair business, which is set to open by 2027 in Porto, in Portugal. And of course there's other things like the big investment modernizing their Hamburg headquarters as well. It's also worth mentioning, one of the other largest MROs in the world and certainly in Europe coming right behind LHT I say Air France Industries KLM Engineering and Maintenance, of course AFI KLM E&M, they saw revenues increase. Third-party sales were up quite impressively to 19.3%, and that was just for the second quarter of this year and 15% for the half the first half this year compared to the first half of last year.

(05:23): And again, engines and components have played a big role in that in terms of driving that and those segments, and I think most notably in recent times, maybe looking at the investment and growth, but also serving the need in their, I guess their supply chain, is their recent announcement with AerCap for a leasing joint venture for LEAP-1A and LEAP-1B, and that's particularly interesting. That was set up to basically provide spare engines to the AFI KLM MRO network when engines are going for a quick turn or maybe a bigger performance restoration shop visit and basically providing that to the MRO network because they've talked before about parts being in scarce supply or engine availability being an issue in that. So they're one of a few MROs that have looked to do that in recent times. So in terms of that, along with some pretty big agreements with particularly Middle Eastern carriers since Saudi Arabia for example, it's been quite a good half for Air France KLM E&M, but similar to Lufthansa Technik, a lot of challenges there as well in terms of costs.

Lee Ann Shay (06:38): Thanks, James. So Sean, switching gears to you, how does this compare to the trends that really stand out for you in the U.S.?

Sean Broderick (06:48): I think James touched on a lot of things that weave through the entire commercial aftermarket business. Now most of the news is good. In a macro environment, MRO providers are still watching passenger demand as the primary predictor and driver of their business. And one might say, well, sure, well, they watch that all the time. Well, in this environment, the last handful of years, we have significant regional disruptions like what has happened between with Russia's invasion of Ukraine. We have now the tariff issue that certainly is causing parts purchasers to ponder whether they need to be buying more of certain parts before tariffs may be hit. The general consensus is though that at least for now it is business as usual. Now there's a caveat. So “business as usual” these days means still dealing with delivery delays that is putting pressure on some older platforms, and that feeds right down to the MRO world.

(07:54): Nowhere is this more evident than in the engine space where GE Aerospace and RTX, Pratt and Whitney, continue to have huge quarterly quarter-over-quarter growth numbers. GE was almost 30%, I think they were 29%. Pratt was up around 20%. I think they were 18% organically and about 13-14% for the, or no, I'm sorry, 24% for the first half of the year. Those are huge numbers, primarily driven by narrowbody work, and it's not all related to sort of warranty work or durability work on the newer models. A lot of it is driven by the CFM56 and the V2500 on GE's and Pratt's side respectively. You put all that together, and that's keeping the engine market sort of hotter than even some analysts and observers thought it would be at this point. Still not seeing high levels of retirements in those fleets, not seeing a lot of USM, used serviceable material, so not a lot of used parts on the market to help keep overhauls cheaper or to lessen the cost of overhauls.

(09:03): So that helps the parts sales. Of course, we're getting into the time of year now where the catalog prices are adjusted and in this inflationary times, those are fairly big adjustments that's driving higher parts sales. So you put it all together and you're looking at high single low double digit across the board growth in the MRO segment with engines being the highest probably I somewhere around 12%, I think that's where RBC's latest survey done by Ken Herbert and his phenomenal team there. They put it in around 12% components next and then airframe after that sort of coming in third. But even on the airframe side, look at AAR, the one of the biggest independent airframe MRO provider here in the U.S. They are adding capacity in Oklahoma City and Miami coming online I think sometime this year, correct me if I'm wrong, Lee Ann, but they're about ready to start inducting airplanes or they're thinking about it. Capacity's already spoken for. Now, AAR's customer base is one that they have big fleets planning far in advance, so maybe not an indication of airframe across the board. But still it's a good sign that you have, in this environment, airlines still booking airframe heavy maintenance visits a year, two years, three years out given what is really potential uncertainty. That uncertainty is not yet translating into significant headwinds for the MRO space, at least not based on most of the feedback from executives that are reporting out on the earnings calls.

Lee Ann Shay (10:43): You both have mentioned tariffs, so we'd be remiss if we don't do a little bit deeper dive into that. When earlier this year some companies started stocking certain critical parts or at least putting the orders in just to try to get ahead of the predicted tariffs. And as we know, the tariffs have been changing almost daily. It's providing a little bit of a volatility to this. So what did the companies have to say? Are they running out of those stocks so that we're going to see increases, or where do we stand?

Sean Broderick (11:16): On the U.S. side, most of the suppliers have, while they've seen some data points of activity here and there, not an overall trend that has driven a rush in buying parts. In many cases, each tariff deal is different and the details on many of them remain a mystery to all but those that negotiated the deals – and in some cases even before, even to those in the negotiated deals. But in a lot of cases, aircraft parts are exempt, but again, not in all cases. But as a trend, not a huge impact, at least on the pre-buying side and on the stocking side in terms of moving the needle. Not saying it's not happening, but is not something that's driving sort of artificially high parts revenues, if that makes sense, Lee Ann.

James Pozzi (12:06): I've heard similar on this side, doesn't seem to be driving the pre-buying side to higher prices, but tariffs certainly are still very much on playing on the minds of some of these companies in Europe. And there's obviously been developments over that in the last few weeks and months. So obviously back to Lufthansa Technik, they've stressed about the uncertainty of this. Of course, tariffs are seemingly forever changing at the moment. We saw the Trump administration and U.S. President Donald Trump meet with the European Commission, president Ursula von der Leyen in Scotland a few weeks ago where they agreed a provisional deal for a tariff rate at around 15% for goods exported to the U.S. from the European Union. As I mentioned before, Lufthansa Technik have like several companies had to pass some of these costs onto the customer in the midterm and material and supplier costs across the industry as well.

(13:03): Tariffs are being cited as a reason for that. Another interesting case in point back to engines, but on the OEM side is Rolls-Royce, of course, they had a very, continuing the impressive numbers from state side. Rolls-Royce saw a lot of growth in civil engine sales for the first half of the year, around 19%. And of course the aftermarket side is playing a big role in that too. Profits in its total care and time and material contracts are strong as well. But being a UK-based company, of course the UK not an EU member state anymore, they could stand to benefit perhaps from a recently agreed deal with the American administration. There was an additional 10% tariff on top of existing U.S. duties, fees and taxes on imports from the UK. But the aerospace sector has seen the removal of 10% tariffs on goods and particularly cited by the UK government at the end of June when this was agreed, was aircraft engines and aircraft parts. A company like Rolls-Royce, of course, would naturally maybe stand to benefit from that. So it could be mid- to long-term a win for them and certainly UK aerospace. So yeah, it's something we're going to have to obviously keep watch on and I think the second half of the year, if that impact spills over into obviously the aftermarket, but particularly a company like Rolls-Royce that will be interesting to follow up on, certainly.

Sean Broderick (14:31): So much to keep track of. I mean, you could do a podcast a day…

Lee Ann Shay (14:35): I'm glad you brought up second half of the year.

Sean Broderick (14:37): Second half of the year, well continued strong demand for MRO I can tell you that. May begin to see some more retirement waiting for retirement rates to tick up, especially in those fleets that I talked about earlier in narrowbodies, V2500, CFM56, they've been running below that sort of historical 3 to 4% rate per year down in the 2%, and even 1%, depending on the engine type. Maybe begin to see as deliveries, pick up the pace of deliveries, pick up like with the 737 MAX. Maybe some of those start to leave the fleet a little bit, but otherwise it's going to be interesting to watch. From a demand standpoint, the U.S. has been the one where there's sort of been some questions, a little domestic weakness in some carriers, some other carriers struggling. Spirit Airlines comes to mind. They have a bunch of airplanes on the ground, geared turbofan issues, but also they have some for sale that they're out of service because of that. Europe has been a little stronger. It'd be interesting to see if those trends hold and which one changes. Obviously, if Europe joins the U.S. with a little bit of struggle, could see some come impact, especially heading into '26. But right now, the outlook really strong for the MRO community for the rest of '25 and at least as far as we can see into '26.

Lee Ann Shay (15:53): Gentlemen, thank you for your insights. That's a wrap for this MRO podcast. Don't miss the next episode by subscribing to the MRO podcasts wherever you listen to them. And one last request. If you're listening in Apple Podcasts, please consider leaving us a star rating or writing a review. Thank you so much.