The Capital Cycle Podcast - Masters of the Air

Episode Date: March 31, 2026

How European aerospace companies lead the world in an attractive capital cycle. Edward Chancellor talks to Ben Slingsby, an European Equities Analyst.For more information, or to access select articles from Marathon’s Global Investment Review publications which accompany this podcast series, please visit www.thecapitalcycle.co.uk Hosted on Acast. See acast.com/privacy for more information.

Hello, this is Edward Chancellor with another episode of the Capital Cycle podcast. And I've got with me today, Ben, Slingsme, who's an analyst on the Marathons European portfolios. Welcome, Ben. Hello, Edward. Thanks for having me again. Ben, we're going to talk today about the capital cycle in a European aerospace, and in particular the European aircraft engine manufacturers that you're keen on. but you start your latest contribution to the Global Investment Review with a brief summary of the history of the European inception of the aircraft industry.

Yes, exactly. I thought we had better start with a quick history lesson today, seeing as I'm sat opposite such a preeminent financial historian in your good self, and Europe's rich history of aeronautical excellence traces back to July 1909 when Louis Blérieux flew over the English Channel in his Type 11 monoplane. It was the first successful flight over any large. body of water globally and he became a celebrity overnight. And then throughout the early 20th century, aeronautical technology developed at pace in Europe. 1909 saw the invention of the Gnome Rotary Engine, the secret source of early European aviation,

and unlike in a car where the cylinders stay still, the entire engine span around the crankshaft, providing excellent cooling and a high power-to-weight ratio. Blereo's original monoplane, i.e. one-wing design, was left behind in favour of biplanes with two wings for better stability and lift. The materials involved changed over time as well. Planes were originally made from wooden canvas, so were fragile in high winds, but in 1915, Hugo Juncker's built the world's first all-metal aircraft, the J-1.

And in 1990, the first non-stop transatlantic flight took place. The 1920s and 30s saw the emergence of the designs that we would recognise as planes today. And the Rolls-Royce-Murland Engine was invented in Britain in 1933 to 35, and became the bedrock of the Allied forces' planes in World War II. In your introductory epigraph, you quote an excitable comment by an early English pioneer of aviation, Claude Graham White. Yes, in his 1914 book, The Aeroplane, White writes,

First Europe and then the Globe will be linked by flight, and nations so knit together that they will grow to be next door neighbors. The conquest of the air will prove ultimately to be man's greatest and most glorious triumph. So what I like about that comment was it reminds me of the excitable chatter that we hear almost every day about AI, how AI is going to change the world and bring us all together. And it also reminded me that in the early years of the aviation industry, there was a lot of hot competition among aircraft manufacturers that resulted in disappointing returns for investors. and another thing that today's AI investors might bear in mind. I was reading recently a piece that Warren Buffett wrote for Fortune magazine in November 1999, in which he's writing a warning to tech investors caught up in the bubble at the time.

And Buffett, first of all, talks about the motor industry and disappointing returns from the early investment in motor cars. And then he says that he went back to check on aircraft manufacturers and found that in the 19 to 39 period, there were about 300 US aircraft manufacturers, but only a handful were still breathing by 1999. And Buffett found that among the planes that were being made then was one called the Nebraska and the other called the Omaha. And incidentally, then I looked up Graham White, who you cite, and found that he actually had his own aviation business, the Graham White Aviation Company, which made aircraft and aircraft hangars and had its own airfield, which later became RAF Hendon.

He was a major manufacturer of airplanes during the First World War, but went bust in 1924. So he was also, despite, if you were, making a good call on the future of aircraft. he was also an early warning sign of the negative capital cycle in this industry. So Buffett then turned his attention to the airlines and pointed out that since the inception of the aircraft through to, I think, 1993, a few years before he wrote this piece, that the total amount of money that it had been made by all US airline companies was zero, absolutely zero. And it's often used an example of a chronically bad capital cycle, correct? Yeah, absolutely. Because there was too much competition. But in Europe, sort of fast-forwarding to 1970,

a number of fragmented European manufacturers were consolidated to form Airbus to compete with the dominant US player Boeing. And this duopoly has endured for over 50 years since. Although a wise portfolio manager that I used to work with used to joke that it's been the least profitable duopoly in history. Why is that? Because neither of them have been able to consider. make money and they've had all sorts of production issues that we'll get on to later.

Despite the sort of Airbus and Boeing competition, there was also Transatlantic cooperation happening. In 1974, Snekber, now Saffran, and GE Aviation formed a highly successful joint venture to create the CFM-56 engine, which remains the most widely used engine in the world today. And from the 1980s onwards, Europe built a world-class tier-1 supply chain, anchored by companies like Rolls-Royce, Safran and Talas. And you say that the competitive dynamics of the industry has improved from an investor's perspective since the 1990s? Most definitely. After Cold War ended, government defence spending plummeted, and the aerospace industry was forced to consolidate.

The oligopolistic market structure that has emerged has been a key reason why the engine original equipment manufacturer stocks or OEMs for short have been so strong recently. Now we've had a sense of history. Tell us your thoughts on the outlook. Well, as capital cycle investors focused on supply side analysis, we think that tight supply of new aircraft means continued blue skies ahead for the stocks, especially the engine OEMs. OELTS-Royce remains a large holding for Marathons European team

and has outperformed its benchmark MSCI Europe by nearly 900% in the past five years. and shares in engine OAMs like Saffran and MTAU air engines are also flying close to all-time highs. So the valuations of these stocks are optically expensive, but you think that they can grow into their valuations? Yes, in the USG Aerospace trades on a price to earnings ratio of 41 times, 26, same as Rolls Royce does in the UK, but MTAU trades on 24 times P and Saffran trades on 30 times. While these sort of short-term valuation metrics look expensive, the stocks are compounding earnings per share at a mid-to-high teen's annual rate, so they soon grow into these multiples. The capital cycle dynamics are favourable, as the supply side is consolidated and has strong barriers to entry. And then demand for air travel remains solid today. Global travel demand has grown at plus 5% per year on average since 1990, and it's rebounded after every major shock.

There are positive structural demand drivers, emerge. emerging market demand is expected to converge with developed markets over time. Today, the average number of flights per person per year in the US is 2.2 or 1.9 in Europe, but it's only 0.1 in India or 0.5 in Brazil. So this strong demand means that airlines are making healthy margins and ordering lots of new planes. There's also been some consolidation amongst the airlines, so competition has eased in Europe. And can you give us a bit more detail on the supply side? Yes, so as mentioned, the airlines are making good money due to that strong demand.

So they've been ordering new planes from their two main suppliers, Boeing and Airbus. However, the ability of the Geopoly to fulfil these orders has been much under pressure in recent years. Boeing's had several well-published production issues in the press, and then Airbus's supply chain was heavily disrupted after the pandemic and is not really recovered. So they're aiming to produce 75 planes per month by 2027, but consensus rightfully doubts that can get there based on their mixed recent track record. Even 75 new planes per month pales into insignificance versus the existing global fleet of over 14,000. Both those suppliers are sold out to the 2030s. So, you know, in this volatile world in which we live in, it is rare to find

businesses with such revenue visibility. Yeah, the industry's order backlog has risen to record levels. If you wanted to order a new wide-body jet now, you'd be waiting five years, whereas you used to only have to wait for two years to get one. And you write that the major beneficiaries of this tight supply situation have been the engine OEMs? Yes, especially Rolls Royce and Saffran. So they are the key suppliers to the suppliers. They are benefiting from the industry consolidation that we mentioned earlier that took place in the 1990s. And there's been a lack of new entrants.

This is due to the complex technical requirements and the huge amounts of capital that will be required to design a new aircraft engine from scratch. And failure mid-flight cannot be tolerated by their custom. so the entry barriers are very high indeed. And you say that they have a razor blade model, like Gillette. Yes, exactly. They incur the costs of developing a new engine up front, which might be 10 billion euros. And then the OEMs sell the engine for little margin up front, but they make their margin mainly from aftermarket services. So a successful product cycle can last over 40 years. The CFM 56 first flew in 1976, I believe. The engine OEMs is. get paid for time and materials when the engines are mended at their repair shops, and they get

paid per flight hour under long-term service agreements. So the lack of new aircraft means that the current engines in use are being flown for longer and they're requiring more aftermarket services, more repairs, which boosts revenues, profits and free cash flow for the OEMs like Saffran and Rolls-Royce. And these companies have strong balance sheets? Yes, exactly. Their balance sheets are in great shape, which continues to enable them to increase shareholder payouts via dividends and share buybacks ahead of consensus expectations. So the stock will be very strong. Safran has a 5 billion euro share buyback program underway currently from memory. So give us the concise take on European aerospace?

The point of the GIR was to highlight a slightly off-the-radar industry where Europe is truly world-class. The aerospace market structure is attractive with aircraft, a duopoly and engines and oligopoly with high barriers to entry. There are a number of large liquid listed stocks enabling investors to benefit from Europe's strength in this industry, including Airbus, Rolls-Royce, Safran and M-TU Aero Engines, amongst others. On the demand side, demand for air travel remains strong and is set to structurally increase as emerging market consumers become wealthier and fly more. Supply of new aircraft from Boeing and Airbus remains tight with backlogs at record levels.

And so this is good news for the engine providers who can harvest more free cash flow for longer from their existing fleet. And Marathon continues to hold a significant position in roles. Yes, exactly. The stock has been a capital cycle winner, generating a total return of nearly 900% in the past five years for Marathon's clients. The current CEO has executed one of the most successful turnarounds in European corporate history, I think you could say.

He understands the industry. his capital cycle and he's exploited the demand supply imbalances to exert pricing power and boost Rolls-Royce's margins. With no end to the supply shortages in sight, we think the shares look well placed to continue to saw. Great. Thanks for up then. Thank you, Edwin. Thank you for your time today. I hope you will listen to the next edition of the capital cycle. This communication is provided for information purposes only. Please refer to Marathon's website and the good global investment reviews for further information, including important disclosures.