Profits boost for defence firms as governments beef up spending

Defense contractors Rolls-Royce and BAE Systems are anticipating a significant boost in profits, driven by a global surge in government spending on defense systems. Both companies announced upward revisions to their earnings forecasts on Thursday, citing commitments from nations worldwide to enhance their military capabilities.

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The transformation of the company is continuing to deliver results.

Rolls-Royce, a key supplier of jet engines for combat and commercial aircraft, as well as turbines for naval vessels, has seen its underlying operating profit forecast for the year rise to between £4.7 billion and £4.9 billion, an increase from its previous projection of £4 billion to £4.2 billion. The company also improved its free cash flow outlook. The jump in defense spending, particularly since Russia's full-scale invasion of Ukraine in 2022, has been a major contributor, alongside increased demand for its power generation units from AI-focused data centers.

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We have made significant operational and strategic progress in the first half of the year.

BAE Systems, a major manufacturer of UK defense equipment including tanks and fighter jets, also reported upgraded profit forecasts. The company now expects earnings to grow by 10% to 12%, slightly exceeding its earlier estimate of 9% to 11%. BAE has benefited from heightened defense budgets in the United States and from export markets, including several Gulf nations. Notable contracts include providing support for Turkish Typhoon aircraft and accelerating the production of seeker components for the U.S. THAAD missile defense system.

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In defence, we continued to establish our leading position in autonomous propulsion, with several key milestones achieved in the period.

Rolls-Royce's chief executive, Tufan Erginbilgiç, highlighted the ongoing "transformation" of the company, noting significant operational and strategic progress. He pointed to improvements in civil aerospace, particularly in aftermarket profitability and the elimination of aircraft on ground issues, as well as establishing a leading position in autonomous propulsion for defense applications. Shares in Rolls-Royce saw a notable increase of 5.5% on Thursday morning following the announcements.

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The global threat picture remains highly volatile and governments are responding with sustained increases in their defence bu