Rolls-Royce has raised its full-year profit guidance, driven by increased defence spending and rising demand in data centre power systems. The aerospace and engineering company reported a 46% increase in underlying operating profits to £2.5 billion for the six months ending in June. It now expects full-year operating profits between £4.7 billion and £4.9 billion, up from a previous forecast of £4 billion to £4.2 billion. The firm also boosted its free cash flow forecast to between £3.8 billion and £4 billion, an improvement of £200 million over earlier estimates.
The company's aerospace division contributed significantly to the profit growth, with a 31% rise in earnings to £1.6 billion, benefiting from a recovery in commercial air travel following the pandemic and regional geopolitical challenges. Rolls-Royce’s aircraft engines power wide-body jets, including the Airbus A350 and Boeing 787. The aerospace division also saw improvements in its business aviation segment, securing £2.4 billion in new orders and maintaining a backlog valued at £17.5 billion, equivalent to over three years of revenue. Meanwhile, the power systems division, which supplies equipment to data centres and other markets, posted a 72% increase in profits to £528 million, reflecting strong demand, particularly from AI-driven data centre operators in the United States.
Rolls-Royce’s chief executive, Tufan Erginbilgic, underscored the company's ongoing transformation, highlighting its diversification into defence, civil aerospace, and power generation as key strengths that allow for resilience amid external uncertainties. Erginbilgic, appointed in 2023, has overseen a significant turnaround in the company, which had faced severe financial and operational challenges during the pandemic.
The defence sector remains a critical growth area for Rolls-Royce amid rising global security concerns. The company manufactures nuclear propulsion systems for the UK’s submarines and produces engines for combat aircraft and maritime vessels. Recent commitments from governments at the Nato summit, including for systems like Saab’s Global Eye surveillance platform and the MQ-4C Triton unmanned aerial vehicle, are expected to bolster the company’s defence revenue. Increased defence budgets, particularly in response to Russia’s invasion of Ukraine and other geopolitical developments, continue to underpin growth. Rolls-Royce has also made advances in propulsion for autonomous systems, an area of strategic importance.
Beyond defence, Rolls-Royce is positioning itself to meet future opportunities tied to artificial intelligence and energy transition technologies. Its power generation equipment is being adopted by large-scale data centres requiring reliable and flexible energy solutions amid strained electricity grids. The company is also exploring the potential of its small modular reactors (SMRs) as a low-carbon power source for hyperscale data centres, though commercial deployment is projected for the 2030s.
Looking ahead, Rolls-Royce intends to re-enter the market for engines powering narrow-body aircraft, an area dominated by long-established competitors, contingent on commitments from Airbus and Boeing for new models. The company has sought financial support from the UK government to back this initiative, reflecting widespread industry reliance on subsidies.
Shares in Rolls-Royce rose notably following the announcement, reflecting investor confidence in the company’s diversified portfolio and growth prospects.
Other defence sector companies have also seen earnings revisions following increased government spending. BAE Systems, a major UK defence contractor, raised its profit forecasts for the year, expecting earnings growth between 10% and 12%, citing sustained demand from the US and allied countries in the Gulf region.
Together, these companies are benefiting from a broader trend of increased defence investment and technological innovation amid shifting geopolitical dynamics.