Rolls-Royce and BAE Systems Boost Outlook on Defence Spending

Rolls-Royce and BAE Systems have both revised upwards their profit expectations for 2026, driven by increased global defence spending. The companies announced these upgrades following robust half-year financial results, as reported by The Standard.

Rolls-Royce Financial Performance

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Engine manufacturer Rolls-Royce now forecasts underlying operating profits for 2026 to be in the range of £4.7 billion to £4.9 billion. This represents an increase from its previous guidance of £4 billion to £4.2 billion. The company's half-year earnings, covering the period up to June 30, showed a 46% increase, reaching £2.53 billion. Revenues for the same period were £11.28 billion, a rise of a fifth compared to the previous year.

While statutory pre-tax profits for Rolls-Royce more than halved to £1.93 billion from £4.84 billion a year prior, this was attributed to currency fluctuations and business divestments. The company's performance is also benefiting from increased demand in civil aerospace and its power systems division, which supports AI data centres.

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BAE Systems Outlook and Earnings

Defence contractor BAE Systems has also raised its profit outlook. The company now expects underlying earnings for 2026 to rise by 10% to 12%, an upward revision from its earlier forecast of 9% to 11%. In the first half of the year, BAE Systems reported an 11% increase in underlying earnings, supported by a 9% rise in sales. Pre-tax profits for the period were £1.28 billion, up from £1.19 billion in the corresponding period last year.

Context of Global Defence Spending

Both companies are experiencing growth as nations increase their defence budgets in response to ongoing international conflicts, including the situation in Ukraine and tensions in the Middle East. The appointment of John Healey as the UK Chancellor has also been seen as a positive development for the defence sector. Mr Healey previously resigned as Defence Secretary, stating concerns about the country's security and defence investment plans.

BAE Systems CEO Charles Woodburn has previously stated that UK defence spending is insufficient for current global threats. He described the present international climate as the most dangerous he has witnessed and highlighted advancements made by Russia. Despite recent funding commitments, Mr Woodburn indicated that the allocated resources still fall short of the necessary levels for national protection, as reported by the BBC.

What Happens Next

The UK Chancellor, John Healey, has expressed a desire to increase defence spending, though a specific target, such as 3% of national income by 2030, has not yet been committed. Further details on the government's defence investment strategy are anticipated.