Rolls-Royce: Could Tariffs Impact the Business?

Citi said in a note to clients this week that they believe potential tariffs would have a limited impact on Rolls-Royce (LON: RR.), given the company’s greater exposure to Europe and Asia than the U.S.

In the large aircraft engine segment, Citi says, citing data from Cirium, that only 8% of Rolls-Royce’s widebody (WB) deliveries go to the U.S.and just 7% of the Trent engine fleet is based in the U.S. 

This limits the direct effect of tariffs, as there is no alternative source for spares, ensuring continuity in aftermarket demand, explains the bank. 

Additionally, Citi states that Rolls-Royce benefits from strong order backlogs, making it difficult for airlines to switch to other manufacturers for new engines.

While defence accounts for 70% of Rolls-Royce’s U.S. exposure, the bank’s analysts believe this segment is “almost entirely domestic production,” shielding it from potential tariff risks.

The company’s Power Systems division, which represents 25% of total revenue, is said to have an estimated U.S. exposure of 10%-20%, meaning only 2.5%-5% of the overall group might face any impact. 

Citi notes that this unit has shorter order books, which could make it more sensitive to trade policy changes, but overall, the effect is “unlikely to be material to the group.”

“Ex-defence, Rolls-Royce’s exposure is much more European and Asian,” writes Citi, reinforcing the view that tariff-related risks are minimal for the company.