Rolls-Royce Thrives While UltraFan Hangs |

Rolls-Royce posted an underlying operating profit of £2.53 billion for 1H26, up 46% year over year and ahead of a £2.37 billion consensus. Revenue rose 24% to £11.28 billion, also beating estimates. Underlying operating margin expanded to 22.5%, from 19.1% a year earlier, with every division contributing to the improvement. Shares rose as much as 5.6% on the news. The company raised full-year guidance across the board: underlying operating profit now targeted at £4.7-4.9 billion, up from £4.0-4.2 billion; free cash flow at £3.8-4.0 billion, up from £3.6-3.8 billion. One Number That Looks Bad and Isn't Reported net profit fell 63%, to £1.615 billion. Read in isolation, that looks like a warning sign sitting inside an otherwise strong release. It isn't — 1H25 included a one-time gain from the deconsolidation of Rolls-Royce SMR that doesn't repeat this year, plus a currency effect. Strip that comparison-year noise out and adjusted net income actually rose 27.4% to £2.034 billion, with adjusted EPS up 40% to 22.17 pence. The headline decline is an accounting artifact of what happened a year ago, not a signal about what happened this year. Where the Growth Is Actually Coming From Defense was the standout: organic revenue up 17%, underlying profit up 57%. Civil Aerospace's improvement leaned heavily on long-term service agreement margins and contract catch-ups — management flagged directly that this contribution moderates in the second half. Don't extrapolate 1H's Civil Aerospace pace into the second half. Power Systems is the newer, more interesting story: the data center power order book grew more than 50% in six months alone, as AI-driven power demand outpaces what utility grids can reliably deliver. Rolls-Royce raised its long-term Power Systems growth target to 25% a year through 2030, up from 20%. Balance sheet strength backs the earnings story up rather than undercutting it: net cash rose to £2.1 billion, £1.1 billion of bonds got repaid, and gross debt fell to £2.7 billion. The Question This Release Doesn't Answer Nothing in the 1H results, or the public reporting, around them addresses the status of Rolls-Royce's UltraFan 30 narrowbody funding need — the £100-200 million UK government commitment CEO Tufan Erginbilgic pushed for again at Farnborough, warning that engineering work could move to Germany or the US without it. That silence could mean the decision genuinely hasn't moved, or simply that 1H earnings calls don't dwell on a program that isn't revenue-generating yet. We addressed this issue earlier this month. Upside is there, but the British government is clearly unsettled with yet another new Prime Minister and the possibility of an election that will almost certainly see the Labour Party lose. Politicians won't risk losing their power easily. If Rolls-Royce has to struggle, so be it. But the earnings news might strengthen Rolls-Royce's negotiating position indirectly. A company posting a 46% profit jump, raising guidance twice in two quarters, and expanding margins across every division is a harder company for the UK government to say no to than one making the same ask from a position of financial weakness. Whether that translates into an actual funding decision is still the open question — and it's the one that determines whether Rolls-Royce ever becomes the third narrowbody engine option for Embraer or JetZero, rather than just a well-run business with three other growth stories that don't need Whitehall's help. The UltraFan program is key to the future of the company's civil business, as much as the GTF is to Pratt & Whitney. Interestingly, both programs are geared turbofans. The history between the two engine makers is bumpy, and may yet become bumpy again when the patent lawyers get involved. Meanwhile, ongoing sales of the Airbus A330neo and A350 ensure more XWB engine sales. Airbus plans to accelerate production; Rolls-Royce has a seat for the ride. There's been less success on the 787 program, which increasingly leans to GE Aerospace. Bottom Line This was a clean, credible beat-and-raise with no real asterisks once the SMR comparison-year noise is explained. Defense and data-center power are genuinely strong, independent growth stories on their own merits. The narrowbody question (UltraFan) remains exactly where it was after Farnborough: unresolved, and now sitting behind a set of results strong enough that Rolls-Royce doesn't strictly need the UK government's money to keep growing — which may make the funding decision easier for London to keep deferring, not harder. Of course, Rolls-Royce could turn to the Germans or Americans if it doesn't get the support it needs. That threat is going to be played for maximum effect. The US administration has already reawakened UK and EU defense contracting in ways it probably was not planning for. Interesting times.

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