Rolls-Royce Braces for the Worst from COVID Crisis – AGM Update

Trent 1000. Image – Rolls-Royce

Rolls-Royce cannot seem to catch a break. The company has spent the last few years dealing with corruption issues, problems on a flagship engine program, the threat of Brexit, and now the COVID-19 pandemic.

Rolls-Royce reported a loss of GBP2.2 billion on turnover of GBP16.6 billion for 2019, up 5 percent from 2018 turnover of GBP15.7 billion.  The loss in 2019 was attributed to problems with the Trent 1000

The troubles reached their nadir in 2017 when Rolls-Royce agreed to pay over $800 million to resolve several long-running bribery and corruption inquiries.  Even more damaging was the $3.7 billion write-down on its currency hedge brought on by a Brexit-induced weakening of the British pound versus the U.S. dollar.  All told, the company posted a record-setting loss of some $5 billion.

In an effort to right the ship, CEO Warren East wasted no time in ordering a review of Rolls-Royce’s operations.  New compliance policies and ethics training have since been implemented, and the number of intermediaries – a key problem in the scandal – has been reduced.  The company is being monitored over a set period, with no prosecution taking place provided that no infractions occur.

With one fire out, another appeared in the form of ongoing issues with the Trent 1000 engine, which powers the Boeing 787 Dreamliner.  Turbine blades on some of the engines have worn out sooner than expected, resulting in delivery disruptions and aircraft groundings.  According to the company’s latest annual report, 2019 results were impacted by a GBP1.4 billion charge related to Trent 1000 issues.  The company is progressing on fixing the program, with the certification of the new blade design expected in 2021. However, the lingering problems, coupled with reduced air travel in light of the pandemic, do not bode well for future engine sales, and it may be many years before airlines look past the engine’s current troubles.

As if that weren’t enough,  the company is now trying to develop a strategy to deal with the COVID-19 crisis.  Commercial aviation has been hammered by the pandemic as airframe production slows.  Both Airbus and Boeing have cut production across their product lines – a dramatic reversal from the past years of booming production to fill record backlogs.

Now, in light of the pandemic, interest in widebodies is being further reduced.  Prior to the pandemic, the A380 was already completing its production run; now, in-service aircraft may be retired even sooner.  This reduction in service of large aircraft also cuts into another Rolls-Royce revenue stream, MRO. As the industry looks to recovery, the widebody sector is expected to trail the marketplace, with demand anemic.

**Update**  Rolls-Royce said in its Annual General Meeting statement released on May 7 that civil aerospace widebody engine flying hours were approximately 40 percent lower than the manufacturer previously expected for the first four months of the year.

The decline included a fall of 90 percent in April when airlines around the world temporarily sidelined big chunks of their long-haul fleets. The result will be significantly fewer service visits to Rolls-Royce’s  maintenance, repair and overhaul shops for 2020 versus the company’s original target. It now expects MRO volumes in 2020 to be below 2019 levels.

With Airbus and Boeing reducing widebody production rates, Rolls-Royce expects to deliver around 250 widebody engines in 2020, down from the engine manufacturer’s previous guidance of 450.

It is working with its supply chain to reduce direct procurement as well as placing over 4,000 of its employees in the U.K. on furlough  – an earlier Financial Times report indicated that the company was contemplating a 15 percent reduction in its workforce, which would put 8,000 jobs on the line. These actions are not expected to affect work on the troubled Trent 1000 program. The company says it now has enough overhauled and spare Trent 1000 engines to reduce the number of grounded aircraft to around 10 once air traffic resumes.

The company reported that while the commercial market is suffering during the COVID-19 pandemic, almost half of its sales derive from defense and other markets, which have remained robust.

With narrowbodies likely to be a focus in a post-pandemic economy, Rolls-Royce is no doubt stepping up efforts in this market.  Rolls-Royce did have a foothold in the narrowbody market via its shareholding in International Aero Engines (IAE).  However, it sold its stake in IAE to Pratt & Whitney for $1.5 billion some years ago.  With the narrowbody market forecast to be strong in the years ahead, Rolls-Royce is focusing on developing new technology, such as the Advance and UltraFan.

While grim at the moment, services and support are expected to remain avenues of growth for the company.  Both the U.S. and U.K. are expanding the use of professional service providers to supplement their armed forces – so much so that operation and maintenance budgets are expected to rival production budgets.

The company’s new management team has its work cut out for it as it deals with headwinds in this COVID-19 era.

 

 

About Richard Pettibone

A military history enthusiast, Richard began at Forecast International as editor of the World Weapons Weekly newsletter, eventually moving to the company's premier newsletter service, World Aerospace & Defense Intelligence (WADI). Richard is the current editor of the Defense & Aerospace Companies, Volume I (North America) and Volume II (International) services. The two books provide detailed analyses of major aerospace and defense contractors. As a contributor to Aviation Week & Space Technology's 2005 and 2006 Aerospace Source Book, he authored the Prime Contractor & Major Manufacturer profiles. Find out more at www.forecastinternational.com

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