LONDON — Rolls-Royce expects to have a profitable end of this decade… but may have to put up with some financial pain to get there.
The UK-based engine manufacturer has done well in recent years; in 2014, it recorded a net profit for the year of £942 million (approximately $1.4 billion), up 12% on the preceding year and it has developed an exclusive position on providing the powerplant – the Trent 7000 – for the forthcoming Airbus A330neo. Its Trent XWB holds a similar position on the new A350. April also saw it announce the largest single civil aerospace order in its history, a $9.2 billion deal to supply engines for Emirates’ batch of 50 Airbus A380s the Dubai-based airline ordered at 2013 Dubai Air Show.
And in recent years Rolls-Royce has proved particularly adept at retro-fitting technology from the latest members of the Trent family of turbofans into earlier models, helping keep them up to date and shaving vital percentage points off their fuel burn.
So, a series of profit warnings over the past 18 months may seem counter-intuitive. What is causing the manufacturer such angst?
Part of the company’s difficulties has nothing to do with the civil aerospace section of the business; the Land and Marine parts of the Group have been weak in recent time, which has affected the overall picture.
However, a major factor in Rolls-Royce’s recent aerospace problems has been that it is on a cusp of moving over to a new generation of the highly-successful Trent – just as demand for earlier models, such as the Trent 700, the most commonly-used engine in the current Airbus A330, is peaking or starting to decline.
Those older models typically have higher profit margins than newer products, which tend to be priced competitively for launch customers; the profit on those new engines comes some years down the line through routes such as the company’s TotalCare package, which covers key aspects of maintenance and engine management. (In 2014, 48% of the aerospace division’s sales came from aftersales revenue.)
This factor has combined with reduced demand for business jet engines and a softer regional aftermarket. Together, these problems are anticipated to create what Rolls-Royce describes as a £300 million “civil aerospace profit headwind into 2016.”
This was apparent in its latest financial figures; in the company’s half-year results, announced in July, the aerospace division recorded a 2% rise in underlying revenue to £4.3 billion, but underlying profit before tax and charges dropped 27% to £432 million.
The UK-based engine manufacturer had warned earlier in July that profits were likely to be down – not the initial message that new CEO Warren East had wanted to deliver to the financial community.
“In the near term, we are managing a significant transition from mature engines to newer, more fuel-efficient ones,” he told analysts as he presented the half-year results. However, “Despite the disappointment of our recent update, our second half outlook remains positive and full-year guidance for revenue, profit and cash remains unchanged,” he commented.
East was able to point to continuing growth in the Group’s order book for the first half of 2015, up £2.8 billion on the same period last year at £76.5 billion.
Looking further ahead, Rolls-Royce anticipates that the roll-out of new engines, such as the Trent XWB, 1000 and 7000, together with a growing aftermarket, will drive “significant revenue growth” over the next decade as it builds toward a 50% plus share of the installed widebody passenger market.
Based on 2013 sales figures, Rolls-Royce had a 40.4% market share of the civil aerospace engine business, just behind GE (41.3%) but significantly ahead of Pratt & Whitney (18.3%). The UK player has been fighting to increase its operating margins; again, based on 2013 figures, these were at 12.7%, compared to GE’s 19.8%.
Long-term, Rolls-Royce’s prospects seem set fair – it just has to get through some choppy conditions first.