Rolls Royce Group Plc, the world’s second-largest aircraft-engine maker, may report its first decline in annual profit in almost a decade because of the cost to fix faulty A380 superjumbo engines and develop new turbines.
Earnings, excluding revaluation of currency hedging contracts, likely fell to 706.9 million pounds ($1.13 billion) last year, from 732 million pounds, according to 17 analysts surveyed by Bloomberg. Rolls-Royce probably incurred costs of as much as 50 million pounds from the explosion of an engine in mid flight on Nov. 4, said Nick Cunningham, an analyst at Agency Partners LP in London with a “sell” rating on the company.
The disintegration of the Trent 900 engine on the Qantas Airways Ltd. flight forced the airline to temporarily ground its A380 fleet, and manufacturer Airbus SAS had to take some new engines off the assembly line to swap for faulty ones. The companies have vowed to claw back costs from London-based Rolls, piling pressure on Chief Executive Officer John Rose to appease his clients before he steps down after 14 years.
“This is John Rose’s last session at a company where he’s had an enormous impact, so is he really going to go out on a earnings mess?,” said Ross Cowley, a Credit Suisse with an “outperform” rating on engine maker. “Rolls should know more about the situation now, and if they come out and say the charge is higher than expected, it’s going to be an issue.”
Roll-Royce rose 3.5 pence, or 0.5 percent, to 657.5 pence in London trading, valuing the company at 12.3 billion pounds. The stock has gained 5.5 percent in the year to date.
Revenue in 2010 probably rose to 10.84 billion pounds from 10.41 billion pounds, the Bloomberg survey found. Rolls-Royce generates about 44 percent of sales from the civil aerospace market, with the remainder spread across marine, defense and energy businesses, data compiled by Bloomberg shows. The company reports earnings tomorrow before the U.K. markets open.
The last time Rolls-Royce had a drop in full-year earnings was in 2002. Rose has been credited with boosting the company to the second position behind General Electric Co. from an also-ran in the industry, swelling the order book to 58.3 billion pounds in 2009 from 10.4 billion pounds in 1998. Rose is leaving at the end of next month to hand the reins to Royal Ahold NV CEO John Rishton, who previously also worked in the aviation industry.
Rolls-Royce’s investigation of the Trent 900 malfunction found a manufacturing defect caused the oil leak that ultimately led to the explosion. Rolls said after the incident that the defect would “slightly” clip its estimated underlying profit growth for the full year. Nobody was hurt in the Qantas blowout.
The explosion, the most severe incident on an Airbus A380 since the aircraft began commercial operation in 2007, has had little impact on Rolls-Royce’s stock. The shares have gained 5.2 percent since the blowout.
Four days after the explosion, Rolls-Royce said it had a better understanding of what caused the explosion, and that such incidents are rare, with the Trent 900 explosion being the first of its kind on a large commercial aircraft since 1994.
Zafar Kahn, an analyst at Societe Generale in London, said Rolls-Royce may be able to limit charges stemming from the Trent 900 fallout for 2010 by reducing service payments from affected customers. He estimates the costs to be about 30 million pounds.
The company, whose products include marine propulsion and energy-generating turbines, had estimated growth in so-called underlying profit of 4 percent to 5 percent. Rose, who announced his departure in September, hasn’t discussed the Qantas incident in public beyond three press releases the company issued following the blowout.
Airbus Chief Executive Tom Enders said last month that costs associated with the Trent 900 difficulties would only become apparent later in 2011. Rolls-Royce received 20 Trent 900 engines from Airbus’s assembly line to supply customers. A delay would lead to penalty payments Airbus would ask Rolls to assume.
The Trent 900 explosion on the A380 followed the blowout of a Trent 1000, the model to be used on the forthcoming Boeing 787 Dreamliner, at a test site in Derby, England, in August. The A380 engine failure on the Qantas flight was unconnected to the Trent 1000 blast, which Rolls-Royce said was caused by testing “outside normal parameters.”
Rolls-Royce competes with a joint venture of General Electric and Pratt & Whitney to build engines for the A380, the world’s largest passenger aircraft. GE and Rolls also compete in the Dreamliner program, while Rolls-Royce is the only supplier for Airbus’s upcoming A350 wide-body aircraft, which is slated for entry into service in 2013 using the Trent XWB engine.
“They’ve got a lot of new programs on and you have a lot of people working on them,” Kahn of Societe Generale said in an interview. “As John Rose always says, R&D cost is people.”
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