Rolls-Royce Plc may lose market share to General Electric Co. and Pratt & Whitney following last month’s Airbus SAS engine blowout, according to Agency Partners analyst Nick Cunningham, who says the U.K. company’s costs from the event will also rise beyond the current consensus estimate.
The uncontained failure of a Trent 900 turbine on an A380 superjumbo operated by Qantas Airways Ltd. will endanger sales of the model, which competes with the GP7200 made by GE and United Technologies Corp.’s Pratt, Cunningham said in a note.
“This event and its aftermath might impact marketability of the Trent 900 and this could have a cost in terms of market share and pricing,” he said. “At the current share price investors may not be fully taking account of the risk.”
Rolls faces compensation claims not only from Qantas and other airlines which grounded planes after the blowout, but potentially also from Airbus and its customers over delivery delays related to the Trent 900, and from carriers affected by performance limits placed on the engine for safety reasons, Cunningham said. An estimated 50 million-pound ($80 million) impact on earnings this year is therefore “very unlikely” to cover the whole scope of claims, the London-based analyst said.
Rolls-Royce fell as much as 2.5 percent to 626 pence and was trading 0.6 percent lower as of 11:11 a.m. in London. The shares have declined 2 percent since the Nov. 4 incident, which prompted Qantas to ground all six of its A380s for 23 days.
Further charges against 2011 accounts will probably follow, according to Cunningham, a managing partner at Agency Partners who has been covering aviation-related stocks for 25 years.
“These speculative estimates have no basis in fact,” a Rolls spokesman, who declined to be identified, said today by telephone. “We have made our view of the range of financial outcomes clear in our recent interim management statement.”
Rolls-Royce said in a Nov. 12 earnings update that it would miss its 2010 earnings target of increasing underlying profit by 4 to 5 percent because of costs from the Qantas incident.
Cunningham’s investor note cited a lawsuit filed against Rolls last week by Qantas as revealing the likely extent of claims, especially concerning the airline’s inability to operate its A380s to Los Angeles because of a thrust cap of about 66,000 pounds on the Trent 900 turbine to prevent a further blowout.
The return flight from the U.S. requires the superjumbo’s engines to operate at a maximum 72,000 pounds of thrust because of the short runway and prevailing tailwinds during takeoff. At a reduced power level, Qantas would be limited to 80 passengers on a plane seating 450, rendering flights uneconomic.
“Rolls could have to continue to compensate Qantas for its inability to fly A380 on the Los Angeles route,” Cunningham said. “Hence, while fixing the problem is likely to have a cost in itself, the time it takes to do so could be more expensive.”
Richard Aboulafia, vice president of Fairfax, Virginia- based consultancy Teal Group, said the market for Trent 900-powered superjumbos could dry up if customers find that the aircraft can’t be operated as advertised.
“This plane only makes sense if you fly it toward the outer limits of its range and payload,” he said. “The economics are awful if you don’t fill it with fuel and passengers.”
Airbus is also seeking full financial compensation from Rolls after removing Trent 900 engines from its production line to replace those considered faulty. It says that could result in late deliveries to customers during the first half of next year.
Societe Generale analyst Zafar Khan also said today that current estimates of the cost impact are probably too low.
“What’s not clear from Rolls is whether there will be any spillover into following years,” said the London-based analyst, who rates the stock sell and has a price target of 530 pence.
Still, Rolls-Royce could avoid taking further hits against earnings by amortizing costs over the period of ‘Total Care’ maintenance contracts, which generally span 10 years, he said.
Qantas has identified a second set of faults with 16 of its A380 engines, Flight International reported. The oil leak in the high pressure/intermediate pressure turbine is unrelated to the earlier problem, the magazine said, citing an unidentified airline spokesman. Calls to Qantas’s 24-hour-hotline weren’t answered and a Rolls spokesman didn’t answer calls or e-mails.