Rolls warns on civil aviation downturn

Issuing what it described as a strong set of half year financial results, the Derby-based manufacturer said the industry would not escape the effects of high oil prices, the economic downturn and constraints on financing. However, chief executive Sir John Rose said the youth, scale and geographical diversity of the company’s civil aerospace installed base, along with its broad portfolio, would help mitigate the consequences of uncertain conditions in the airline industry. During the half year to 30 June, the Rolls order book increased by 17 per cent to £53.5 billion (2007: year end £45.9 billion), underlying sales increased by 12 per cent to £4.2 billion with services revenues increasing by 12 per cent to £2.2 billion and representing 53 per cent of group sales. Underlying pre-tax profit increased by eight per cent to £410 million - achieved after costs incurred in relation to the 2,300 redundancies announced in Jannuary. The company said its consistent strategy over many years has created a broadly based power systems company. The breadth, diversity and materiality of the Group's portfolio of businesses and products, access to global markets, a growing installed base, the expansion of the Group's aftermarket services business and the strength of the balance sheet all place Rolls-Royce in a good position to deal with the challenges of the current economic environment. Activity in the group's civil aerospace business had continued to increase strongly in the first half despite the impact of global economic pressures and rising fuel prices. Demand for widebody aircraft remained strong and Rolls-Royce now has a 50 per cent share of this sector. Programmes in the business jet market also continued to sell well, with 191 deliveries in the first half, the successful launch of the Rolls-Royce powered Gulfstream G650 extending Rolls’ footprint in this sector. The widebody and corporate sectors, which together account for more than 75 per cent of civil aerospace original equipment revenues, continued to be resilient, Rolls said. The delays to the Airbus A380 and Boeing 787 programmes had reduced planned capacity in the widebody sector by around 300 aircraft over the next three years and caused firmer demand for existing widebody products. The relative youth and fuel efficiency of the Rolls-Royce installed base, which has an average age of eight years, make it less likely that Rolls-Royce powered aircraft will be grounded than older and less efficient aircraft, the company said. The majority of announced retirements to date had been narrowbody aircraft or aircraft over 20 years old. In the narrowbody sector the Rolls-Royce effective share is less than ten per cent of the current generation market and less than ten per cent of the Rolls-Royce narrowbody fleet is more than 20 years old. The company said its marine business was benefiting from high levels of activity in the oil and gas sector with offshore exploration and development, as well as in compression and transportation systems, generating demand for high specification, bespoke vessels and equipment. This was opening up new opportunities for the supply of offshore ship designs and equipment. Defence aerospace continued to benefit from strong US demand, and Rolls maintained its lead in the military transport sector where its AE series of engines had made strong progress. The company’s energy business was also benefiting from increased worldwide demand in the oil and gas production sector, driven by higher oil prices and, in the land-based power generation market. This is opening up new opportunities for the business in the supply of gas turbines and compressors for land-based and underwater pipelines, as well as for power generation on rigs and floating production, storage and offloading vessels. Looking ahead, Rolls-Royce said it was confident that it will continue to deliver profitable growth and positive cash flow for the full year.