Tags: Superjumbo | Woes | Rolls | Royce

Rolls-Royce Back From Brink but Future Uncertain

Friday, 12 Nov 2010 02:09 PM

 

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Rolls-Royce Group PLC edged back from the brink Friday as investors accepted its assurances that a problem with its engines for the world's largest airliner was isolated and being repaired.

But the crisis appears far from over for the world's second-largest civil aircraft engine manufacturer. An Airbus executive suggested that Rolls-Royce knew about the problem before the midair disintegration of a Trent 900 engine last week, raising the question of long-term damage to the reputation of one of Britain's last globally important industrial manufacturing companies.

And there are no answers yet on how much the incident will cost Rolls-Royce, particularly if the company is forced to pay out compensation to affected airlines and undergo a complete overhaul of the faulty engine series. Analysts said that if Airbus' Chief Operating Officer John Leahy's comments were correct, Rolls could face claims for faulty service and lost revenue that would run into the millions of dollars.

Still, there was some initial relief that a plan of action appeared to be in hand. Rolls-Royce shares gained 4.6 percent, or around $700 million, after a rout that wiped $1.5 billion off its share price in the week since the alarming midair incident on a Qantas flight from Singapore to Sydney.

"Investors have been reassured that the problem is being contained," said Howard Wheeldon, a senior strategist at BGC Partners in London.

"This is not a BP incident, this is a contained incident," he added, in reference to the devastating April Gulf of Mexico explosion and lengthy oil spill that almost brought another of Britain's major companies to its knees.

Rolls-Royce said that the disintegration of the Trent 900 engine as Qantas Flight 32 flew over an Indonesian island on Nov. 4 was caused by a specific component of the turbine engine that started an oil fire. It said the problem was unique to its series of lighter-weight, quieter and less-polluting engines designed specially for the world's newest and largest passenger plane.

The statement matched a report from the European Aviation Safety Agency, which issued an emergency order Thursday requiring airlines to re-examine their Trent 900s and ground any planes with unusual oil leaks.

Chief Executive John Rose said the company will be replacing the relevant part "according to an agreed program." Inspections on the 20 aircraft that currently use the engine, operated by Qantas, Singapore Airlines and Lufthansa, will also continue in association with aviation regulators.

"This program will enable our customers progressively to bring the whole fleet back into service," he said.

He offered no details and Rolls-Royce declined to comment on remarks to reporters in Sydney by Airbus' Leahy, who said that Rolls-Royce had at some point fixed the bearing box on newer versions of the Trent 900. He said Rolls was now fixing it on older versions. The Herald Sun newspaper reported his comments on its website.

Leahy's comments did not address why Rolls-Royce had not fixed the bearing box in older versions of the engine. Airbus did not elaborate.

The box in question contains the metal ball bearings that allow movement of the drive shaft that spins the turbines inside jet engines.

Keeping customers like Airbus and the airlines on its side is critical for Rolls-Royce, the world no. 2 behind Fairfield, Connecticut-based General Electric.

The last thing they need is for companies to defect to the alternative engines for the A380 made by the Engine Alliance, a 50/50 joint venture between GE Aircraft Engines and Pratt & Whitney, which are currently used by Emirates and Air France.

Rolls-Royce makes almost half its 10 billion pound ($16 billion) annual revenues from its civil aerospace division. The Trent series and its RB211 engines, which power Boeing Co.'s under-development 747 jetliner, account for nearly two-thirds of that.

Rolls-Royce does not break down sales for each type of engine, but sales of the Trent 900 are significant. The company has orders to equip 70 new A380s and airlines have option for 20 more.

Qantas CEO Alan Joyce and his counterpart at Lufthansa, Wolfgang Mayrhuber, have so far been supportive of the continued use of the Trent 900 engines in their A380s and Leahy said that three A380s due to be delivered to Qantas by the end of the year would be fitted with Trent 900 engines that have a design upgrade.

Rolls-Royce, which also has marine and defense divisions, acknowledged Friday that its full-year earnings would be "slightly lower than previously guided" because of the crisis. Back in July, it said that its underlying profits would grow by 4-5 percent compared to 2009.

Jonathan Jackson, head of equities at Killik & Co. said that while uncertainty surrounding the Trent 900 engine is "likely to linger for a while longer, today's statement provides reassurance that the incident is containable, and that the scale of the share price reaction this week looks overdone."

"However, we would highlight that a purchase of the shares is not without risk in the short term," Jackson added.

Engines on the A380 malfunctioned four times before one of them disintegrated during the flight from Singapore to Sydney last week, and aviation experts have said that the earlier mishaps may hold clues to design or construction flaws.

Three of the four previous problems centered on the turbines or oil system.

The A380 has already proved a long headache for Airbus, owned by Toulouse, France-based EADS, the manufacturer of the frame for the double-decker jet. The development and production of the plane was hampered by lengthy technical delays and EADS Chief Financial Officer Hans Peter Ring said Friday that the potential financial impact of the engine trouble was unclear.

"We cannot exclude that there is risk at this point," Ring said. "This is a very recent development, being managed on a daily or even hourly basis."

© Copyright 2014 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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