Rolls-Royce shares soar as Airbus fears eased

James Moore,Deputy Business Editor
Saturday 13 November 2010 01:00 GMT
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Rolls-Royce shares surged to the top of the FTSE 100 leader board yesterday as the company said it expected limited impact on profits from the fault in its Trent 900 aircraft engine that saw airlines across the world grounding Airbus jets that use it, and that the problem would be fixed.

Some £1.3bn had been wiped from the company's market value as it found itself at the heart of a crisis following the emergency landing in Singapore of a Qantas A380 after part of its engine disintegrated mid-flight.

However, Rolls-Royce managed to instill some calm in its skittish investors yesterday with a trading statement in which its famously publicity shy chief executive, Sir John Rose, said: "This event and the consequent actions will have an impact on the group's financial performance this year.

"However the scale of our order book, the breadth and mix of our portfolio, the global nature of our business and our strong balance sheet makes Rolls-Royce a resilient business, and we expect continued underlying profit growth in 2010." That, and the fact that the group provided details on the problem and on efforts to fix it, sent the shares sharply higher in London trading.

They finished up 27p at 611p, making Rolls-Royce comfortably the biggest riser in percentage terms on the FTSE 100. Tina Cook, an analyst at Charles Stanley, said the announcement provided "welcome clarity". She noted the disparity between the amount wiped from the value of the company and the likely hit to profits, which she put at about £25m, given the company's guidance of growth "slightly lower" than the 4 to 5 per cent it had previously expected. However, she added: "The market has reacted positively, but a modicum of caution is still warranted as the investigation and remedial work is still ongoing."

On this front Rolls-Royce said the problem was specific to the Trent 900. and that the failure was confined to a specific component in the turbine area of the engine. This, said Rolls-Royce, "caused an oil fire which led to the release of the intermediate pressure turbine disc".

The company said it would replace the "relevant module" according to an agreed programme and would continue to work closely with investigating authorities. It said the programme would "enable our customers progressively to bring the whole fleet back into service".

However, the ripples from the incident continued to flow through the industry yesterday as Airbus' parent, EADS, said investigations into the Rolls-Royce engine blowout could delay deliveries of A380s in 2011 as it focused on maintaining the existing fleet.

The Airbus chief executive, Tom Enders, said: "The customer has priority, and the priority is to keep the 39 aircraft flying or back in the air as quickly as possible and I would not rule out some impact on the delivery schedule."

Qantas's six Airbus A380s have been grounded since last Thursday in the biggest incident to date for the world's largest passenger jet.

Gary Davies, professor of corporate reputation at the Manchester Business School, said the most important thing for Rolls-Royce now was to fix the problem to prevent it from contaminating its brand and hitting other parts of the business. "When there is spillover it can be quite severe," he said. "You just need to look at what happened to Jarvis after the Potters Bar rail crash in 2002. All its operations were associated with it. The key now is to get the problem fixed as quickly as possible and for the most senior person to take responsibility for that."

Elsewhere Rolls-Royce said trading across its businesses had progressed "in line with the guidance for modest growth provided in July 2010".

The company said its non-civil aerospace businesses were likely to perform "slightly better than guided" in July and that there were "signs of improving demand in our marine business". It said the growth of its defence business overseas would compensate for the impact of cutbacks expected in the UK.

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