Rolls-Royce to shift production away from Britain

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The Independent Online

Sir John Rose, chief executive of Rolls-Royce, has warned that more UK workers would lose their jobs at the jet-engine maker as it shifts its industrial base to lower-cost, dollar-denominated markets.

"Ninety per cent of our revenue comes from outside the UK, and the manufacturing balance will continue to move that way," Sir John said yesterday. "Over time we will increasingly ensure that our supply chain is either dollarized or low-cost so that we can get a hedge against the dollar."

The company admitted yesterday that the fall inthe dollar, the currencyin which its sales are booked, cost it £92m last year, reducing its annual profit to £800m.

Sir John did not give specific figures or sites that might be closed, though he argued that the company's record order book, which grew 76 per cent to £45.9bn last year, meant that the "rebalancing" would be more about opening new sites abroad than shutting factories here.

The news comes just days after the company, one of the biggest manufacturers with more than 20,000 employees in the UK, confirmed the closure of an oil and gas turbine factory on Bootle, Merseyside. The closure will lead to an estimated 200 lost jobs.

Sandy Morris, an analyst of ABN Amro, said a steady shift reflected the company's increasingly global nature. "Sadly that has to be a given. Half of the order book is now in the Far East. They are staying close to their customers," he said.

Despite profits of £800m, which represented a 13 per cent improvement over the prior year, investors sent the stock 10.2 per cent lower on the day. Shareholders were disappointed by the company's decision to inject £500m into its pension scheme and increase its dividend by 35 per cent to 13p per share, equivalent to about £100m over the coming three years. Analysts had expected that the financial review instituted last year would lead to a special dividend of between £500m and £1bn.

Shareholders also continue to worry that a downturn in the civil aviation industry after several boom years could slow the company down.

Nick Cunningham, an analyst at Evolution Securities who put a "sell" recommendation on the stock, said: "The combination of a weaker mix (more engines on low margins), tougher currency, higher units costs, higher payments to risk-sharing partners, higher tax and more interest does pull back our forecasts." JP Morgan Cazenove cut its rating to "in-line".

Rolls is the world's second largest provider of jet engines, with a 36 per cent share of the market after the American giant GE.

The company has benefited hugely from the unprecedented boom inthe aviation sector, driven by a surge in demand from Asia and the Middle East. Indeed, engine ordersthis year from carriers in those regions are equal to the company's entireorder book just fouryears ago.

The company is signed up to be the sole provider of engines for Airbus's A350 XWB, its new wide-body aeroplane that is expected to come on the market from 2013. Airlines have already ordered 290 of the planes.

While much of the focus on Rolls falls on its civil aircraft engine business and its vulnerability to cyclical downturn, the sale of new engines accounts for just 19 per cent of the group's overall turnover. A greater portion comes from the decades of servicing that the engines require once they go into service. The remainder is divided between the company's marine, defence and energy units.

Global demand for jets to soar, Airbus predicts

Airbus, one-half of the world's jet-making duopoly, seems to have missed the doom-and-gloom warnings about the coming global recession.

John Leahy, Airbus's chief operating officer and salesman extraordinaire, yesterday increased the company's already heady predictions for the global demand for passenger and freight aircraft.

Between now and 2025, he said, 24,262 new planes will be delivered – a 7.5 per cent increase on the company's prediction one year ago. To put that in perspective, the world's current fleet consists of just under 15,000.

A rosy picture indeed for the industry, but rather less so for environmental campaigners who are already clamouring about the estimated 2 per cent of global emission caused by air travel. The skies will be clogged. The same goes for the many airports, with Heathrow as the prime example, which are struggling to handle the surge in passengers and planes.

Airbus predicts that airport congestion will spike, leading to a surge in demand – by as much as 50 per cent – for the very largest airplanes that can move more people in and out in one go.

Funnily enough, such a nightmare scenario would suit Airbus quite well indeed. They happen to make the world's largest airplane, the overdue and vastly over-budget A380.

Boeing has a similarly buoyant outlook for future aircraft sales, though its breakdown skews much more heavily to long-range, intermediate-sized planes, much like their 787 Dreamliner.

Danny Fortson