Rolls takes a pounds 265m tumble

SHARES IN Rolls-Royce yesterday plunged more than 8 per cent, wiping over pounds 265m from the company's market value after the world's third largest aero-engine maker revealed that tough competition in its main markets was putting a squeeze on margins.

The company said that the fierce battle against its United States aero- engine rivals, General Electric and Pratt & Whitney, eroded profitability in the first half of the year. However, Rolls-Royce added that its drive to win airline contracts pushed its order book to an all-time high of pounds 10bn and gave it more than a third of the aero-engine market.

Sir Ralph Robins, the chairman, defended the Rolls-Royce strategy of increasing engine sales despite shrinking margins. He pointed out that the company needed high engine sales to penetrate the lucrative spare- parts market.

"The thing that matters is the aftermarket. Spares is where the profit is," he said.

His comments came after Rolls-Royce reported a 16 per cent increase in interim pre-tax profit to pounds 135m on sales up 7 per cent to pounds 2.09bn. Earnings per share rose 10 per cent to 7.17p.

Sir Ralph said he was confident the target would be met for at least the next three years and pointed out that Rolls had a leading position in markets which would be worth nearly $1,000bn (pounds 625bn) over the next 20 years.

City analysts expressed disappointment at the results, which came in at the bottom end of expectations. They said that the increase in profit was largely due to a fall in research and development spending. Their comments contributed to a 18p fall in Rolls-Royce shares to a six-month low of 203p.

Sir Ralph said Rolls-Royce's presence in the consortium which this week won the order to fit nearly 200 Airbuses A320s for British Airways, was "very important". Rolls-Royce will net over pounds 500m from the deal.

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