Rolls-Royce let down by overworked suppliers

The soaring demand for new aircraft from the big airlines has left suppliers in the industry unable to meet expectations, the jet engine maker Rolls- Royce warned yesterday, after years of cuts and redundancies during the recession.

Rolls-Royce also blamed intense competition for new jet engine orders with rivals General Electric and Pratt & Whitney of the US for the squeeze on its profit margins, despite unveiling a 20 per cent jump in operating profits in the first half of the year to pounds 115m.

Sir Ralph Robins, chairman, said Rolls-Royce had identified several bottlenecks in its engine business following the 33 per cent rise in sales in its aerospace group, which includes civil and military jets, to pounds 1.7bn.

Since the recession Rolls-Royce has halved the number of suppliers to 600. Some 70 per cent of its engine parts are bought in, of which around the same proportion are sourced from UK companies. "Most of us are all sucking on the same supply network which has been strained by it," said Sir Ralph. Staff were working 20 per cent more overtime to satisfy the demand, even after excluding the impact of an overtime ban last year. Rolls-Royce said about 1,000 extra employees had been taken on at the aerospace division since last year, though 800 had left in other parts of the company.

But Sir Ralph denied the company had bought market share at the expense of profits. Commenting on the increase in the order book to a record pounds 7.8bn, he said: "It's a hell of a nice problem to have." A further pounds 1.2bn of orders have been announced, but are not yet included in the formal order book.

He also pointed to a slight improvement in profit margins, up from 10.9 per cent to 11.1 per cent over the same period the year before, as a sign that underlying profits were improving.

Fears about the squeeze on margins hit Rolls-Royce shares yesterday, which fell 19p to 235.5p. The group raised its dividend payout to shareholders by 10 per cent to 2.2p a share. An increase in its final dividend in March was the first since 1991.

Headline profits in the first six months of the year were pounds 116m, compared with losses of pounds 169m the year before, following pounds 263m of provisions to cover the sale of the Parsons steam turbine business to Siemens of Germany. Two companies are negotiating to buy the International Combustion boiler- making business in Derby, which was put up for sale with Parsons more than a year ago. Sir Ralph said an announcement would be made soon.

Despite the restructuring of the power business, profits fell from pounds 19m to pounds 14m on sales of pounds 530m. Sir Ralph described the result as "disappointing".