Rolls-Royce shares fly as 11 September clouds lift

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Rolls-Royce shares surged 15 per cent yesterday to 154.5p after investors breathed a sigh of relief that the battered engine producer has begun to pull itself out of the post-11 September gloom.

The company said it had attracted a record level of orders for civil aero-engines in the six months to 30 June, creating new orders worth £5.2bn.

Rolls-Royce saw its net debt climb by £50m to £990m, but it pleasantly surprised investors by saying the position should be better for the year as a whole than it had predicted soon after the terrorist attacks on the World Trade Center and Pentagon.

John Rose, chief executive of Rolls-Royce, said the outlook was "challenging", but reiterated his confidence that the company was trading in line with guidance given last October.

At the time Rolls-Royce warned of the dramatic impact 11 September was having on its business, but was upbeat about prospects for later this year and early next year.

Yesterday, Mr Rose said the company would hit profit again in 2003, unless it is forced to take a £35m hit to its profit and loss account to shore up its troubled pension fund.

Rolls-Royce's main pension fund has a deficit of £700m, measured on the FRS17 accountancy basis. The company said that if its pension shortfall remained at this level, it would plough £35m extra contributions into the fund.

The deficit on Rolls-Royce's pension, along with many others among FTSE 100 companies, has been known about for some time and news that the company might increase provisions next year did not faze the City.

The company, which makes 50 per cent of its revenues from manufacturing and servicing the engines of aeroplanes, unveiled the impact of the slump in the aviation market.

Underlying pre-tax profits nearly halved to £104m in the six months to 30 June. Deliveries of civil aero-engines fell sharply during the period from 670 to 405, while revenues dipped 9 per cent to £2.76bn.

Some analysts had raised concerns that last week's decision by American Airlines to ground its entire fleet of Fokker 100s, which are powered by Rolls-Royce engines, could hit the engine maker hard.

American Airlines is the world's largest operator of this type of aircraft. Its decision to ground the fleet comes after US Airways, which last week filed for bankruptcy protection, grounded its own Fokker 100s, raising the prospect that 40 per cent of the Rolls-Royce powered aeroplanes could soon stand idle.

Mr Rose signalled that he thought there could be further collapses among US airlines. But he added that such an eventuality was taken into account in Rolls-Royce's October profit warning.

At that time Rolls-Royce announced it would cut 6,000 jobs, with 1,000 of that number coming from contract staff and 5,000 from its permanent workforce.

The company said 5,500 staff had been laid off and the remaining 500 redundancies would come this year. It said it was on track to produce annual costs savings of £250m by 2004.