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Rolls-Royce may have to renegotiate £250m in aid

Michael Harrison
Thursday 04 July 2002 00:00 BST
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Rolls-Royce may be forced to return to the Government to renegotiate a £250m aid package it was granted to develop a new engine for the Airbus A380 super-jumbo.

The repayable launch investment was tied to the development of two new engines in the Trent family – one to power the new Airbus and one to power a stretched version of the Boeing 747 jumbo jet.

Since the aid package was announced in February last year, however, Boeing has cancelled plans for the stretched jumbo and there are also doubts over the development programme it unveiled instead, the 700 mph Sonic Cruiser.

Rolls would not say how much of the £250m had so far been received from the Department of Trade and Industry, saying funding was only paid once there was "ongoing activity" on a programme.

It also maintained there was no question of any aid having to be repaid to the Government.

But it did confirm that it would be more economic to develop the two new Trent derivatives together and that if aid was not forthcoming for the Boeing engine then it would need to reach a new agreement with the Government over the amount of money available for the A380 engine programme.

Some observers believe that if the £250m of support is cut back to any significant degree then it could undermine the financial rationale for developing the Trent 900, the engine which will power the new Airbus super-jumbo.

But a Rolls spokesman flatly rejected this. He said Rolls had already received enough orders for the Trent 900 to cover its development costs. Rolls has been selected as engine supplier on 50 of the 85 A380s so far ordered, bringing in orders worth about $4bn.

The fresh doubt over the amount of aid Rolls will receive highlights again the controversial way in which the company accounts for launch investment. Rolls' policy is to treat both repayable launch aid from the Government and funding from commercial risk and revenue sharing partners as operating income and add it to the profit and loss account where it goes straight to the bottom line.

The Government and the risk and revenue partners then receive a set proportion of the revenue from every engine Rolls sells. This is classed as an operating cost and deducted from its income.

The amount that Rolls itself invests each year on engine research and development is written off immediately rather than being capitalised on the balance sheet.

Critics in the City say this accounting treatment makes a nonsense of the underlying profit figures which Rolls reports. Last year it reported an underlying profit of £475m after including £239m of "other operating income" – payments from the Government and risk and revenue partners. Had it not been for this income, then Rolls would have reported a bottom line loss of £47m.

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