Rolls-Royce cannot seem to catch a break. The company has spent the last few years dealing with corruption issues, problems on a flagship engine program, the threat of Brexit, and now the COVID-19 pandemic.
Rolls-Royce reported a loss of GBP2.2 billion on turnover of GBP16.6 billion for 2019, up 5 percent from 2018 turnover of GBP15.7 billion. The loss in 2019 was attributed to problems with the Trent 1000.
The troubles reached their nadir in 2017 when Rolls-Royce agreed to pay over $800 million to resolve several long-running bribery and corruption inquiries. Even more damaging was the $3.7 billion write-down on its currency hedge brought on by a Brexit-induced weakening of the British pound versus the U.S. dollar. All told, the company posted a record-setting loss of some $5 billion.
In an effort to right the ship, CEO Warren East wasted no time in ordering a review of Rolls-Royce’s operations. New compliance policies and ethics training have since been implemented, and the number of intermediaries – a key problem in the scandal – has been reduced. The company is being monitored over a set period, with no prosecution taking place provided that no infractions occur.
With one fire out, another appeared in the form of ongoing issues with the Trent 1000 engine, which powers the Boeing 787 Dreamliner. Turbine blades on some of the engines have worn out sooner than expected, resulting in delivery disruptions and aircraft groundings. According to the company’s latest annual report, 2019 results were impacted by a GBP1.4 billion charge related to Trent 1000 issues. The company is progressing on fixing the program, with the certification of the new blade design expected in 2021. However, the lingering problems, coupled with reduced air travel in light of the pandemic, do not bode well for future engine sales, and it may be many years before airlines look past the engine’s current troubles.
As if that weren’t enough, the company is now trying to develop a strategy to deal with the COVID-19 crisis. Commercial aviation has been hammered by the pandemic as airframe production slows. Both Airbus and Boeing have cut production across their product lines – a dramatic reversal from the past years of booming production to fill record backlogs.
At this writing, the company was contemplating a 15 percent reduction in its workforce, which would put 8,000 jobs on the line. The crisis has exacerbated a vulnerability in the company’s product offerings. Over the past few years, Rolls-Royce has focused its programs on widebody aircraft, while the market has been demanding narrowbody planes.
Now, in light of the pandemic, interest in widebodies will likely be further reduced. Prior to the pandemic, the A380 was already completing its production run; now, in-service aircraft may be retired even sooner. This reduction in service of large aircraft also cuts into another Rolls-Royce revenue stream, MRO. As the industry looks to recovery, the widebody sector is expected to trail the marketplace, with demand anemic.
With narrowbodies likely to be a focus in a post-pandemic economy, Rolls-Royce is no doubt stepping up efforts in this market. Rolls-Royce did have a foothold in the narrowbody market via its shareholding in International Aero Engines (IAE). However, it sold its stake in IAE to Pratt & Whitney for $1.5 billion some years ago. With the narrowbody market forecast to be strong in the years ahead, Rolls-Royce is focusing on developing new technology, such as the Advance and UltraFan.
While grim at the moment, services and support are expected to remain avenues of growth for the company. Both the U.S. and U.K. are expanding the use of professional service providers to supplement their armed forces – so much so that operation and maintenance budgets are expected to rival production budgets.
The company’s new management team has its work cut out for it as it deals with headwinds in this COVID-19 era.