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February 20, 2024
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Rolls-Royce has produced its first operating profit since 2019, reporting a £414 million underlying operating result for 2021. The engine maker has completed a long and painful restructuring that has reduced its Civil Aerospace unit in size by one-third. It expects to benefit from this and further market growth. Rolls-Royce back to its first operating profit since 2019.

The £414 million operating Group profit compares to a £2.008 billion loss in 2020, and £-808 million in 2019. The statutory operating result was £513 million last year, £-1.972 in 2020, £-852 million in 2019, £-1.161 billion in 2018, with the last profit of £366 million reported back in 2017.
Group revenues were £11.218 billion compared to £11.491 billion in 2020. Rolls’ profit margin improved to 4.6 percent from -17.2 percent.

Looking at Civil Aerospace, the unit dramatically reduced its losses to £-172 million from £-2.535 billion in 2020 despite lower revenues of £4.536 billion versus £5.068 billion in the previous year. Civil delivered 195 engines compared to 264 in 2020 and 510 in 2019. Business engine deliveries were also down, to 114 from 184.

Engine flying hours improved but lag behind the original guidance

At 610 versus 831, large engine shop visits were also lower, but Long-Term Service Agreements (LTSA) or engine flying hours increased to 7.4 million from 6.6 million in 2020. LTSA was lower than expected because Covid-restrictions delayed the recovery and is still more than halfway off 2019 levels of 15.3 million. Underlying revenues of Civil Aerospace were £4.536 billion, down from £5.0.89 billion in 2020. The profit margin of Civil is still -3.8 percent, but that’s an improvement of -50 percent in 2020. Free cash was £-1.4 billion, better than the £-2.0 billion that was guided for the year thanks to lower working capital outflow. Net debt increased, however, to £5.2 billion from £3.6 billion, but Rolls-Royce has a strong liquidity position with £7.1 billion.

Civil Aerospace is now one-third smaller than before the restructuring that started in 2020, with 9.000 fewer roles and run-rate cost savings that exceed the original £1.3 billion target one year ahead of schedule. Rolls-Royce now wants to fully exploit that improved position, said Chief Financial Officer Panos Kakoullis: “We continue to make sure that a large proportion of the costs that have gone out, stay out. Even as the load, as demand grows.”

CEO Warren East added: “The fundamental restructuring means that we have now much lower costs and much-improved operational gearing. We can see significant growth in demand in our factories and that is accompanied by only small incremental growth of our operating costs. This is extremely important as we continue to generate value of our large installed base.” That includes 5.700 large and 9.700 business jet engines.

The Airbus A350F gives Rolls-Royce access to the growing full freighter market. (Airbus)

East, who announced today that he will step down by the end of the year after almost eight years at the helm, is particularly happy with the new opportunities that come with the Airbus A350F: “The A350F represents a great opportunity for us to take a share in the market that has been, until recently, dominated by Boeing and General Electric.” Rolls-Royce is the exclusive supplier to the A350-program until 2030, offering the Trent XWB-97 for the freighter. Since the launch order of Air Lease Corporation at the Dubai Airshow, Rolls has won 58 orders and commitments for the freighter program that are part now of its 1.500 order backlog.

Also of great importance is the selection of the Pearl 10X on the Dassault 10X business jet and the Pearl 700 on the Gulfstream G800. The Pearl 700 is now in the final phase of certification and has performed very well, said East.

Investment in electrical powertrains is for the long-term

Rolls-Royce is expanding its activities in the New Markets segment for electrical aircraft, a business with high-growth potential that Warren East said is something that the company wants to have a long-term presence. East acknowledges that the eVTOL market currently is non-existing, but nevertheless, Rolls-Royce has partnered with Vertical Aerospace on the VX-4 eVTOL vehicle and with Eve UAM on the Embraer-designed vehicle. It also is active with Tecnam and Norwegian regional airline Wideroe on developing an electric powertrain for entry into service this mid-decade. At last week’s Singapore Airshow, Rolls-Royce expanded this partnership with Wideroe to include Embraer.  

Over the next five years, Rolls-Royce expects to invest a cumulative £1.0 billion in R&D on Electrical and its Small Modular (nuclear) Reactors, of which half is self-funded and the rest must come from third-party grants.

Despite challenges in the market and rising inflation, Kakoullis is confident that Rolls-Royce will see continued positive momentum in its financial performance, with low to mid-single-digit revenue growth that is supported by a strong order book in Defense and Power Systems and a continued gradual improvement in Civil Aerospace. The operating margins will be around flat as the OEM increases its engineering spend on sustainable growth opportunities in Electric and Power Systems. Free cash flow should be modestly positive. The divestment of subsidiary ITP Aero, which should generate £1.7 billion, is expected to close later this year.

Warren East will step down as CEO at the end of 2022. (Rolls-Royce)

The Rolls-Royce Board will now launch a campaign to find a successor to Warren East. He will remain fully committed to the company until the end of 2022, but reflected on his eight years as CEO: “We have simplified the Group, fundamentally improved our underlying operations and driven long-term change. Rolls-Royce is a dramatically different business today: a leading industrial technology company that is not only addressing the energy transition but embracing the opportunity it presents to generate substantial business growth, including through the creation and nurturing of new businesses with very significant potential.”

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Active as a journalist since 1987, with a background in newspapers, magazines, and a regional news station, Richard has been covering commercial aviation on a freelance basis since late 2016.
Richard is contributing to AirInsight since December 2018. He also writes for Airliner World, Aviation News, Piloot & Vliegtuig, and Luchtvaartnieuws Magazine. Twitter: @rschuur_aero.

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