The extension of the contract that confirms Rolls-Royce as the exclusive supplier until 2030 for the Airbus A350-family is a major boost for the Derby-based engine manufacturer. It secures its return on investment on the twin-aisle program, although the Covid-crisis will have a significant impact on sales of the aircraft model in the next coming years as the recovery of long-haul travel lags behind that of short-haul.
The contract extension with Airbus on the A350-900 by five years until 2030 was announced during Rolls’ 2020-results presentation on March 11. It means the Trent XWB-84 will remain the sole engine on the smallest version of the A350. Rolls-Royce already had an exclusive agreement for the XWB-97 on the stretched A350-1000.
The renewal ends one and a half years of speculation, in which Airbus and General Electric were said to study the option to offer the GEnx on the -900 from 2025-2026. This would have required a redesign of the A350 engine mounting as well as an engine upgrade on power, as the maximum output of the current GEnx-1B and -2B on the Boeing 747-8 and 787-10 is only 76.000 lbs. Offering a second engine on the A350 would have made sense for Airbus to make the A350-900 more attractive to loyal GE-customers.
This option might have been attractive in 2019 when reports first emerged, but in a (post)-Covid world where A350-sales are likely to stay behind the original forecast, investing in a second engine option will likely have cast doubts at both Airbus and GE. Is there a market big enough for two engine suppliers? As of March 1, the A350-900 had sold 745 with 355 delivered. Of the larger A350-1000, on which Rolls has the exclusive rights, only 168 have been sold and 53 delivered. The XWB has clocked up over seven million flight hours since entry into service in 2015.
Who made the decision to end discussions on the GEnx-powered A350 (Airbus, GE?) isn’t clear, but Rolls-Royce is delighted with the opportunity to extend the contract. As Warren East said: “The -900 is the volume variant, it’s a hugely successful airplane. Technically, yes, the aircraft could be dual-sourced (with another engine option – RS) at the end of 2031, but the 2030 date pretty much coincides with the development timeline of our next-generation UltraFan engine program.”
In other words: when the contract on the XWB-84 expires in 2030, Airbus and Rolls-Royce might be willing to re-engine the A350 with newer engine designs like the UltraFan. If that makes sense, that is, as the A350 design will be 25 years old by then. In September, Airbus outlined plans to have a new, hydrogen-based airliner, available from 2035. This could well be an A350 derivative.
The UltraFan is expected to have its first proper run in early 2022. (Rolls-Royce)
UltraFan still waiting for its first customer
Rolls-Royce is relying heavily on the future success of the new UltraFan, which after years of studying and designing is now entering a new phase. The first engine is under assembly and is expected to have its first run later in 2021, although East said that early 2022 is more likely. Thanks to its advanced combustor and fan technology, a 15:1 by-pass ratio and 60:1 pressure ratio, and operating at higher temperatures, UltraFan will be 25 percent more fuel-efficient compared to the current Trent family. The engine is also 100-percent sustainable aviation fuel (SAF) compatible, a key factor at a time when the industry is actively involved with the use of SAF’s in all sorts and forms.
When it launched UltraFan, Rolls-Royce had hoped to have a customer for the scaleable engine by now. However, it hasn’t been confirmed on any existing or new aircraft design. Rolls-Royce had offered the engine to Boeing for its muted New Market Aircraft, but in February 2019 pulled out and left the bidding to GE and Pratt & Whitney as it said its development timeline was out of sync with that of Boeing’s. After Boeing itself has deferred the NMA in early 2020, the two timelines seem to converge again. Boeing reviewed its new airplane options and according to CEO David Calhoun has made strong progress on this, which could offer new opportunities for the UltraFan.
“Our UltraFan development has gone well since then (2019) and is gearing up for demonstration early next year. It will depend on whether we will go ahead at that stage or pause. It will depend on the timing of new aircraft programs. UltraFan will be scaleable across single-aisle and dual-aisle. We will have to see if programs actually materialize when they do”, explained East.
2020 loss of 3.1 billion
Rolls-Royce reported a GBP-3.169 billion loss over 2020 compared to GBP-1.311 billion the previous year, with an operating loss of GBP-2.081 billion (-852 million). Revenues were at GBP 11.824 billion versus 16.857 billion the previous year. Free cash flow was down to GBP -4.185 billion, reflecting the impact of the Covid crisis on its Civil Aerospace business segment. The large and business engine divisions reported an underlying loss of GBP-2.574 billion, on revenues of GBP 5.089 billion (-37 percent).
During the year, Rolls-Royce delivered 264 large engines compared to 510 in 2019. This year and in 2022, it expects to deliver between 200 and 250 large engines, but this is dependent on the build rates of Airbus and Boeing. Delays of 787 deliveries will trigger payments by R-R to customers that will have a negative impact on cash flow, East said. Fewer deliveries reflect the impact of the Covid-crisis on the long-haul segment of air travel, although XWB-powered A350s and Trent 1000-powered Boeing 787s form the backbone of operations with most airlines. Talking about the Trent 1000: as most issues with the intermediate-pressure compressor and turbine, and high-pressure turbine blades are resolved, Rolls expects these issues to result in GBP 300 million lower cash costs this year compared to GBP 524 million in 2020 (578 million in 2019).
Engine flying hours at only 43 percent
An important parameter for Rolls-Royce is engine flying hours (EFH), which tells how active the fleet has been and how this translates into maintenance, repair, and overhaul. In 2020, large engine flying hours were 43 percent of 2019 levels, with engine shop visits down by 14 percent. EFHs of the newer XWBs have recovered to some sixty percent by December, with those of the Trent 7000 (Airbus A330neo) and Trent 1000 slightly behind. Older Trent family engines are lagging behind as many aircraft remain grounded or have been retired, with the Trent 900 on the Airbus A380 at the bottom of the EFH-list.
East said EFH is expected to recover to 55 percent this year and to over eighty percent in 2022. This should have a positive effect on cash flow, which should improve by GBP 1.2 billion thanks to better EFH alone. Overall, free cash this year is expected to be around GBP -2.0 billion and recover to a positive GBP 750 million once eighty percent EFH is achieved.
Rolls-Royce continued its restructuring plan and reduced the operating costs by GBP 1 billion in 2020. It is on track to meet GBP 1.3 billion in annual savings by the end of 2022. Some 7.000 employees (many in Civil Aerospace) have left the company through voluntary leave and compulsory redundancies, out of 9.000 or one-third headcount that is to be made redundant. Spending is under strict control, including one-third of subcontractor spending at Civil Aero. Capital expenditures are about fifty percent lower compared to 2019 levels. As announced, production of engine parts at five locations will be consolidated in a “fundamental transformation is Civil Aero cost base.” Discussion on the disposal of surplus sites are underway, including that of subsidiary ITP Aero. The disposal of more sites is not excluded.
The OEM secured GBP 7.3 billion in additional liquidity last year, including GBP 2.0 billion through a rights issue. Total liquidity is GBP 9.0 billion, with another GBP 5.5 billion available in undrawn debt.
Rolls-Royce, Tecnam, and Wideroe target the entry into service of the hybrid-electric P-Volt 11-seater in 2026. (Rolls-Royce)
Recovery through investing in low-carbon technology
Rolls-Royce wants to position itself for recovery by maximizing the value of its existing capabilities. Warren East outlined that Civil Aero has largely completed its major investment cycle in large engines and now wants to capitalize on extracting aftermarket value from its 5.000 plus installed engines by improving time-on-wing and by reducing costs of components.
A second pillar of the recovery of Civil Aero is by investing in sustainable low-carbon technology like hybrid-electric propulsion, which will “really be the lion share” of self-funded Research and Development. The engine maker target to increase funding in low carbon technology like UltraFan and lower carbon/next generation of aero engines from a combined 45 percent last year to some 75 percent mid-term.
In the commuter and regional aircraft market. Rolls-Royce announced earlier this week that it will expand its collaboration with Tecnam and Norwegian airline Wideroe on the development of an 11-seat commuter aircraft based on the P-Volt to be available in 2026.
Rolls is most interested in the use of hydrogen, which can be used relatively easily on current engine technology but will push the boundaries on the engineering side. “I am confident we will have the technical capability to support our aviation customers if indeed this is the direction the industry moves”, said East.