Rolls-Royce recovery on track as global travel revives

Pandemic's impact on engineering company resulted in steep losses in core business

The Covid-19 pandemic hit the engineering company's core business. Getty Images
Beta V.1.0 - Powered by automated translation

Rolls-Royce announced a loss for the first half of the financial year as it manages rising inflation and supply chain disruption for its engineering and aircraft engine business.

The loss of £1.6 billion ($1.94bn) came as the management said the squeezed operating profit margin would improve in the second half, keeping it on track to meet its targets in tough conditions.

“The external environment remains challenging, with the war in Ukraine, inflationary pressures and supply chain constraints all impacting our business,” the company said.

“We expect these issues will persist into 2023 and have been managing our business to address and minimise the impact.”

The engine maker reported lower underlying operating profit of £125 million in the first half of the year on underlying revenue of £5.3bn, compared with £307m a year ago.

The Covid-19 pandemic hit the engineering company's core business, which revolves around engine flying hours. No flying hours means no revenue.

The company lost £4bn in 2020. Flying hours for wide-body turbines, a key metric for highly profitable overhaul activity, have reached 60 per cent of pre-coronavirus levels, helping to trim cash outflows by £1.1bn.

A Rolls-Royce Trent XWB engine, designed specifically for the Airbus A350 family of aircraft, at the company's factory in Derby. Reuters Photo: Rolls-Royce

“We have progressed well in the first half of the year,” chief executive Warren East said. “We are actively managing the impacts of a number of challenges, including rising inflation and ongoing supply chain disruption, with a sharper focus on pricing, productivity and costs.”

Rolls-Royce repeated its full-year financial targets of low to mid-single digit underlying revenue growth, an unchanged operating margin and modestly positive free cash flow this year, weighted towards the second half.

The British manufacturer is the sole engine supplier for the Airbus A350 and has a sizeable market share on other flagship models such as the A380 and the Boeing 787.

As part of its slimming down process, it turned three assembly lines into one and moved production in Singapore back to Derby, where six or seven engines a week are prepared for passenger aircraft.

The company makes about a quarter of its materials in-house, such as ultra-strong turbine blades ready to withstand 12,000 revolutions a minute, and made in an increasingly automated process with robots doing the heavy lifting.

For the parts it cannot make itself, Rolls-Royce has narrowed down its suppliers to a small group of what it regards as high-quality providers and signed long-term deals for the next decade.

Shares of the London-based firm fell as much as 6.8 per cent in early trading, extending their decline this year to 30 per cent.

'Spirit of Innovation' – in pictures

Updated: August 04, 2022, 8:52 AM