- Engineering firm grapples with issues with Package B and C Trent 1000 engines
- Rolls-Royce says costs associated with problems could rise to £440m
- Yesterday firm announced plans to axe 4,600 jobs over next two years
- Shares rise 13.4 per cent to 1,001.25p in early trading today
Rolls-Royce has warned that it could incur £100million of additional costs as a result of technical issues with its engines.
The engineering firm is grappling with problems with its Package B Trent 1000 engines, as well as a durability issue with its Package C Trent 1000 engines which power Boeing’s 787 Dreamliner.
Parts in the engines have been wearing out faster than anticipated, causing some planes to be grounded.
Faulty engines: Rolls-Royce has warned that it could incur £100m of additional costs after discovering technical issues with its engines
Today the company said that costs associated with the issues could rise from £340m to £440m.
It follows yesterday’s announcement that the firm is to axe 4,600 jobs over the next two years as part of a major restructuring in a bid to slash costs by another £400m a year.
It is the company’s biggest job cuts programme in almost 20 years, costing £500m, with back office and mid-management jobs set to go in the shake-up as it focuses on its core business of civil aerospace, defence and power systems.
Rolls-Royce said in a statement: ‘At the time of our full-year 2017 results in March we had anticipated that the cash costs associated with in-service issues on both the Trent 1000 and 900 would broadly double from the £170 million incurred in 2017.
‘Our current assessment is that the further issues encountered with Trent 1000 since our 7 March announcement could lead to combined additional 2018 cash costs of around £100m.’
But the firm added that it has cost mitigation actions in place to offset the costs.
Rolls-Royce is carrying out inspections of the Package B engines, which are used by Boeing, but has said that the problems will not prevent it hitting financial targets for the year.
The group said that the about two-thirds of the announced job cuts would affect the UK workforce, mainly in its Derby headquarters, and would be made over the next two years, with around a third of them expected by the end of 2018.
Investment return: Boss Warren East will also aim for a more than 60% increase in the group’s return on invested capital
Rolls said that the overhaul, which follows its announcement in January that it plans to slash its five operating businesses to three core units, will impact support functions and management, including within engineering.
After five profit warnings since 2014, and the decision to cut and then freeze the dividend in 2016 and 2017 while the business was stabilised, Rolls-Royce is under pressure to prove to investors that it is on a sustainable path to recovery.
Rolls said today that it will meet a 2020 target for cashflow generation of £1billion and boost cash generation from 15p a share last year to more than £1, while pledging to almost double that figure in the medium term.
The target marks a significant improvement from Rolls-Royce’s current performance.
Last year the group delivered £273m in free cash, and had 1.8bn shares in issue.
Boss Warren East will also aim for a more than 60 per cent increase in the group’s return on invested capital as the company prepares for a new generation of aero-engines, the adoption of digital technology and electrically powered flight.
Mike van Dulken, head of research at Accendo Markets,said: ‘Today’s announcement builds on yesterday’s already impressive 6.5 per cent climb on a trio of good news.
‘Firstly, we were told that necessary restructuring/job cuts (to make it lean and mean) might cost £500m but would save a net £400m from 2020.
‘Secondly, rising costs related to Trent 1000 engine problems would not affect the company’s £450m free cash flow guidance for 2018.
‘Lastly, the 2020 target of around £1bn cash flow still stood.
‘All good noise to help the shares reverse strongly from lows of 820p and break above May highs.’
Shares were up 13.42 per cent at 1,001.25p in early trading today.
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