Engine blow-out puts big hole in Rolls-Royce profits

The explosion that grounded the Qantas A380s has cost the company £56m. But we might not know the full cost for a few years yet.

by Emma Haslett
Last Updated: 09 Feb 2012
Three months after an explosion in one of its Trent 900 engines grounded all six of Australian airline Qantas’s A380s, Rolls-Royce has finally put a number on how much money it has actually lost as a result. According to end-of-year figures released by the manufacturer today, the explosion cost it a hefty £56m, causing its pre-tax profits to slump by 76%. And although it was keen was to draw attention to its better-than-expected underlying profits, the trouble is that the financial hit might not just be a short-term one - it could be counting the cost of the reputational damage for years to come.

Naturally, Rolls-Royce is trying to put a more positive spin on the situation, arguing that it ‘delivered a strong performance in 2010’. It pointed out that if you strip out its fuel hedging contracts, as well as foreign exchange movements, underlying pre-tax profits actually rose by 4% to £955m in 2010 - a decent improvement on the £939m expected by analysts. Rolls-Royce says that figure is actually a much better indication of its performance, because it ‘reflects our global customer base and the balanced portfolio of products and services that we offer’.

Nonetheless, £56m is still an awful lot of money. And that may just be the start. The reputational damage of this episode is a lot harder to quantify, but it won't be insignificant. Since the company makes most of its money through engine servicing contracts, there must be a danger that clients decide to look elsewhere next time the contracts come up for review, or that potential clients choose to pick a different provider - which could hurt future profits. So to focus on underlying earnings, as if this is entirely a one-off hit, is perhaps a bit misleading.

On the other hand, there are some factors that are likely to work in Rolls-Royce's favour. For a start, the speed of its response to the problem has been generally well-received. And it's worth remembering that this sort of thing does tend to happen to engine companies every now and then – so the fact that this is Rolls-Royce's first notable problem since 1994 suggests that there's no fundamental quality control issue.

Still – John Rishton, the former BA CFO who’ll replace the highly-regarded Sir John Rose as CEO at the end of March, will clearly have some work to do to restore Rolls-Royce's ultra-reliable reputation.

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