Rolls-Royce (RR) has won a $5bn contract to supply engines for 50 new Airbus planes ordered by the US carrier Delta. This, the analysts feel, will help alleviate the impact of global defense spending cuts. The FTSE 100 engine maker has lost a third of its value in the past 12 months after shocking the City with its first profits alert in a decade in March. Rolls-Royce, which is the only engine supplier for both aircraft, will also provide Delta with long-term maintenance support. The service agreement under Rolls-Royce’s TotalCare plan is worth more than $2bn over the engine’s lifetime.
Chief executive Officer John Rishton didn't seem very excited about the deal. He said, “It is going to be bumpier than we expected.” He also revealed plans to slash 2600 jobs over the next 18 months as well as axing finance boss Mark Morris after nearly three decades with the company.
The order includes Rolls’ Trent XWB engines to run 25 Airbus A350 aircraft, and Trent 7000 engines to power 25 Airbus A330 neo jets. That plane order was a closely fought battle between European Airbus and US plane giant Boeing, and will see Delta replace a string of Boeing 747 jumbo jets.
The officials from Delta have said that the aircraft would improve service on its Pacific, Atlantic and Latin American Routes. Its shares have fallen by 30% since the last fiscal year. Rolls-Royce’s civil aviation arm has become increasingly important to the governments around the world as they trim their defense budgets; its Trent XWB has become the fastest-selling wide-body engine, with more than 1500 sold.
The Delta deal has been closely watched in the industry after the airline requested proposals from suppliers in March to replace older wide-bodied planes including Boeing’s 747. Boeing blamed its failure on being unable to match its rival’s delivery schedule after Emirates cancelled an order leaving Airbus with extra capacity. The company issued a second profit warning last month, blaming weak demand from customers in the oil and gas and construction industries amid worsening economic conditions.
The analysts around the world have been very speculative about this deal. They feel that since both Airbus and Rolls have relatively low market share with the US legacy carriers, this deal, in the long run, would prove to be really fruitful for both the companies, particularly as the US legacies have old fleets and thus big future replacement demand.
Rolls-Royce will add $3bn to its order book to cover the sale of the engines plus a small initial payment under TotalCare. Services to customers make up more than half of Rolls-Royce’s revenues. Under the agreement Delta pays Rolls-Royce in instalments while the engine is working but the payments stop when engine trouble takes the plane out of action. This hasn’t apparently done much to put the plans for massive job cuts on ice: the 2600 redundancies are thought mostly to affect managerial and engineering roles at Rolls-Royce’s plants in Derby and Bristol, in the aerospace division.
Terminating the workers from these posts will cost Rolls ÂŁ120 million over the next two years, but it reckons the short-term pain is worth it as annual costs will be ÂŁ80 million lower after that. The share in the market may be small but this deal might just prove to be very lucrative for the company. The average aircraft life of these Delta crafts in more than 17 years. This is more than most of the standard US carriers. This reduces the replacement spending by a great deal. Shares in Rolls-Royce rose 5p to 828.5p
