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Rolls-Royce bullish for 2006 despite F136 JSF engine cancellation

UK engine manufacturer Rolls-Royce is bullish on its prospects for 2006 as strong performance in the civil sector offset the negative impact of the imminent cancellation of its alternative engine for the Lockheed Martin F-35 Joint Strike Fighter (JSF).

The company posted sales of £3.51 billion ($6.1 billion) in its civil aerospace division in its preliminary full-year results for 2005, compared with £3 billion in 2004. Underlying profit before financing costs was £454 million, £260 million higher than the previous year in the division.

R-R’s overall sales grew to £6.6 billion, an increase of 9% year-on-year on an underlying basis. The group posted profit before financing costs of £877 million and ended the year with a record order book of £22.9 billion. Chief executive Sir John Rose says “Growth in our sales and order book and our consistent focus on improved efficiency underpin our expectation of further growth in profits and positive cash flow in 2006.”

The company delivered 881 civil aircraft engines in 2005, 7% more than the previous year. Out of £3.5 billion total revenues for the civil sector, 59% – or £2 billion – was generated by services. R-R predicts an overall increase in the number of civil aircraft engine deliveries in 2006, despite the continuing decline in regional aircraft engine deliveries, as the Trent 900 enters service on the A380.

But the group’s three-year moving average share of civil engine orders fell seven percentage points to 23%, “largely as a result of the high proportion of Boeing 737 aircraft, for which the group does not offer an engine, which were ordered during the year,” R-R says.  In its defence division, R-R posted £180 million profit on sales of £1.41 billion, 3% higher than the previous year.

But the cancellation of the company’s jointly-developed F136 alternative engine for the JSF could dampen the company’s military business in the longer-term. Analyst Ben Fidler of Deutsche Bank says “the initial development programme for the engine was worth $2.4 billion, with about $1 billion due to R-R. The cancellation is negative for R-R longer term.”

The company’s pension deficit grew also 15% to almost £1.2 billion. R-R says it introduced major changes to deal with the deficit in 2003, and will “review further actions in the light of the actuarial review of the main scheme, which is due this year, and the changing regulatory environment.”

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