Rolls-Royce is to undertake a further restructuring initiative after a review determined that its business will face greater financial pressure in 2016 than previously expected.

The review doubles the impact on its 2016 profit outlook to £650 million ($990 million), from an earlier figure of £300 million.

Rolls-Royce says it aims to save £150-200 million annually from 2017 through the “wide-ranging” cost-reduction programme. The manufacturer will detail the changes on 24 November but says they will simplify its organisational model and “streamline” senior management.

“We carry too much fixed cost and are inflexible in managing this in response to changes in market conditions,” says new chief executive Warren East, who ordered the review. “This is unacceptable in a world-class business that…needs to be more resilient and sustainable.”

Up to £250 million of the additional impact will arise from its aerospace activity, as a result of changes which have become evident over the third quarter.

While it is maintaining demand forecasts for new engines on widebody aircraft types, Rolls-Royce says that some operators of older engines on widebodies are starting to reduce utilisation.

“This management of short-term excess capacity, as the market takes delivery of newer, more fuel-efficient [aircraft], is already starting to impact aftermarket revenue and profit,” the manufacturer states.

It expects these developments to generate a £100-150 million profit impact. The company also foresees a £100 million effect from “significant declines” in aftermarket demand from the 50- to 70-seat regional jet sector as well as “sharply-lower” volumes of corporate jets powered by Rolls-Royce engines.

Rolls-Royce had already warned that a decline in Trent 700-powered Airbus A330 production would affect its profits.

The company says the impact is “exacerbated” because its Trent 700 accounting ties aftermarket margins to engine delivery, which results in profits being carried at the sale. But the successor programme, the Trent XWB for the Airbus A350, is not linked in this way and no up-front profit is recognised.

Rolls-Royce expects this change in mix will result in the proportion of unlinked large engines to rise over the year, from 33% to around 40%.

“The speed and magnitude of change in some of our markets, which have historically performed well, has been significant and shows how sensitive parts of our business are to market conditions in the short-term,” says East.

He says the new restructuring effort is “vital” if the company is to establish a foundation for long-term profitable growth.

“It is important to ensure we are financially stronger, more resilient to short-term shocks and more flexible to take advantage of growth opportunities,” he says.

Source: Cirium Dashboard