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AEROSPACE

Rolls Royce 2017 Review: A Vigorous Performance Despite One or Two Crosswinds

Victanis Advisory Services GmbH
2018-03-16
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Rolls Royce delivered its 2017 FY results on 7th. March, and surprised the market positively with better than expected results!

Introduction

Rolls Royce is one of the ‘Big 3’ engine providers for civil aircraft and the leading engine maker in the wide-bodied aircraft segment. None of this will be news to anyone with even a passing interest in aerospace but nevertheless the state of this important OEM and its outlook for the future is of very considerable significance for the aerospace and defence supply chain in the UK in particular, and the EU more generally.

Rolls Royce delivered its 2017 FY results on 7th March, and surprised the market positively with better than expected results as well as a good performance in continuing to overhaul the cash performance of the business and capped off with a markedly positive outlook for the next 5 years. As such, we have put together a brief that identifies the key announcements from the results as well as a brief assessment.

Overall Highlights and Assessment for the Civil Aerospace Business

  • Underlying revenue growth in the civil business was 12% for 2017, with deliveries up 35%, and a healthy 12% increase in flying hours for Rolls Royce in-service engines in civil and business aerospace. The wide-body fleet powered by Rolls Royce increased to 4,400 aircraft. Interestingly, business aviation services, which is a very small part of Rolls Royce’s civil business, was up 18% in revenue terms reflecting a very strong aftermarket, a good barometer of the health of business aviation which continues to recover strongly as a market.
  • However, the ‘nasty’ surprise was accelerated ageing of fan blades within the Trent 900 and 1000 engine families. This will mean the replacement of blades and ‘deep’ overhaul workshop visits for operators of aircraft with these engines. This will hit Rolls Royce to the tune of £170 million of cash costs in respect of the Trent 900 and 1000. However, this is obviously will mean unanticipated demand for turbine blade suppliers as well as possibly other engine component suppliers as changing the blades means taking an engine offline for a radical overhaul. It is possible that some operators will use this to bring forward other maintenance in order to limit the time an engine is in the workshop.

Specific Highlights

  • Rolls Royce saw wide-body engine deliveries increase to a record 483 engines in 2017, 35% up on the previous year. The company believes this will grow in 2018 to 550 engines delivered. This was based on build of over 500 engines in 2017, which is likely to rise to around 600 in 2018.
  • The in-service fleet of large engines grew by 7% with the Trent fleet up 11% to 3,300. In-production fleet growth was 22%.
  • Although the issues announced with the Trent 900 and 1000 was unexpected, the other 80% of the Rolls Royce powered fleet was said to be flying well. The Trent 700 and Trent 800 in particular saw good growth in flying hours.
  • The Trent 7000, which will be used on the A330 neo, also came into service during 2018.

Future Outlook

  • A key driver for Rolls Royce over the next 5 years is the Trent XWB. Already 44% of engines business in 2017, it is critical to Rolls Royce’s future as well as many within the supply chain. To put it into context, 2,500 civil engines are on order of which 1,400 are Trent XWB.
  • Further out, the company guided to around 8% CAGR over the next 5 years for the installed fleet.
  • Invoiced flying hours is expected to grow at around 10%.

Summary

In short, despite the unwelcome surprise regarding the Trent 900 and 1000, these were a cheering set of results for Rolls Royce’s supply base. The company made good progress in returning stability to its cash balance. But more importantly, growth throughout the business is expected to be robust and healthy, led by the progressive ramping up of Trent XWB deliveries.

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