Rolls signals job cut threat despite return to profit

Engine maker Rolls-Royce has signalled further job cuts amid plans to ramp up cost savings as it bounced back from record losses with a £4.9 billion annual profit haul.

Rolls boss Warren East said it was too early to say how many jobs will be affected, but confirmed the shake-up will see it cut out duplicate roles in its support and management functions.

He made the comments as Rolls revealed it returned to profit last year with a pre-tax surplus of £4.9 billion, thanks to a £2.6 billion accounting boost from recent strengthening of the Brexit-hit pound.

Warren East is chief executive of Rolls-Royce
Warren East is chief executive of Rolls-Royce

This marked a recovery from a dire 2016, when it fell into the red by £4.6 billion in what was its largest ever loss and one of the biggest in UK corporate history after being knocked by the pound's plunge and a corruption scandal.

On an underlying basis, Rolls saw annual pre-tax profits rise 25% to £1.1 billion in 2017.

Rolls also said 2018 results would be hit by costs relating to repairs on some of its engines used in planes flown by British Airways and other airlines - and admitted the fault would take years to fix.

But shares jumped as much as 15% as investors cheered a better-than-expected performance for 2017 and as it stuck to a closely-watched earnings target for 2020.

Mr East said Rolls had made "good progress in 2017" and assured the ongoing restructure efforts were necessary to "make ourselves truly competitive and fit for the future".

The group has hired advisers Alvarez & Marsal to help it "significantly" slash costs and streamline its business as part of the wide-ranging restructure announced in January.

It comes after around 600 managers have left the group since 2015 under a previous overhaul.

Mr East declined to say how much the group hopes to save under its latest overhaul.

(PA Graphics)
(PA Graphics)

While management roles are set to be impacted, Mr East stressed its engineer workforce was set to remain unaffected, with plans to invest £1.4 billion in research and development and to hire engineers and technology experts.

Rolls will update on the overhaul in the middle of the year.

While investors cheered Mr East's plans, he admitted the group was facing "significant" issues with its engine faults.

It revealed a charge of around £340 million in 2018 for the cost of repairs on existing engines, which could see this year's earnings fall 7% to £300 million at the lower end of its forecasts.

Up to 500 Trent 1000 engines - used on Boeing 787 planes - and some Trent 900 engines are affected by the issues, which see components wear out earlier than expected.

Mr East said: "We are being transparent with our customers, we're being transparent with the market. We're prioritising resolving the situation for our customers. We have our arms around the solution."

Andy Chambers, an analyst at Edison Investment Research, said the results gave hope that Rolls-Royce "may finally be starting to take off facing into the wind".

"Despite the continuation of the challenges facing Rolls-Royce, we believe the 2017 results provide some underpinning of optimism for progressively improving operational performance," he said.