Rolls-Royce Says Costs of Fixing 787 Engines Dent Profit

(Bloomberg) --

Rolls-Royce Holdings Plc said it will spend more on fixing engines made for Boeing Co.’s 787 Dreamliner, a move that will eat into full-year earnings and cash flow.

An improved blade for the latest version of the Trent 1000 turbine won’t be ready until 2021, Rolls-Royce said in a statement on Thursday. That will force the U.K. manufacturer to stock up on spare engines and expand maintenance facilities for Dreamliners that require temporary fixes to keep flying.

The 400 million-pound ($515 million) expense, combined with the cost of customer disruption and provisions against future losses on contracts, means the London-based company faces a one-time charge of 1.4 billion pounds against 2019 operating profit.

The extra spending will allow Rolls-Royce to meet a target of ending groundings of 787s equipped with its engines in the second quarter of next year, Chief Executive Officer Warren East said on a conference call. Affected Dreamliner operators have included British Airways, Norwegian Air Shuttle ASA and Virgin Atlantic Airways Ltd.

The company is focused on providing certainty to customers and isn’t prepared to again extend the deadline for ending groundings, East said in an interview. Rolls-Royce also didn’t previously have the capacity to build up a supply of spare engines.

Total Cost

All told, cash costs for in-service work on 787 engines is now expected to amount to 2.4 billion pounds through 2023. Design glitches have plagued the Trent program since 2016, eating into Rolls-Royce’s turbine market share to the benefit of rival engine maker General Electric Co.

The improved blade for the latest version of the 787 engine and associated systems needs to be refined further in order to bring down operating temperatures, East said. At the same time, the company is struggling to predict the durability of compressors in the engines, he added.

Power Systems

Overall trading has improved since the half year, the CEO said, aided by restructuring efforts and a reduction in excess inventory. Revenue and profitability have improved across all of Rolls-Royce’s main businesses, though the power-systems arm has seen some projects deferred, with sales growth for the year now set to be in the low- to mid-single-digit range.

Rolls-Royce is targeting free cash flow of 700 million pounds this year, plus or minus 100 million pounds, and the figure will now come in at the lower end of that range, the company said.

The shares fell as much as 3.9% before recovering to trade 1.1% higher at 784.80 pence as of 1:58 p.m. in London. The stock has declined 4% this year.

To contact the reporter on this story: Christopher Jasper in London at cjasper@bloomberg.net

To contact the editors responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net, John Bowker, Tara Patel

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