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Rolls-Royce Cautious After Trent 700 Slump

With most eyes focused on Athens, Rolls-Royce (RR) has risked further spooking investors with yet another profit warning. This year the British manufacturer expects pre-tax profit of up to £1.48bn ($2.30bn), down from £1.55bn in ($2.41bn) its previous guidance. Any decline this year will largely be down to the company’s underperforming marine division, but civil aerospace is on the hook for £300m ($467m) of “headwinds” in 2016. Three weaknesses have been identified: slow Trent 700 sales; slack demand for business jet engines; and a softening regional aircraft aftermarket. Once the third engine choice for the A330, the Trent 700 quickly rose to become one of RR’s bestsellers, and today accounts for nearly two-thirds on the installed base of A330 powerplants. Unfortunately the A330 backlog has fallen off a cliff in recent years

Three weaknesses have been identified: slow Trent 700 sales; slack demand for business jet engines; and a softening regional aircraft aftermarket.

Once the third engine choice for the A330, the Trent 700 quickly rose to become one of RR’s bestsellers, and today accounts for nearly two-thirds on the installed base of A330 powerplants.

Unfortunately the A330 backlog has fallen off a cliff in recent years due to the introduction or announcement of the 787, A350 and re-engine A330neo. The speed of the A330’s demise appears to have taken RR by surprise.

“The number of legacy engines that have been sold is fewer and the prices that we achieve for those engines has been lower than we originally thought,” new CEO Warren East told journalists.

Fewer engine sales also translate to worse-than-expected aftermarket and spare parts revenues, a problem also encountered in the business jet engine market where 70 per cent of Rolls’ sales are attached to CorporateCare maintenance contracts.

Rolls hopes that these dips will prove only temporary as the company transitions to production and servicing of the Trent XWB (A350), Trent 1000 (787) and Trent 7000 (A330neo).

With these engines it hopes to capture half the market for new widebody power plus a lucrative book of TotalCare contracts. In 2012 more than half of RR’s civil aerospace revenues stemmed from aftermarket deals.

Next year may not match those heights, but don’t expect any let up in the OEM’s pursuit of a larger slice of the maintenance pie.

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