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Rolls-Royce looks to simplify through restructure

In what has been a tumultuous year of profit warnings, reduced investor confidence and weakened demand in lucrative segments, Rolls-Royce could be forgiven for wanting to see the back of 2015.

But while a new year brings fresh optimism for many, the challenges facing Rolls-Royce look certain to continue well beyond 2016. This week, Rolls-Royce CEO Warren East, who also unveiled its extended production line for the Trent XWB engine at Derby on Monday (November 23), outlined details of a planned restructure that will see £200m ($300m) of savings up until 2017.

East said the move to “simplify the organisation” will include job cuts to senior management, reduced fixed costs and greater pace and accountability on decision-making while boosting engineering skills. But such measures could be just the tip of the ice berg for a firm that forecast in early November that profit in 2016 could be £650m ($980m) lower than expected.

While analysts agree with East’s belief that Rolls-Royce is still a fundamentally sound company, they feel turning around the fortunes of the UK engine maker is very much a long-term proposition.

East concedes that current investor confidence in Rolls-Royce “was not in a good place” and has failed to establish a position for itself in certain aerospace markets while being unable to separate engine sales and long-term revenues from its engine servicing business.

While battling against what East describes as an “accountancy fog”, the OEM now plans to wait and unveil fresh medium-term business targets in 12 to 18 months from now.

Despite the outlook in the next two years being challenging at best, the sheer size of the global aircraft order backlog, along with the firm’s reputation for engineering excellence in the industry, give reasons for optimism.

It also maintains that long-term revenues will be driven by continued growth in maintenance and spare parts programmes on widebody aircraft engines, of which Rolls-Royce currently has a 31 per cent market share. For the narrowbody market, meanwhile, it’s a case of wait and see, with East stating Rolls-Royce would keep its options open regarding investment in that area.

While the highly regarded East has a strong track record in industry, making one of the crown jewels of UK manufacturing more efficient and restoring investor confidence in a changing market environment will surely prove among his biggest career challenges.

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