Defence Aerospace

Defence Aerospace
2009 2008
Order book (£bn)6.55.5
Engine deliveries662517
Underlying revenues (£m)2,0101,686
Underlying services revenues (£m)1,046947
Underlying profit before financing (£m)253223

The Defence aerospace portfolio is characterised by its large installed fleet of engines across a broad range of applications and geographies in support of more than 160 customers in 103 countries.

A number of new programmes helped to further extend the portfolio in 2009. Three Agusta Westland helicopters, including the Lynx Wildcat, flew for the first time, all powered by the CTS800. In addition, the BAES MANTIS UAV, powered by the Model 250, and the Airbus A400M military multi-role aircraft, powered by the TP400, both flew for the first time in 2009. In the first few days of 2010 the Rolls-Royce LiftSystem® on the JSF was successfully engaged for the first time in flight.

There is continuing uncertainty about the A400M programme. However, the TP400 engine has made good progress, with engine flight test results to date being encouraging. We believe that our estimated costs of completion adequately consider the remaining testing and delivery phases.

Investment in technology for the defence markets continued through 2009. Rolls-Royce was awarded funding under more than 20 different technology programmes from the U.S. Department of Defense (DoD) including the second phase of the ADVENT programme. This phase will include the integration of a variety of advanced technologies, component-testing culminating in the development of a new technology demonstrator engine. The demonstrator is designed to reduce fuel consumption significantly, enabling extended mission duration. This advanced engine is targeted for future U.S. military aerospace platforms.

The business continued to make good progress in 2009 with the order book growing strongly to £6.5bn. Orders of almost £3bn in the year included more than £1.7bn in service contracts.

A 28 per cent increase in engine deliveries, driven primarily by engines for the transport sector including the C130-J and V-22 Osprey, supported a 30 per cent increase in original equipment revenues. Services revenues increased by ten per cent, reflecting the utilisation of the large installed fleet and foreign exchange translation benefits.

In the military transport sector, engine contracts worth more than $720m for the V-22 Osprey covering delivery and in-service support were signed in the year, providing further evidence of the success of this programme.

In the combat sector, engine contracts worth more than £1.2bn for Tranche III Eurofighter production and an innovative 10-year service and support contract with the UK Ministry of Defence were signed. As in previous years, funding for the F136 engine contract, to power the JSF, remained uncertain. It was pleasing that funding for 2010 was ultimately confirmed although risks to 2011 funding remain.

Margins deteriorated slightly in 2009 as higher unit costs and one-off charges more than offset strong revenue growth and improvements from better USD translation rates. Despite this, a 13 per cent improvement in profits was a strong result in a challenging year.

Outlook

The expansion of the portfolio, the strong positions in military transport and access to a global customer base leave the defence portfolio well positioned to access growing markets. These factors provide resilience in an uncertain budgetary environment.

The defence portfolio remains well positioned to deliver a solid performance in 2010 with revenues and profits expected to be similar to those in 2009.

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