Civil Aerospace (First-half)

Civil Aerospace
2010 2009
Order book (£bn) 47.3 47.0
Engine deliveries416424
Underlying revenues (£m)2,2942,280
Underlying OE revenues (£m)858943
Underlying services revenues (£m)1,4361,337
Underlying profit before financing (£m)210257

The Civil portfolio benefits from having a large, broad-based and relatively young fleet of engines, which helped to mitigate some of the consequences of the global downturn. The business continued to make progress in the first-half of 2010 with a number of major development and commercial milestones achieved. However, trading conditions remained subdued. This, combined with changes in revenue mix, held back the first-half trading result as expected.

Major milestones achieved on flight test programmes included the Boeing 787, Gulfstream G650 and the Embraer Legacy 650. Development schedules remain on target for these programmes to enter service over the next two years, further expanding the Group’s portfolio and market share and underpinning long-term growth. Following the first running of the Trent XWB, development testing will now progress to support its scheduled entry to service in 2013.

Orders totalling £3.3bn were received during the first-half, including orders for 50 Trent and 190 V2500 engines, ensuring the order book remained resilient over the period. A further £1bn of orders were announced during the recent Farnborough Airshow.

The order book includes more than 5,100 engines. This is equivalent to more than 35 per cent of today’s installed fleet which was delivered over more than 25 years.

The trading environment remained difficult throughout the first-half, reflecting the ongoing uncertainty in the global economy, specifically the airline industry. Overall deliveries of new engines remained broadly stable, but with a greater emphasis on engines for new aircraft types. The industrial and commercial costs associated with the early phases of these new programmes, combined with subdued aftermarket activity, were the main cause of weaker margins.

A distribution services agreement with Aviall Services Inc. was completed in the first-half. This covers logistics, marketing and customer management on the RB211-524 engine powering the Boeing 747 and 767 aircraft. It will also support spares sales on this programme in 2010 and beyond.

While the airline industry showed some improvement, the impact on services revenues remains modest. Continued capacity discipline by airlines, the impact of the volcanic ash disruption and subdued economic activity in Europe and the USA constrained services revenues growth, which improved by seven per cent in the first-half.

Increased fee income from Risk and Revenue Sharing Partners (RRSPs) and favourable foreign exchange effects were more than offset by weaker original equipment mix in the period, and one-off benefits in 2009 which did not recur. This resulted in lower reported profits in the first-half.

Civil aerospace outlook

Air travel and air freight have shown signs of recovery but the extent of the improvement varies by region and future trends remain uncertain.

The second half of 2010 will see further mix changes in original equipment revenues resulting from deliveries for new programmes with associated pressure on margins. Services revenues are expected to increase by around ten to twelve per cent in the full-year 2010, benefiting from improved foreign exchange achieved rates, an increasing installed fleet and the Aviall Services Inc. distribution agreement. R&D charges are expected to be £40m to £45m higher than 2009 because of increased activity associated with early phase programmes, such as the Trent XWB. Improved GBP~USD achieved rates will help mitigate some of these effects.

As a result of these factors underlying profits are expected to be modestly lower in 2010 than in 2009.

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