Civil Aerospace

Civil Aerospace
2010 2009
Order book (£bn)48.547
Engine deliveries846844
Underlying revenues (£m)4,9194,481
Underlying OE revenues (£m)1,8921,855
Underlying services revenues (£m)3,0272,626
Underlying profit before financing (£m)392493

The Civil portfolio benefits from having a large and growing, broad-based, and relatively young fleet of engines.  Major milestones were achieved on key flight test programmes in 2010 that will further expand the portfolio and underpin long-term growth. In the wide-body sector, the Trent 1000 has now accumulated more than 2,000 hours of flight time on the Boeing 787 which is due to begin commercial operation in 2011.  The Trent XWB ran for the first time in June 2010. Three engines are now included on the test programme with a further four engines expected to come on stream in 2011.  In the Corporate and Regional sector, the first Embraer Legacy 65 was delivered to its customer in December.  The Gulfstream G650 is expected to enter service in 2012.
 
However, trading conditions remain challenging.  The increasing costs of bringing major new programmes to market, higher research and development charges and the net effect of a number of one-off items all contributed to a decline in profitability, largely as had been expected.  This decline was partially offset by foreign exchange benefits and improving productivity.

The failure of a Trent 900 engine on an Airbus A380 in November 2010 generated considerable scrutiny of the aircraft and engine programme. A rapid and effective response from all stakeholders, including Qantas, Airbus, Rolls-Royce and the regulatory bodies, enabled quick understanding of the cause, issues and remedies and the return to normal service within a matter of weeks.  The costs provided for this failure, including incremental service and support costs, un-contracted settlements to all affected customers and the impact on the Group’s operational activity totalled £56m, and are reflected in the 2010 underlying profit performance.  A modest level of additional costs may be incurred in 2011.

Orders totalling £7.5bn were received during the year, resulting in a record order book at the year end.  This included orders for more than 300 Trent and 188 V2500 engines. The Trent 700 continues to lead the Airbus A330 market. It has won more than 90 per cent of orders in 2010, and more than 70 per cent in the last five years.  The outlook for the programme remains particularly strong with the Trent 700 order book at record levels, despite having delivered 139 engines in 2010. Orders totalling more than 150 engines were also received for the Trent 1000 and Trent XWB. These two programmes now have over 1,700 engines in the order book, similar to the current operating civil Trent fleet which began service in 1994.

In total, the civil 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 overall level of new engine deliveries remained broadly stable.  A record number of V2500 engines for the Airbus A320 family of aircraft was offset by lower deliveries of Trent engines, reflecting the schedule status of major new aircraft programmes. 

Service revenues grew 15 per cent from 2009 levels including a four per cent benefit from better FX rates and a five per cent benefit from a distribution services agreement with Aviall which will not be replicated in 2011.  The costs associated with the early phases of new programmes, changes in revenue mix and increased R&D charges, together with the net impact of a number of one-off items, were the cause of weaker margins.

While the airline industry showed some improvement, the impact on services revenues remains modest with around five per cent organic growth in the year.  Continued capacity discipline by airlines, the impact of the volcanic ash disruption in April and subdued economic activity in Europe and the USA constrained services revenues growth.

Outlook

Air travel and air freight are recovering but the extent of the improvement varies by engine programme, customer and region and future trends remain uncertain largely for macroeconomic reasons.

There are encouraging signs of the return of much delayed “time and materials” activities on a number of programmes, and overall service growth in 2011 is expected to be in the mid to high single digit range.

In addition, continuing launch and programme costs and higher R&D charges will cause headwinds.  However, further service revenue growth, better achieved FX rates and improving productivity are expected to more than offset these headwinds, resulting in underlying profits increasing by around 25 per cent in 2011.

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