Business environment risks
Cyclical downturn – global recession
The current challenging economic environment is a source of some uncertainty for the Group. The length and depth of the current recession and constraints caused by reduced liquidity from global capital markets may hinder the ability of customers and suppliers to make planned investments in all sectors. The Group’s largest market, civil aerospace, is cyclical by nature, although services activity and revenues, now representing more than 60 per cent of the civil aerospace business annual revenue, have historically been less volatile in economic slowdowns and are considered more predictable and robust than the sales of engines for new aircraft.
The contribution from the Group’s global activity in other non-civil aerospace markets is becoming more significant. It now represents around 50 per cent of Group revenues, and these markets are also less cyclical in nature.
The Group’s broadly balanced power systems activities, access to global markets with greater diversification by sector, customer and geography and an improved balance between original equipment and services revenues are expected to help mitigate the effects of the slowing global economy.
The Group has a robust balance sheet with positive net cash. The changes made to the UK defined benefit pension schemes should ensure a less volatile, more predictable funding requirement in the future.
External events or factors affecting air travel
The civil aerospace business remains an important contributor to the Group’s revenues and profits. The willingness of passengers to travel by air is influenced by a range of factors, including economic conditions, health and security issues. Any prolonged reduction in air travel would impact airlines’ revenues and cash flows, and potentially reduce their need for new engines, spare parts or aftermarket support services.
Exposure to this risk is mitigated by the Group’s business strategy, which has driven it to become a global operation with a broader business base, with 50 per cent of revenues and 40 per cent of earnings now generated outside the civil aerospace business from its defence aerospace, marine and energy businesses.
The Group’s crisis management plan and framework would be instrumental in responding to, and recovering from, wider external events such as the impact of terrorist activity or an influenza pandemic.
Environmental impact of products and operations
The Group recognises that its products and business operations have an impact on the environment, particularly related to climate change. Rolls-Royce is determined to be part of the solution to these environmental challenges and continues to make significant investment in innovative solutions for the aviation, marine and energy markets. The challenge is being addressed through the enhancement of current product ranges and affordable research and development into complementary technologies such as nuclear power, fuel cells and tidal energy. The Group continues to work closely with its customers, industry partners and other stakeholders to implement these development opportunities.
A robust governance structure headed by the Environment Council directs and monitors improvements in the environmental performance of the Group’s products, and the Environmental Advisory Board reviews and makes recommendations on the environmental aspects of the Group’s products and business operations. See page business case for Corporate responsibility.