Rolls-Royce weathers engine fault storm

Its shares have rebounded after the Qantas explosion, but Rolls-Royce may have suffered long-term damage to its reputation, analysts fear

It has been a tough 10 days for Rolls-Royce – the company which has come to symbolise the best of British engineering and one of the country's best known industrial "brands". The explosion in one of its engines on a Qantas "superjumbo" Airbus A380 prompted fears that the Derby-based business might just be about to suffer a similar hit to its reputation as that endured by BP in the wake of the Deepwater Horizon disaster.

Investors – and airlines around the world – became increasingly concerned that Rolls's other engine models could also be faulty, which would have been devastating for a company which prides itself on its global reputation for excellence and safety.

Rolls-Royce engineers scrambled to determine the cause of the explosion – but the limited information the firm provided added to the growing uncertainty. At one point more than £1bn was wiped off the stock market valuation of the company.

It would have been a disastrous end to an otherwise illustrious career for its chief executive, Sir John Rose, widely regarded as one of Britain's premier industrialists, who recently announced he would retire next March after 14 years at the helm.

However, after a holding statement this week, Rolls looks as if it has weathered the immediate storm. The company finally gave more details about what had caused the explosion – a single faulty component which led to oil inside the engine overheating and catching fire. Preliminary inspections found that this resulted in a turbine disc breaking off and shooting through the wing of the aircraft, which was forced to make an emergency landing. The company said it would replace this component in all 20 A380s that were fitted with its Trent 900 engines.

It repeated its previous statement from earlier in the week that the fault was specific to the Trent 900, and not connected to an explosion of a different model during tests in August.

Rose issued an apology, and despite a warning that the problem would dent its profits this year the shares rose almost 5%, even though analysts at stockbroker Charles Stanley cautioned that Rolls could not draw a line under the problem while further inspections continued.

The shares are still some 7% lower than they were before the safety scare began. After the mid-air engine explosion last week, Qantas and Singapore Airlines, two of the three airlines which use the Trent 900, found oil leaks on some of their A380s and then grounded all of their superjumbos.

In today's routine trading statement, Rose used a humble tone. "Safety is the highest priority of Rolls-Royce.  We have instigated a programme of measures in collaboration with Airbus, our Trent 900 customers and the regulators.  This will enable our customers progressively to bring the whole fleet back into service. We regret the disruption we have caused."

This may be the closest Rose gets – or needs to get – to issuing a mea culpa during his time running the company. As Rolls-Royce has been fond of repeating in the last 10 days, this is the first serious incident involving a Rolls-Royce engine on an airliner since 1994.

Jason Adams, aerospace and defence analyst at Japanese investment bank Nomura, argued that what unnerved investors was not so much the fault itself – most aerospace manufacturers have suffered technical problems at one point – but the revelation that Rolls-Royce was not, after all, infallible. He said: "There has been enough bad news – which could turn out to be circumstantial – related to Rolls-Royce's recent engine failures which has caused some investors to question the company's reputation and safety record, which previously had been taken for granted."

The impact of the engine problems goes further than Rolls. EADS, the European aerospace conglomerate which controls Airbus, warned that the scare would hit orders of the superjumbo. The need to replace the faulty $14m (£10m) engines – which Rolls is expected to pick up the tab for – and extra inspections would slow down deliveries, particularly next year.

Tim Clark, president of Emirates airline, also piled further pressure on Rolls this week. Emirates operates the biggest fleet of A380s, albeit with engines made by the Rolls rival Engine Alliance. He called on the company, which before today had only issued two curt statements on the problem, to be a "little bit more communicative about what's actually going on", adding it was "vitally important" that the A380 did not become a "bete noire".

It is hard to assess the damage to Rolls-Royce in the longer term, assuming no more faults are discovered. Cass Business School Professor Joseph Lampel said that privately airlines might decide to opt for A380 engines made by its rival. "Inevitably, no airline will openly admit to this, so the potential consequences will unfold over the long run."


Tim Webb

The GuardianTramp

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