Rolls-Royce’s chief executive, Warren East, has warned of supply chain problems and inflation in his final results announcement at the helm of the jet-engine maker, saying the company is suffering “post-Covid indigestion”.
The share price of the FTSE 100 manufacturer slumped by 10% on Thursday morning to near its low point earlier this year after it missed analysts’ forecasts for profitability. Rolls-Royce said it made an underlying loss of £111m in the first half of 2022, compared with a profit for the same period in 2021.
East’s stint at the top of one of Britain’s most prominent industrial names has been dominated by crisis-fighting, first with engine problems and then with the pandemic. He is due to be replaced by the former BP executive Tufan Erginbilgic in January.
Coronavirus is still making its mark on the company, which East said had been affected by delays in the supply of semiconductors (computer chips) used to control its engines.
It has also been forced to find alternative sources of titanium used in strong but lightweight aircraft parts after it pledged to cut ties with Russia over the invasion of Ukraine. However, Rolls-Royce is still sourcing some titanium from Russia.
Concentrating orders with fewer, larger suppliers, has allowed the company to cut costs, East said.
Rolls-Royce has been particularly hard hit during the pandemic because its revenues are closely tied to the number of hours its engines are airborne. It provides engines for aircraft such as Airbus’s A350 that are used primarily for long-haul travel, which has not recovered as quickly as shorter journeys.
East said that in the first half of 2022 Rolls-Royce engines flew about 60% of the hours they flew in 2019, before the pandemic, and were now at about 65% of that level. He expects that to pick up to 70% during the course of this year, and to recover to pre-pandemic levels by 2024 at the earliest.
East said he recognised a “theoretical risk” of a widely expected recession in several large economies, including the US and UK. However, aviation traffic has reduced so much because of the pandemic that he does not expect a recession to have a major impact on the gradual recovery of long-haul travel – although short-haul could be worse affected, he conceded.
“It might affect exactly which month in 2024-25 we get back to 100%,” East said.
Rolls-Royce has gradually improved the rate at which it is burning through cash, with a £68m outflow during the half year, compared with £1.2bn in 2021. East insisted he would bow out, with Rolls-Royce finally generating cash over the course of 2022.
He said he was “very pleased with the progress” the company had made and that he would leave Rolls-Royce “a leaner, agile organisation with a more modern culture”.
He said Rolls-Royce was “a more sustainable business in both senses of the word”, in reference to its financial stability but also its ambitions to produce lower-emission power – even though the company still derived most of its revenues from products that burn polluting fossil fuels. Rolls-Royce has changed to a “not switch, but tilt” approach towards net zero technologies, East added.
