Rolls-Royce 787 Engine Woes Widen as Thousands of Job Cuts Loom

Jun 11, 2018, by Christopher Jasper

(Bloomberg)

Rolls-Royce Holdings Plc’s engine-durability crisis worsened after the company detected new issues that will require extra repair shop visits on a further batch of turbines that power Boeing Co.’s 787 airliner.

The glitch concerns a pressure compressor on “Package B” Trent 1000 engines for the wide-body plane, London-based Rolls said in a statement on Monday. Shares of the U.K. company, which is expected to announce thousands of job cuts this week as part of a restructuring plan, fell as much as 2.2 percent.

Following an agreement with Boeing and safety regulators, some 166 engines that are potentially affected will undergo a one-time inspection to assess the extent of the problem,Rolls said. Package B turbines have been in service since 2012, with evidence of excessive wear detected on a small number of the most-used units, it added.

While the check-up visits will incur “some additional cost,” Rolls-Royce stood by its 2018 free cash-flow estimate of 450 million pounds ($604 million), plus or minus 100 million pounds. The reiteration takes into account increased servicing of Package C engines, where the glitch was originally detected, as well as mitigating actions being taken across the group, the company said.

Failed Inspections

About 80 percent of the Package C engine version have undergone initial checks for cracking or signs of wear and tear on turbine blades, a person with knowledge of the issue has said. Just under a third of those engines failed the initial inspections required by regulators for planes that fly more than 2 hours and 20 minutes from the nearest diversionary airport.

Chief Executive Officer Warren East has said Rolls-Royce will reduce discretionary spending to offset the additional funds needed for overhauls and to keep to a key target of reaching 1 billion pounds in free cash flow by 2020.

The company is due to unveil more sweeping measures devised by turnaround consultants Alvarez & Marsal at a capital markets day on Friday. It could cut as many as 5,000 jobs, according to a note from JP Morgan published May 31, which said analysis of restructuring programs at seven comparable businesses over the past decade suggests 10 percent of the payroll may be eliminated.

East, who has already scrapped thousands of posts and earmarked the group’s marine unit for disposal since taking charge in 2015, said on May 10 that the cull will concern middle management and back-office staff in the engineers’s human resources, finance, IT, legal and marketing departments.

“We are proposing to move to a considerably simplified staff structure, with fewer layers and greater spans of control across the group,” a spokesman said Monday, while declining to provide details on any impact on jobs.

The shares traded down 0.6 percent at 830.20 pence as of 11:49 a.m. in London, giving a market value of 15.4 billion euros.

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