Rolls-Royce is holding firm to its profit forecast despite investor jitters over the Middle East conflict, telling shareholders it remains on course to deliver at least £4 billion of underlying operating profit this year, with engine flying hours running 15% ahead of pre-pandemic levels.
The Derby-based aero-engine giant used its annual general meeting to draw a line under several weeks of share-price turbulence triggered by Donald Trump’s decision to launch military action in the Middle East. Since hostilities began, the stock has shed close to 20% of its value, sliding from an all-time high of £13.63 and wiping more than £20 billion off the company’s market capitalisation. Shares clawed back 2.9% in early trading on Thursday to stand at £11.06.
The market’s anxiety has been understandable. Rolls-Royce’s civil aerospace division leans heavily on long-haul carriers operating through the Gulf, and the threat of a blockade in the Strait of Hormuz raised the spectre of jet-fuel shortages, route cancellations and a fresh bout of pain for an engine maker still scarred by the pandemic-era grounding of the global fleet.
Resilient Performance
Yet the picture painted by chief executive Tufan Erginbilgic, now nearly three and a half years into his turnaround, is one of remarkable resilience. In the first four months of the year, engine flying hours have run ahead of internal forecasts. In the three months to 31 March, large engine flying hours rose 5% to reach 115% of 2019 levels. The company is sticking to its full-year guidance of 115 to 120%.
Rolls-Royce reported a “significant recovery” in Middle Eastern airline activity, with flying hours on the Airbus A350, powered exclusively by the company’s Derby-built Trent XWB, its single largest revenue line, having “fully recovered to pre-conflict levels”. Carriers had moved with unexpected speed to redeploy aircraft into other growth markets, leaving far fewer planes parked than analysts had feared.
The group also pointed out that the bulk of aircraft currently grounded for economic reasons, chiefly fuel-cost pressures, are narrow-body, short-haul jets, a segment Rolls-Royce does not serve.
Diversification Strategy
For Erginbilgic, the message to shareholders is that diversification is doing its job. Civil aerospace remains the engine room, but the defence arm, supplying powerplants for the Eurofighter Typhoon, Royal Navy warships and submarines, and several US military programmes, is buoyant amid heightened Western defence spending.
The power systems division, which builds diesel engines and generators for everything from data-centre backup to German and Polish army fighting vehicles, is benefiting from the global data-centre boom and rearmament across NATO. A fourth, emerging leg, small modular nuclear reactors, formally backed by the UK government, adds longer-dated optionality.
The reaffirmed guidance points to underlying operating profit of £4 billion to £4.2 billion this year, with free cash flow of £3.6 billion to £3.8 billion.
“We have had a strong start to the year. Operational performance has been strong across the group,” Erginbilgic said. “With our diversified portfolio of three high-performing businesses, we are creating a more resilient and agile Rolls-Royce that is better equipped to respond to changes in the external environment. The conflict in the Middle East has created uncertainty for the industry. We are taking the necessary actions and expect to fully mitigate the current financial impact of the disruption to our business.”