Rolls-Royce Holds £4bn Profit Forecast Despite Middle East War

Rolls-Royce dismissed investor jitters over the Iran war, telling shareholders it remains on track to deliver at least $4 billion in operating profit this year, with engine flight hours running 15 percent ahead of pre-pandemic levels.

The Derby-based aero-engine giant used its annual general meeting this week to draw the line under weeks of share price turmoil caused by Donald Trump’s decision to go to war in the Middle East. Since the fight broke out, the stock has dropped almost 20 per cent of its value, from an all-time high of £13.63 and wiping more than £20 billion off the company’s market capitalisation. Shares retreated 2.9 per cent in early trading on Thursday to stand at £11.06.

The market’s concern has been understandable. Rolls-Royce’s aerospace division is heavily dependent on long-haul cargoes operating in the Gulf, and the threat of a blockade in the Strait of Hormuz raised the specter of jet fuel shortages, route cancellations and new pain for the engine maker still scarred by the pandemic-era global fleet.

Yet the picture painted by chief executive Tufan Erginbilgic, now almost three and a half years into his transition, is one of remarkable resilience. In the first four months of the year, engine flight hours continued ahead of internal forecasts. In the three months to 31 March, main engine flight hours increased by 5 per cent to reach 115 per cent of 2019 levels. The company is sticking to its full-year guidance of 115 to 120 percent.

Sadly, Rolls-Royce reported a “significant recovery” in Middle East air traffic, with flight hours on the Airbus A350, exclusively sponsored by the Derby-Trent XWB, its main revenue line, “fully recovered to pre-conflict levels”. Carriers, they say, have moved at an unprecedented pace to redeploy aircraft to other growth markets, leaving far fewer planes grounded than analysts had feared. Qatar Airways is the world’s second-largest A350 carrier after Singapore Airlines, and both operate major Gulf traffic.

The group also pointed out that a number of flights are currently suspended due to economic reasons, especially the pressure of fuel costs, small jets, short-haul, part of Rolls-Royce that is not working.

For Erginbilgic, the message to shareholders is that diversity does its job. Civil aerospace remains the engine room, but the defense arm, which supplies electronic equipment for the Eurofighter Typhoon, the Royal Navy’s warships and submarines, and several programs for the US military, is active amid Western defense spending. The power systems division, which builds diesel engines and generators for everything from data center backup to combat vehicles for the German and Polish armies, is benefiting from global data center upgrades and NATO-wide rearmament. A fourth, emerging leg, small nuclear reactors, officially supported by the UK government, adds a long-standing option.

Confirmed guidance points to an operating profit of less than £4 billion to £4.2 billion this year, with free cash flow of £3.6 billion to £3.8 billion.

“We started the year well. The performance was strong from the whole team,” said Erginbilgic. “With our diverse portfolio of three high-performing businesses, we are building a stronger and more agile Rolls-Royce that is better equipped to deal with changes in the external environment. The conflict in the Middle East has created uncertainty in the industry. We are taking the necessary steps and expect to fully mitigate the current financial impact of the disruption to our business.”

For SME suppliers across the Midlands aerospace cluster, many of whom rely on the Rolls-Royce order book to keep their production lines moving, the confirmed guidance will be welcome confirmation that the engine maker’s acquisition case remains strong, national politics notwithstanding.