Airlines phasing out older aircraft and needing fewer engine spare parts will hit Rolls-Royce heavily in 2016

Phasing out old aircraft behind Rolls-Royce's profit fall

Engineering giant Rolls-Royce has downgraded its profit estimates for the fourth time in about a year, blaming weak demand for aero-engine spares and services.

The firm said on Thursday its 2016 profits would probably be more than 30 per cent below what has been originally estimated.

The announcement forced the company’s shares down by 20 per cent, highlighting the challenge facing the new CEO Warren East.

Derby-headquartered Rolls-Royce previously revised its profit estimates in July when it announced its aero-engine business, the biggest profit-generating unit, would face problems in 2016.

The forecast released on Thursday expects profit headwinds of £650m next year, up from the £300m predicted in July. Before the latest downgrade, the company expected to make £1.053bn in profits in 2016.

Rolls-Royce blamed the loss on operators of wide-bodied aircraft taking deliveries of new more fuel-efficient planes and using older engines less. This trend would mean losses worth up to £150m due to lower sales of spare parts and servicing of older engines.

The additional hit next year would come from weakness in demand for corporate and regional jet aftermarket services and the continued lower demand from oil and gas customers because of the weak price of oil.

CEO East said he had already identified a number of areas where the company could make ‘fundamental changes’.

Launching a major restructuring programme designed to save between £150m and £200m, he said the firm will streamline senior management and improve decision-making.

"The next few years are going to be important in laying the foundations for our long-term profitable growth," East said.

"Therefore it is important to ensure we are financially stronger, more resilient to short-term shocks and more flexible to take advantage of growth opportunities."

He didn’t elaborate on how many of the firm's 2,000 senior managers are at risk. It is expected the cuts will not be limited to UK operations.

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