Rolls-Royce is set to report a record annual loss of more than £4billion this week following sterling’s fall against the dollar and the £671million fine it must pay after admitting corruption charges.
The bulk of the losses comes from a £4billion write-down on the firm’s currency positions, which showed massive losses following sterling’s slump after the Brexit vote.
The write-down does not involve a cash cost, but reflects a snapshot of the value of its very long-term currency hedging plans on the last day of 2016.
The hedges are designed to smooth the effect of currency movements for the group over many years, reflecting the long timescale of its aero-engine contracts.
The City also expects profits to have been hit by the real cash cost of £671million in fines paid to the Serious Fraud Office, the US Department of Justice and Brazilian authorities after Rolls-Royce admitted bribery allegations going back decades.
It will book that sum in this week’s accounts, though it will pay the fines over five years.
But even excluding the currency loss and fine, the group, which declined to comment, is expected to see its underlying earnings almost halve from last year’s £1.4billion to £678million, reckon analysts.
The fall in underlying profits is also as a result of the continued ‘headwinds’ that chief executive Warren East referred to after he was brought in during 2015 to restore the company’s fortunes following a series of profits warnings.
These include the switch from production of its Trent 300 engine, which powers the Airbus A330, to the Trent 3000, which will exclusively power the Airbus A330neo.
Sales of the A330 have fallen ahead of the introduction of the new aircraft and Rolls-Royce is competing with US rivals GE and Pratt & Whitney for the A330, but it has exclusive rights to the A330neo.
The firm has also been affected by the move to ‘park’ older aircraft like the Airbus A340, which it supplies with engines, because these four-engined aircraft are less economic than modern, long-range, twin-engine planes like Boeing’s 787.
Rolls-Royce loses up to £2million on every engine it sells, but makes its money from service charges when they are being used, so it suffers when aircraft are parked.
It was also affected by slowing sales in corporate and regional jet markets.
Its marine division, meanwhile, has been affected by the slowdown in the oil exploration market as a result of the low oil price.
However, the City believes these results will be the point at which East can start citing reasons for renewed confidence in his transformation programme, which he launched in November 2015.
The plan aims to reduce bureaucracy and speed up decision making. The company has axed 600 management positions, 2,600 jobs in its aerospace business and 1,000 in marine operations.
It is expected it will have saved £50million last year and up to £200million by the end of this year.
Rolls-Royce has an order book of £80billion and expects that its engines will power half of all wide-bodied aircraft flying after 2020.