Rolls-Royce shares plunge as profits face 'headwinds'

Rolls Royce Engine Image copyright Getty Images

Shares in aerospace group Rolls-Royce sank 19.6% after it warned "sharply weaker demand" would hit profits.

It said profits this year would be at the low end of expectations, while next year it would face £650m of "headwinds" - more than previously forecast.

Rolls-Royce is carrying out a review of its business, which it said was likely to involve job losses among its 2,000 senior managers.

It has previously announced 3,600 job cuts across the group.

Rolls-Royce also said it would review of its shareholder payments policy, signalling the possibility that dividend payments could be cut.

At the end of trading, shares in Rolls-Royce were down 130.5p at 536.5p. The company's shares have now nearly halved since April.

Rapid change

In July, the company warned lower deliveries of its Trent 700 engine would affect profits in 2016 and 2017.

It also said at the time that profits in 2015 would be between £1.325bn and £1.475bn.

Warren East, who was appointed chief executive of Rolls-Royce in April, said: "The speed and magnitude of change in some of our markets, which have historically performed well, has been significant and shows how sensitive parts of our business are to market conditions in the short-term."

Rolls-Royce said there were three areas where it had seen demand weaken - corporate jets powered by Rolls-Royce engines, servicing of the firm's wide-bodied engines, and offshore marine markets.

Image copyright Getty Images

Analysis: Theo Leggett, BBC business reporter

Rolls-Royce has been badly affected by a decline in its main aircraft engine business. It says that although demand for new engines for large passenger aircraft remains unchanged, many airlines have been sidelining their older planes in favour of modern, more fuel efficient models.

As a result, profits from supplying spare parts and servicing have fallen significantly. In addition, sales of engines for corporate jets have declined sharply.

Meanwhile the low price of oil has taken a heavy toll on Rolls-Royce marine engine business, largely because of falling demand from offshore energy companies.

Mr East, who is carrying out a structural review of the business, added Rolls-Royce carried "too much fixed cost" and was "inflexible in managing this in response to changes in market conditions".

He is looking for annual cost savings of between £150 and £200m, of which £115m cost savings are expected to come from the company's aerospace and marine division in 2016.

'Major setback'

More details on the structural review of the company will be announced later in November, Rolls said.

Keith Bowman, equity analyst at Hargreaves Lansdown stockbrokers, said yet another profit warning from Rolls had "shocked investors", adding that the review of its shareholder payments policy was "a major negative".

He said: "The company's prior push to reduce earnings volatility and surprises looks to have been completely unwound, with investors today suffering another major setback.

"Rebuilding confidence in the company's outlook is now paramount for the relatively new chief executive."

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