Rolls-Royce axes 2,600 jobs to protect its medium term recovery

AERO engine manufacturer Rolls Royce has announced it is to cut 2,600 jobs – the bulk of them within its aerospace division – as it responds to declining demand across its markets.

The company said the restructuring would see the jobs lost during the next 18 months, with the majority achieved in 2015.

However, it was warned there will be further cuts to come as it looks to stabilise its position ready for renewed growth in the medium term.

In a near simultaneous announcement, the company said it has also recruited for Jaguar Land Rover boss David Smith to be its new Chief Financial Officer.

Rolls-Royce had braced the markets for an announcement following a statement last month saying it was looking to sustain the business over the short term as a response to the more challenging trading environment.

It said the worsening conditions were likely impact revenue and it warned 2014 compared with 2013 was likely to be 3.5% to 4% lower (previously guided as flat), excluding an adverse foreign exchange translation estimated at £500m.

It said that in the last few months economic conditions had deteriorated and Russian trade sanctions had tightened, leading a number of its key customers to delay or cancel orders particularly in the Nuclear & Energy and Power Systems businesses.  

Across the business, it said underlying revenue for Civil Aerospace revenue was expected to be maintained at +2% to +5%, while Defence Aerospace revenue was maintained at -15% to -20%. Marine revenue is maintained at around -10%, with Power Systems steady at +/-2% and Nuclear & Energy revenue reduced to 0% to +5% as against a previously stated +5% to +10%. It said the latter reflected market conditions and the impact of the impending sale of its Energy gas turbine and compressor business.
 
Factoring in the cost reductions due to the redundancies, it said it would maintain predictions for underlying profit as flat in 2014.

The company said it was keen to stress that the investment its had made in technology and new capacity, alongside the organisational changes would enable the group to increase output and improve efficiency in the future.

For example, it said a large engineering team had been required for the development phase of the Trent 1000 and Trent XWB engines. However, both these major programmes have now entered their production phase, reducing the engineering requirement.

Also, it said it had opened a number of world class new facilities, such as Crosspointe in the United States and in the UK at Rotherham and Washington, Tyne & Wear. It said these set new standards in productivity and efficiency and would allow the group to improve its competitiveness.

The reorganisation of the group into two divisions – Aerospace and Land & Sea – will enable it to reduce management layers and associated structural costs including indirect labour.
 
It said it anticipated the measures would result in incremental restructuring costs of around £120m over the next two years. It intends to accrue around half of these costs this year, subject to employee consultation. Annualised cost benefits are predicted to be in the region of £80m when fully implemented. Approximately half of this amount has been factored in to its 2015 guidance and the full benefit in its medium term outlook.
 
John Rishton, Chief Executive Officer, said: “We are taking determined management action and accelerating our progress on cost. The measures announced today will not be the last, however they will contribute towards Rolls-Royce becoming a stronger and more profitable company.
 
“We will work closely with employees and their representatives to achieve the necessary reductions on a voluntary basis where possible, while making sure we retain the skills needed for the future.”
 
He said the business remained well position in growth markets.