Qantas has reached a settlement with engine maker Rolls-Royce over last year’s mid-air disintegration of a the Trent 900 engine, which temporarily forced the grounding of its entire fleet of A380s. The terms of the agreement have not been revealed but will give Qantas a $100 million (A$95 million) boost in profits. For Rolls Royce the cost of the Qantas settlement is therefore likely to be somewhat greater and my guess would be in the region of $110 million.
My estimate made in November 2010 that Rolls Royce would face a hit of around $300 million for direct costs and in settlement costs seems to be not far off the mark. The cost to Rolls Royce of loss of future sales remains intangible and perhaps only temporary.
Alan Joyce, the Qantas chief executive, said the terms of the agreement are confidential, but said the settlement’s profit and loss impact would amount to a A$95m boost to the Australian airline’s bottom line.
Mr Joyce said the settlement marks an end to the legal proceedings Qantas launched against Rolls-Royce in the Federal Court of Australia in December.
In November, a Rolls-Royce Trent 900 engine on a Qantas A380 disintegrated shortly after takeoff from Singapore, forcing the plane to make an emergency landing.
The Australian Transport Safety Bureau’s interim report on the A380 incident said a manufacturing defect in an oil pipe deep within one of the engines led to an oil leak, which sparked a fire. The fire caused a disintegration of one of the engine’s giant turbine discs, sending pieces of it shooting through the plane’s wing and raining onto the ground below.
The engine explosion was the most significant safety issue an A380 had ever faced since it began passenger flights in 2007, and prompted intense scrutiny of Rolls-Royce engines.
The settlement will help Qantas recover from the millions it lost following the incident. The airline was forced to temporarily ground its entire fleet of A380s for a series of inspections, and Joyce said the plane damaged by the explosion won’t return to service until February.
“Qantas and Rolls-Royce have had a long and successful commercial partnership spanning several decades,” the airline said in a statement. “Qantas looks forward to a continued strong relationship with Rolls-Royce on the basis of the settlement announced today.”
The compensation payment helped boost the airline’s expected underlying pretax profit for the year to June 30 to between A$500 million (£326m) and A$550 million (£359m), up from A$377 million (£246m) a year ago.
…… Qantas shares rose 0.8 per cent to AU$1.84 in afternoon trading.
This leaves Rolls Royce the task of settling with Airbus and some less costly settlements with Lufthansa and Singapore Airlines.
My estimate is that it will take another 2 to 3 quarters for most of these costs to have worked their way through Rolls Royce’s accounts. However RR will have to bear an increased and continuing service cost regime for some time to come for the Trent 900.
The Trent 1000 for the Dreamliner is still a long way off from generating real revenues for Rolls Royce.
It could be time to buy Rolls Royce again.