More Monetary Quantification of the Rolls Royce Aircraft Engine Failure Incident

Three months post incident, we are beginning to get a more quantified sense of the costs impact revolving around the November in-air, uncontrolled explosion incident involving a Rolls Royce Trent 900 engine that was attached to a Qantas A380 superjumbo jet flying out of Singapore.  Readers may recall our previous commentary noting how the skills of the Qantas cockpit crew flying the aircraft were able to avoid a potential catastrophic event.

Today, the Financial Times noted that Rolls Royce reported its full year earnings and a rather upbeat view of its next twelve months. The Times futher noted that Sir John Rose, will be stepping aside as chief executive after 15 years. Rolls management took the opportunity to also quantify the costs incurred in dealing with the A380 super jumbo jet mishap, which was reported as £56m ($89.6m USD) a bit higher than the previously speculating number of $80 million USD.  Many were seeking more detail relative to Rolls corrective plans, and the FT also reported that investors were keen for any other details relative to the ongoing delays to Boeing’s 787 Dreamliner program, where a separate test bed engine failure caused a delay in that program.  None were forthcoming.

What makes this supply chain disruption incident ever more important is that the Rolls aircraft engine group has been moving away from a direct sales model in favor of the industry’s “power by the hour” model where air carriers lease engines from a manufacturer and pay by operational use.  Airline customers continue to favor this model since it provides better control of long-term operating costs and incents the engine manufacturer to insure that aircraft engines are reliable in uptime performance. Interesting enough, it has been reported that among the combined Boeing 787, Airbus A380 and A350 programs, Rolls currently holds a 65% market share.

Meanwhile, Qantas has resumed flights involving all of its existing A380’s after inspections and repairs were initiated. In an interview also published in the Financial Times, CEO Alan Joyce indicated: “There were big decisions with grounding and restarting the aircraft operations of the A380”. Qantas has taken pre-emptive legal measures to potentially seek damage payments from Rolls, but Joyce indicated in his interview that he is more inclined toward a negotiated settlement. Some are estimating costs to Qantas to be in the range of $60 million USD.

In terms of quantifying the overall cost of this single, but significant failure incident, the combined number thus far looks to be north of $149 million USD.

Rolls Royce remains rather confident in its current order book rates, backlog, and engineering prowess.  However, with the new industry “power by the hour” business model, and with airline customers continuously under margin pressures, Rolls would be wise to focus more attention on responding to product crisis and mitigating product defects.  We trust that Rolls’ new chief executive will have this area as an agenda item.

Bob Ferrari

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