Last updated: November 12, 2010 7:26 pm

Rolls-Royce

When an engineering company’s product malfunctions, it can do little beyond investigating and explaining. After last week’s engine failure on a Qantas Airbus A380, Rolls-Royce has done the former; chief executive Sir John Rose sought on Friday to do the latter, updating trading conditions and warning that profits this year would be hit.

Sir John had resisted saying anything substantive until Rolls-Royce could establish the cause of the November 4 incident on a Trent 900 engine to its own satisfaction. Questions remain about the “specific component” identified as the cause of the explosion. The financial impact is likely to be limited to the low tens of millions of pounds – Sir John said this year’s numbers would be “slightly lower” than the 4 to 5 per cent growth forecast in July. Still, the lower guidance matters, since civil aerospace accounts for half of the company’s underlying profit (it made £983m in 2009).

Investors appeared reassured; shares in Rolls-Royce rose 4.6 per cent. However, shareholders are not the only party with a stake in the resolution of this incident. Rolls-Royce needs to reassure its customers – Qantas, Singapore Airlines and Lufthansa, the three airlines that fly A380s with Rolls-Royce engines – and Airbus, the manufacturer. Shares in EADS, parent of Airbus, fell more than 3 per cent on Friday. Future buyers of the A380 must also be watching.

Rolls-Royce shares are down 7 per cent since the incident. That was from rather a lofty perch – they had risen nearly 25 per cent since July. Given the uncertainty the incident has created, there is no immediate reason why investors should push the shares back to their pre-blow-out level anytime soon.

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