Rolls-Royce to Shelf Next-Generation Propulsion Engine After Testing Ends in 2022
Comment of the Day

January 04 2021

Commentary by Eoin Treacy

Rolls-Royce to Shelf Next-Generation Propulsion Engine After Testing Ends in 2022

This note from the Financial Times may be of interest to subscribers. Here it is in full:

Rolls-Royce Holdings PLC will shelf its next-generation UltraFan engine program and halt investment until a new aircraft is launched as the industry grapples with low demand for new airplanes, the Financial Times reports.

--The British engineering giant will finish testing the new engine in 2022 but will then put the program "on ice," including postponing the search for an industrial partner for the new propulsion system, according to the FT.

--Rolls-Royce Chief Executive Warren East said he expects a significant delay until the new aircraft appear as the industry reels from the acute shock of the coronavirus pandemic, the FT reports.

Eoin Treacy's view

The challenge for many industrial companies is that their growth prospects are dependent on economic growth and the ability of their customers to boost capital expenditure. At present the enthusiasm which greeted vaccine approvals is being tested by the evolution of new strains of the COVID-19 virus. That suggests capex decisions will likely be delayed until customers have visibility on what their post pandemic businesses will look like.

The announcement by Rolls Royce that it will cease developing new engines until it has customers for them is part of that calculus. The share rebounded impressively from the October lows and is now consolidating. That suggests it is a high beta play on reopening. When the prospects for renewed economic activity re-emerge the share will likely rebound to new recovery highs.

This same way of thinking may contribute to a process of mean reversion on the iShares Global Industrials ETF.


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