Rolls-Royce CEO Says Cost Crisis Tied to Over-Complex Processes

• U.K. engine-maker poor at predicting changes in demand: East
• Slump in overhauls on older wide-body models is worst in Asia

Rolls-Royce Holdings Plc Chief Executive Officer Warren East said complex practices introduced by former managers are stopping the aircraft-engine maker from reacting quickly to changes in demand, contributing to the profit warning that wiped 20 percent from its stock Thursday.

“We’ve just built up loads of processes here over the years,” East, who took over in July, said by telephone Friday. “They’ve all been added to, one on top of another on top of another, and it’s time to clean it up a bit. Our speed of reaction to changes in the market is not good enough.”

The company is also suffering because its “accuracy, in terms of being able to sense these things coming down the pipe, is not good enough,” East said.

Rolls-Royce said Thursday that 2016 earnings would take a 650 million-pound ($990 million) hit from slowing sales of business-jet engines and a slump in revenue from maintaining regional aircraft. A slide in the overhaul of bigger turbines for older wide-body planes relates chiefly to a downturn in travel in Asia, where there’s a glut of new aircraft, East said.

The company is also burdened by costs from inefficient “legacy” production facilities, which will at least disappear when Rolls-Royce is able to eliminate older programs and machinery over the next few years, he said.
Earnings are separately being hurt by a changing product mix, with lower-margin items accounting for a greater share of revenue that is itself generally stable, the CEO said.

Shares of Rolls-Royce closed 4.3 percent lower at 513.50 pence in London. Thursday’s decline was the steepest in 15 years, wiping about 2.5 billion pounds from its value.

- Source:  http://www.bloomberg.com