Engine Uncertainties Keep Rolls Royce Under Pressure

| About: Rolls Royce (RYCEY)

Shares in Rolls Royce Group (OTCPK:RYCEY) slipped another 2.6% to 590p Wednesday on news that Singapore Airlines had grounded three of its Boeing (NYSE: BA) A380 super-jumbo jets ahead of plans to replace one engine on each of the planes. The move follows the explosion of a Rolls-Royce Trent 900 engine on a Quantas operated Airbus A380 over Indonesia last week. Earlier this week Singapore Airlines said it had found no problems with any of its engines during initial testing but it now seems that there are concerns about potential oil leaks.

Singapore Airlines was the first carrier to add the A380 to its fleet, when it was launched in October 2007. It is understood that 20 A380s, operated by Qantas, Lufthansa and Singapore Airlines, are using the Rolls-Royce Trent 900 engine. Another 17 of the planes in service are owned by Emirates and Air France, but use an engine built by Rolls’ fierce rival, GE-Pratt & Whitney (NYSE: UTX).

Earlier this week, Rolls-Royce said it had made progress in understanding the cause of the original engine failure on the A380 Qantas flight and that it appeared the incident was specific to the Trent 900 engine. It said it was working with Airbus to carry out a series of checks with operators that use the engines on their planes.

Julian Tolley, an analyst at HB Markets, said the latest news was “very worrying” given the Singapore carrier had previously said there were no problems. “We would expect the price to slide to around the previous lows of 580p or potentially spike lower as the holding statement from Rolls-Royce was very limited and [we] felt that it was very carefully worded,” he said. “Not sufficient to sell for private clients but CFD traders will do well to be short.”

Last week’s accident triggered a collapse in Rolls’ share price from a 12-month high of 654.5p but the price rallied Tuesday to 606.5p on news of a £1.2bn order from China Eastern Airlines for Trent 700 engines to power 16 Airbus A330 aircraft. China Eastern, which will bring its new A330s into service from 2011, was the first airline in mainland China to use Trent technology when it received Trent 500 engines for its Airbus A340 aircraft in 2003.

The Trent 900 incident was the first of its kind to occur on a large civil Rolls-Royce engine since 1994. Since then Rolls-Royce has accumulated 142 million hours of flight on Trent and RB211 engines.