No Luxury Ride for Rolls-Royce

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In a determined effort to cut costs, Rolls-Royce PLC recently announced plans to dismiss 2,300 workers, nearly six percent of the company’s approximately 39,500 international employees. Workers in the U.K., the U.S., Germany, and Nordic countries will most feel the sting, according to the Wall Street Journal. The U.K. jet-engine maker seems to be faring well, with a hefty number of recent orders, but London analyst John Middleton of Cazenove reported that these job cuts are expected to reduce overall operating costs by several million dollars. It’s really about improving efficiency and competitiveness on the part of the company, Mia Walton, a Rolls-Royce spokesperson, told the Canadian Press. It is reported that the cuts, which will focus on managerial, professional, and clerical positions, are meant to improve productivity and offset the impact of a U.S. weaker dollar and higher raw material costs.

There are very few – if any – ways for companies to combat both high-cost metals and other problems that develop when certain metals are difficult to procure. Unfortunately, these raw materials can rarely be replaced in Rolls-Royce products and several other products on the market. This necessity poses a dilemma, since prices of aerospace metals such as cobalt, nickel, titanium, and rhenium are still on the rise, while rhenium, cobalt, and tantalum remain in short supply. Titanium alloys, nickel alloys, and composites have been scarce for quite some time. For the world’s second biggest maker of commercial airplane jet engines, the properties in these metals are not expendable, Leon Grabowski, sourcing specialist at Rolls-Royce, said last April in a Reuters article . Once [an aircraft engine] is designed, tested, flown in, it’s almost impossible to take [various materials] out, Grabowski explained. Instead, Rolls-Royce and other companies must continue to purchase these expensive materials, making further layoffs in the sector more likely as raw material costs remain elevated.

Rolls-Royce rolled across Metal Miner last month when Stuart Burns discussed the company’s plans to establish a manufacturing and assembling facility in Virginia. Burns noted that the exchange rate of the dollar against the euro was certainly one of the reasons for this move. The weaker U.S. dollar is also offered as a main factor in the company’s most recent decision to axe several jobs, as Rolls-Royce engines are sold in dollars and the weakness of American currency has raised Rolls-Royce costs by 40 millions pounds. Interestingly, due to the strength of the pound against the dollar, the company has also considered closing a plant in northwest England that makes gas turbines for the energy industry.

In the midst of these job cuts, Rolls-Royce plans to keep recruiting new graduates and apprentices, sparking cries of possible age discrimination. The lack of an alternative to high-metal costs, however, does show that some sort of response was necessary, and the cuts should affect certain positions, not targeted individuals. Numis Securities analyst Clive Forestier-Walker has explained that Rolls-Royce is more efficient after recent plant upgrades ” and therefore, needs to employ less people. Rolls-Royce is growing strongly, Andrew Gollan of Numis Securities told the Canadian Press. It’s a strong market so they need engineers and are recruiting engineers, but they don’t need as many admin or support staff to back that up.

Rolls-Royce cuts should not impact 2007 financial results, and the company says that savings achieved in 2008 should manage to offset the costs of staff cuts. More information on the movement to lower costs for the company can be found on the Rolls-Royce website.

Amy Edwards

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