The Week Ahead: Updates due from Rolls-Royce, Thomas Cook and TUI

Cuts to defence budgets and the impact of falling oil prices on the marine sector are expected to ha

Cuts to defence budgets and the impact of falling oil prices on the marine sector are expected to have hit annual profits at engine maker Rolls-Royce. Photo: Rolls-Royce/PA - Credit: PA

The City will look for an update this week on how Rolls-Royce plans to turn around its troubled business, and will study the effect of recent terror attacks on holiday firms Thomas Cook and TUI.

Engine-maker Rolls-Royce is expected to report a 16.5% fall in underlying annual pre-tax profit to £1.35billion on Friday after being hit by defence spending cuts and falling crude prices, which have impacted its Marine division which supplies the oil industry.

In December, Rolls-Royce chief executive Warren East, who joined the firm last July, said he would scrap the current Aerospace and Land & Sea divisional structure.

The move will cut out a layer of senior management, with the new structure instead comprising five businesses – Civil Aerospace, Defence Aerospace, Marine, Nuclear and Power Systems.

The shake-up comes amid a major revival plan to boost performance and slash costs by between £150million and £200m a year.

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FTSE 100-listed Rolls-Royce issued its fifth profit warning in two years in November, having also seen lower orders in the corporate jet market due to slowdowns in China, Brazil and the Middle East. It is cutting management roles and has previously announced 3,600 redundancies.

Analysts at Societe Generale said “most of the group’s businesses face major earnings and cashflow headwinds in the medium term, and any recovery will be very gradual”.

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Mr East is under pressure to revive the group’s fortunes with its share price having fallen by more than 40% over the last 12 months i the wake of successive profit warnings.

US activist shareholder ValueAct, which has doubled its stake in the firm to around 10%, is pressing for change, and has asked for a seat on the board.

It was reported in December that the Government would consider nationalising the Roll-Royce arm that makes the power systems used in Britain’s nuclear systems if the firm’s woes deepen.

The speculation comes amid rumours of takeover interest in Rolls-Royce following its share price plunge. The UK Government holds a “golden share” in Rolls-Royce, which means certain deals would require its consent. Foreign ownership of Rolls-Royce is also limited to 15% under rules drawn up when the group was privatised in 1987.

Holiday firm Thomas Cook will lay bare the impact of recent terrorist attacks on its financial performance when it updates the market on Thursday.

Analysts expect consumer confidence in the holiday sector to have taken a knock in the wake of recent atrocities in Paris and Egypt, and Thomas Cook’s decision to join rival holiday operator TUI in scrapping its Summer 2016 programme to Tunisia is also likely to have hampered progress.

It comes after Thomas Cook cancelled its flights and holiday programme to the popular Egyptian tourist destination of Sharm el Sheikh until March 23, following the Russian airliner crash in October.

There is also emerging evidence that the Zika virus could be having a damaging impact on customer appetite for holidaying in the Caribbean, after Jamaica announced it had been infected by the virus.

Analyst Will Wallis at Numis said the spin-out from the terrorist attacks and the Zika virus could see a drive towards more people wanting to holiday in the Mediterranean.

But he added: “This poses logistical problems for Thomas Cook which may have difficulty in getting access to sufficient accommodation at some popular resorts.”

The forecasts for Thomas Cook’s full-year earnings for 2016 are expected to range between £199m and £232m. The group posted its first annual bottom line profit for five years in November 2015, despite a £130m sales hit from the Tunisian beach and hotel terrorist attacks in June.

Thomson and First Choice owner TUI is expected to nurse further blows to its finances in the wake of terror attacks when it reports to the market on Tuesday.

The travel giant revealed at the end of last year it had taken a 52m euro (£37.6m) hit from the Tunisia attack and cut its guidance for the year ahead after cancelling all flights to Sharm el-Sheikh in Egypt following the terrorist bombing of a Russian airliner.

TUI has 13 hotels in Sharm el-Sheikh, with the resort accounting for half of its business in Egypt.

Concerns have been mounting across the travel sector that recent terrorist attacks in Paris, Egypt and Thailand could continue to dampen consumer confidence and drive down passenger numbers on flights.

But TUI, which is forecasting a 10% increase in earnings this year, is expected to be handed a welcome boost from the tumbling oil price, helping to drive down the cost of running its cruise ship and airline businesses.

Peter Long, joint chief executive of TUI Group, said in December that that trading for the summer 2016 season was strong, with bookings ahead by 11% and nearly a quarter of the programme already sold.

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