ENGINE manufacturers Rolls-Royce unveiled sharply lower profits yesterday and warned that next year's recovery could be set back by a pension fund review.

The group has borne the brunt of the post-September 11 downturn in the aviation industry.

This includes a slowdown at its Sunderland plant, which makes aircraft components.

Underlying profits in the six months to June 30 were £104m, down from the £190m a year earlier.

Bottom-line pre-tax profits were £33m against £137m last year.

The slump comes after underlying profits in its biggest division, civil aviation, fell to £55m from £163m.

But chairman Sir Ralph Robins said the business had performed as expected following a period of restructuring, which included 5,000 job losses announced at the end of last year.

He said: "We have made excellent progress with our restructuring programme, which we accelerated as a result of the events of September 11."

The company said it was positioned for growth next year, but warned that the final outcome for 2003 could be influenced by any increase that might be required in pension fund contributions.

Shares in Rolls-Royce surged seven per cent after the figures met City expectations and the company also eased concerns about its borrowing levels.

The company said shareholders would receive an interim dividend of 3.18p a share.

Net debt at the half-year end was £770m, compared with £748m a year earlier, and led the company to predict that the figure for this year could be "modestly better" than its previous guidance.

Rolls-Royce is the world number two in the defence aerospace sector and is involved in programmes including Eurofighter and Joint Strike Fighter.

Rolls-Royce engines now power 38 of the world's top 50 airlines and Mr Rose said the range of customers had helped protect the company from the financial difficulties of individual airlines following the September 11 terror attacks.

The group now expects to deliver 870 new civil engines this year, a fall of 36 per cent on a year earlier, but still in line with the performance of 1998.