Britain's engineering flagship has high hopes as airline traffic grows. By Roger Eglin.
When British Airways shunned Rolls-Royce last year and turned to its American rival, GE, for jet engines, it was a profound shock to the Derby-based engine maker. It was bad enough to lose such a massive order. Contracts worth $1.4 billion are rare in good times, never mind in the depth of a recession. But this was not the only damage to Rolls. GE had been having trouble setting up an airline partner to launch its new GE90. BA was ideal. Its size, prestige and engineering reputation was just what GE needed - and if BA's decision not to fly the flag and to reject Rolls's contender, the Trent, sent shock waves through the airline industry and financial community, better still as far as GE was concerned. The two engine makers have been eyeball-to-eyeball since Rolls pulled out of its co-operation agreement with GE.
The American giant has never made any secret of its conviction that there was not enough room in the market for three big engine manufacturers and that Rolls would be forced into partnership, possibly with the other American company, Pratt and Whitney, or out of the big engine business altogether.
The loss of the BA order raised a gloomy chorus echoing GE's contention that Rolls couldn't go it alone. Nor did the publication of Rolls's results in early March help to confound the jeremiahs. Pre-tax profits were down 71% from £176 million in 1990 to £51 million in 1991. The core aerospace business actually lost £6 million compared with a profit of £81 million the year before. Only the £73 million earned by the industrial power division helped keep the group in the black.
Before the doomsters get the upper hand, it is worth taking a more detached look at Rolls's prospects. Some leading stockbrokers have done so and came up with "buy" recommendations. Few believe that Rolls lost the BA order because the GE90 is an outstandingly better engine than the Trent. There is a strong feeling that Rolls lost because it could not offer the financial package that GE dangled in front of BA - one that appeared to turn on a surprisingly generous purchase price for BA's Treforest engine overhaul plant in South Wales.
True, with big aerospace orders, money can talk as loudly as engineering and Rolls should have been quicker to get its financial act together. But Rolls has signed up Thai as launch partner for the Trent on Boeing's big 777 twin. More recently Emirates, the Gulf airline, chose the Trent for its 777s and the engine is a strong contender for other important orders in the Far East, not lease one from Hong Kong's Cathay Pacific. The Trent has also won orders from Cathay, TWA, Garuda and the American leasing company, ILFC, to power Airbus A330s.
Some analysts believe the loss of the BA order will affect Rolls's market share for big jet engines. But this hypothetical loss has to be set against the growing market for such engines. The aerospace analysts at Barclays de Zoete Wedd (BZW) estimate the Boeing 777 project will generate between $50-60 billion of engines and spares business. Similarly they expect Airbus Industrie's A330, another big twin, to produce $25-30 billion of engines and spares business with a similar figure for McDonnel Douglas's MD 12X.
This is only the start of it. Boeing is in discussions with airlines about the shape of a 600-seater and Airbus Industrie is holding similar talks. In a recently published review of the aircraft market, Boeing has produced figures showing that there will be striking growth in the market for aircraft with 350 or more seats. There are only just over 800 such aircraft in service but by 2010, Boeing believes, this fleet will have risen to just under 4,000 in number. Such growth puts a fresh perspective on the loss of one engine order.
With upwards of 60,000lb of thrust and the capability to produce even more, the Trent is the heavyweight of Rolls's range and has been designed with the coming generation of 600- and even 800-seater aircraft in mind. Even below these giants aircraft generally are getting bigger and this suits Rolls which has anticipated this trend.
Until recently, the market was dominated by aircraft with 120 seats or less - which accounted for an estimated 34% of delivered units. Now Boeing believes 120-170-seaters will take up the running. With an estimated 30% of unit deliveries, Boeing believes such aircraft will become the biggest single market group. It augurs well for the V2500, an engine project led by Pratt and Whitney and Rolls in which the latter has a 30% stake. After a delayed start caused by development problems, the V2500 is now looking a much better bet.
The strength of Rolls is that after spending £2 billion on R and D over the last six years its range of engines is wider than ever before. The Trent and the RB211 derivatives give Rolls a strong presence in the market for aircraft over 170 seats. In the middle range is the V2500 while the Tay is becoming a powerful contender below 120 seats.
The smaller-sized sector of the market is contracting but will still account for nearly 1,200 aircraft deliveries between now and 2010, according to Boeing. The Tay is the sole engine chosen for Fokker's F100, one of the most important aircraft in this sector, and the fact that the Tay is the only new engine in this range has given Rolls a strong position.
The Tay has also broken into the business of re-engining older jets, UPS, the big parcels carrier, chose it to replace the Pratt and Whitney engines on its Boeing 727-100 fleet and there should be more business to be won bringing a new lease of life to old thirsty and noisy jets. Below the Tay, Rolls has linked with an American company, Williams, to produce a successful, corporate, jet-sized engine, the FJ44.
The impact of this family of jets is reflected in the order book. Pessimists overlook Rolls's success in building its order book from £2.8 billion in 1987, when it was privatised, to £6.6 billion last year. "The market opportunities for Rolls-Royce are expanding in the coming decade ... many of the current aircraft where Rolls cannot offer an engine, look the most vulnerable whereas new opportunities later in the decade provide the growth potential," says the BZW analyst.
Of more immediate impact is the conviction that, as far as aerospace goes, the worst of the recession is over. Airline traffic is growing once more. The spares business, where Rolls makes its real profit in times when it has to sell new engines at rock-bottom prices, should soon start to recover. Defence prospects, too, will be better if British expectations that the European Fighter will go ahead become a reality. The manner in which Rolls is being forced to cut costs and jobs underlines how tough the jet business is. But the flagship of Britain's engineering industry isn't ready to throw the towel in yet.
Roger Eglin is managing editor of The Sunday Times.