UK: The Rolls-Royce model. (1 of 4)

UK: The Rolls-Royce model. (1 of 4) - In 1971 Rolls-Royce went bust; now it is taking the world by storm. But the path from bankrupt to billionaire has not been easy, as Hashi Syedain reports.

by
Last Updated: 31 Aug 2010

In 1971 Rolls-Royce went bust; now it is taking the world by storm. But the path from bankrupt to billionaire has not been easy, as Hashi Syedain reports.

Rolls-Royce has been through it all in the past two decades: from nationalisation to privatisation, from sell-offs to acquisitions and, most importantly, from bankruptcy to spectacular profits. It is a company that, more than any other perhaps, has pulled itself up by its bootstraps to be a world class player in the fiercely competitive aero-engine market.

And so it should be. Rolls-Royce, after all, is one of the best brand names in the world, invoking a tradition of British engineering excellence recognised around the globe. If a company of Rolls' pedigree cannot compete with the best of them, it is a sad reflection on our industry indeed.

But Rolls-Royce is powering on. After years of stagnation in government hands, following its collapse in 1971, Rolls has returned with a vengeance. "We had to grab hold of the company if it was going to survive and going to float," says Sir Ralph Robins, deputy chairman and chief executive, who has been with the company for 35 years. "Governments work to different time constraints. We have to think long term while they never think beyond three years. The combination is deadly," he adds.

For Robins and chairman Lord Tombs, appointed in 1985 in the run-up to privatisation, "grabbing hold of the company" has meant a relentless drive to cut costs and win market share. The aero-engine market has just three significant players worldwide: General Electric and Pratt and Whitney in the United States and Rolls-Royce in Britain. Rolls is definitely still third in overall market share with 20% of the civil engine market. But it is also by far the smallest of the three - Pratt is owned by the vast United Technology Corporation and GE's profits are bigger than Rolls' entire turnover.

In the four years since privatisation, however, profits have leapt. The 1990 results were disappointing - pre-tax profits down 24% to £167 million on turnover up 24% to £3.67 billion. But times are tough. Nobody could have foreseen the Gulf War and the devastating effect that it has had on the airline industry. Added to this is the weakness of the dollar; since aero-engines are sold in dollars, a strong pound has immediate effects on Rolls' bottom line. And if all of that was not enough, there is the general recession hitting travel. Indeed, the fall in Rolls' profit is largely explained by a £50 million extraordinary provision for restructuring (including hefty job cuts) and bad debts or deferred orders (Air Europe, for example, is a Rolls-Royce customer).

The significance of low passenger miles is that airlines use up fewer spare parts; and this is where engine manufacturers like Rolls make much of their profits. Margins on spares are 40 to 50% and their total value in the lifetime of an engine is about 2.5 times that of the engine itself.

Of course the downturn in civil engines has been partly offset by the mini-boom in military. The coalition forces in the Gulf were flying Tornados, Jaguars and Harriers with over 1,000 Rolls-Royce engines. No doubt they were busily generating spares ordered via the special control centre set up in Bristol to serve Desert Storm. But Rolls says that it has not yet felt the benefit; and in any case the dictates of taste, if not of ethics, mean that it is unlikely to brag about any advantages.

Post Gulf, however, many observers think that the overall trend of falling military expenditure by governments is unlikely to be reversed. "What the Government shouldn't be doing, which I think it might do, is reducing spend on research and development. If it's going to reduce the size of the armed forces, it's going to require more sophisticated weapons," says Robins.

Whatever the future of military engines, it is the civil sector that promises most growth. The current recession, according to supply director Jim Keir, is merely a blip on a steep upward curve of passenger miles. "It's a truism that more and more people are going to fly. Peace is breaking out in Eastern Europe and both there and in the Third World air travel offers a cheaper transport infrastructure than road or rail," he declares in a burst of unbridled optimism.

The most dynamic sector of this growing market is expected to be mega-thrust engines - 80,000lbs and above - which will power the new generation of wide-bodied passenger aircraft, like the A330 Airbus, the McDonnell Douglas MD11 and the giant Boeing 777. This market is estimated to be worth some $50 billion to the year 2000, half of the total aero-engine market, and will be of vital importance to all three manufacturers.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

Subscribe

Get your essential reading delivered. Subscribe to Management Today