Rolls-Royce battles to restore reputation for excellence
Chief executive reassures investors over engine problems that have hit confidence
The name Rolls-Royce is synonymous with engineering excellence — but Richard Turner begs to differ.
A former Rolls-Royce employee and now a shareholder, Mr Turner told the company’s annual meeting in Bristol last week he was concerned about a lack of “serious engineering” capability at the top.
“There has never been a situation where a substantial portion of a Rolls-Royce-powered [airline] fleet has been grounded for so long,” he said, eliciting a round of applause.
Mr Turner’s criticism underlined the weight of the problems that Rolls-Royce, a British engineering icon, has faced as it has battled to resolve issues with its Trent 1000 engine that powers Boeing’s 787 aircraft.
Ian Davis, chairman of the 113-year-old company, parried the attack by stressing the company’s expertise at Thursday’s shareholder meeting, pointing out that chief executive Warren East is an engineer and nearly two-thirds of the board have an engineering background.
But even he had to acknowledge in his opening remarks that the engine problems had damaged confidence and sparked worries over the group’s operational performance. The issue “has caused pain for us and even more importantly for many of our customers,” Mr Davis conceded.
The Trent 1000 accounts for 11 per cent of Rolls-Royce’s commercial fleet. Turbine blades on certain variants of the engine have been wearing out faster than expected, forcing Rolls-Royce to embark on an extensive and costly programme of repairs. Airlines around the world, including British Airways and Virgin Atlantic, have had to ground aircraft, disrupting their schedules — leaving them not best pleased with Rolls-Royce.
The problems have been costly; in February, Rolls-Royce said it expected the cash cost of the Trent 1000 programme to be about £1.5bn between 2017 and 2021.
But despite coming under fire from some private investors last week, Mr Davis and Mr East held out the prospect of light at the end of the tunnel. Mr East told shareholders the company had now “settled compensation claims with all airlines to be affected in the next two years”.
The number of aircraft on the ground has dropped, from 40-50 late last year to 30-40 in the first quarter. That number is expected to be in the single digits by the end of this year. New orders have also been won for the Trent 1000 Mr East said later on the sidelines of the meeting, compared with “a complete drought last year”.
“The airlines can see the problems starting to appear in the rear-view mirror now,” he added.
For Rolls-Royce investors the statement might not be quite as categoric as they would like but coming from Mr East, whose direct demeanour has won supporters, it signals progress.
Shares in the company rose on the day of the shareholder meeting after the company confirmed it was on track to meet its full-year targets.
But there is still a long way to go before Rolls-Royce is truly back on a roll. Its shares closed at 934p on Friday — up 15 per cent since the start of the year — but still below the three-year high of more than £10 a share of last August.
The past few years have been nothing if not turbulent even before Mr East took the helm in July 2015 in the wake of several profit warnings.
The company agreed to a deferred prosecution agreement with the Serious Fraud Office in January 2017 under which it paid a fine of almost £500m. The SFO in February announced it had dropped its investigation into individuals associated with Rolls-Royce, ending the probes — but they have left a mark.
Last summer Mr East announced plans to cut 4,600 jobs in a bid to drive change through an organisation that has resisted years of serial restructuring. The restructuring comes as Rolls-Royce’s engineers are busier than ever, building more than five different engine types.
The group has made free cash flow a key measure of performance and promised to deliver more than £1bn by 2020, up from £641m for the year to the end of December 2018. It is a target Rolls-Royce cannot afford to miss.
“There is quite a lot to do,” admitted one Rolls-Royce insider, adding that “it was never supposed to be like that with several new engines coming through at the same time”.
The scale of the tasks the company faces became evident in February when Mr East said Rolls-Royce had withdrawn from the competition to power Boeing’s new midsized plane. The chief executive said at the time the company was not ready to meet the timetable to provide an engine by 2025.
Rolls-Royce is also developing the UltraFan, a next generation engine that it expects to be ready for service in the second half of the next decade. Boeing has been considering the launch of a new “middle of the market” plane to bridge the gap between its biggest narrow body passenger jet and the 787 Dreamliner twin aisle.
Asked whether the current crisis at Boeing, which is grappling with the fallout from two deadly crashes of its best-selling 737 Max aircraft, might delay the launch of the proposed jet and thereby provide another opportunity for Rolls-Royce, Mr East said the company might be able to “reassess” things.
“We think technically we have a good solution,” he added, cautioning that the company did not want to jeopardise the success of the UltraFan by launching it too soon.
The engine will be scaleable, meaning it will be suitable for wide-body and narrow-body aircraft. It will also be 25 per cent more fuel efficient than the earliest version of the Trent engine and as such is part of Rolls-Royce’s plan for the longer-term.
With the industry facing tough emission reduction targets and noise restrictions that need to be met by 2050, the company will need to come up with new technologies, including electrification. It cannot afford to be shut out of the next technological wave.
For Mr East and his board there is a lot to do. Nick Cunningham, analyst at Agency Partners, credits him for using the company’s crises to help drive change.
“Warren has used the series of crises over the past few years to exact change from the organisation, something that has been notoriously difficult to do at Rolls which has had a very institutionalised culture,” he said.
For investors, who have endured a turbulent ride, the one thing that is guaranteed is that there will be risks.
The Trent 1000 issues “are a reminder that there is intrinsic programme risk in the aerospace business,” said Mr Cunningham.
“Until the Boeing 737 Max issues, investors had sort of forgotten this about the industry.”