Magazine article Management Today

The Rolls Model: In 1971, Rolls Royce Went Bust; Now It's Taking the World by Storm; but the Path from Bankrupt to Billionaire Has Not Been Easy

Magazine article Management Today

The Rolls Model: In 1971, Rolls Royce Went Bust; Now It's Taking the World by Storm; but the Path from Bankrupt to Billionaire Has Not Been Easy

Article excerpt

THE ROLLS MODEL

Rolls Royce has been through it all in the last two decades from nationalisation to privatisation, from sell-offs to acquisitions and, most importantly, from bankruptcy to spectacular profits. It's 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 can't compete with the best of them, it's 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 add.s

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 & Whitney in the US 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 Group and GE's profits are bigger than Rolls' entire turnover.

In the four years since privatisation, however, profits have leapt. The 1990 results were disappoingting -- pre-tax profits down 24% to 167 pounds million on turnover up 24% to 3.67 billion pounds. But times are tough. Nobody could have foreseen the Gulf War and the devastating effect 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 wasn't enough, there's the general recession hitting travel. Indeed the fall in Rolls' profit is largely explained by a 50 million pounds 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 40-50% 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 Tornadoes, 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 hasn't yet felt the benefit; and in any case the dictates of taste, if not of ethics, mean it's unlikely to brag about any advantages.

Post-Gulf, however, many observers think 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's 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. …

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