Magazine article Management Today

What the Doomsters May Be Missing about Rolls-Royce

Magazine article Management Today

What the Doomsters May Be Missing about Rolls-Royce

Article excerpt

When British Airways shunned Rolls-Royce last year and turned to its Ameriacan rival, GE, forjet 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. It size, prestige and engineering reputation was just what GE needed - and if BA's decision not to fly the flag and to reject Roll'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 either be forced into partnership, possibly with the other American company, Pratt & 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 Roll's results in early March help to confound the jeremiahs. Pre-tax profits were down 71% from 176 pounds sterling million in 1990 to 51 pounds sterling million in 1991. The core aerospace business actually lost 6 million pounds sterling compared with a profit of 81 pounds sterling million the year before. Only the 73 pounds sterling million earned by the industrial power division helped keep the group in the black.

Before the doomster get the upper hand, it is worth taking a more detached loot at Rools'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 beig aerospace orders, money can talsk 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 least 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 Roll's marker 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 McDonnell Douglas's MD 12X.

This is only the start of it. Boeing is in discussion with airlines about the shape of a 600-seater and Airbus Industries 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. …

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