Flight International - 04

Propulsion Manufacturing
New Rolls-Royce chief tears
into underperformance and
strategic weakness
But Tufan Erginbilgic says he sees
huge potential to turn engine maker’s
finances around and reshape business
David Kaminski-Morrow London
New Rolls-Royce chief executive
Tufan Erginbilgic has
given a withering assessment
of the company’s strategic
and financial performance as
it unveiled its full-year results.
R-R has been “underperforming
for an extended period”, Erginbilgic
said during a presentation
on 23 February.
“Cash generation is unsatisfactory.
Our debt is still too high. Too
much of our gross profit is simply
covering overheads and interest
payments. A weak balance sheet
and sub-investment-grade credit
rating limit our ability to invest in
growth for the future.”
Although the company generated
improved results last year, Erginbilgic
says it cannot rely on market
recovery alone to demonstrate
better performance.
He notes that total shareholder
return over the past five years
reached -67%, showing that the
problem is “not just a Covid issue”.
Even excluding 2020 – when the
pandemic was fiercely affecting
businesses – the company’s average
return on capital employed
was just 3.5%.
R-R has recently completed a
benchmark study, says Erginbilgic,
which confirms that its margins are
“below competition” on a like-forlike
adjusted basis.
It has “not had sufficient strategic
clarity” with which to make
its investment choices, he adds:
“Instead, we’ve been trying to keep
too many options open.”
But Erginbilgic says that the manufacturer
has the potential to be
a “much higher-quality and more
competitive company”, and it can
be in a “much stronger position”.
Erginbilgic argues that the company
can still afford to undertake
further cost-reduction measures
despite the extensive restructuring
carried out during the pandemic.
Previous cost-cutting efforts had
focused on civil aerospace and had
been “activity-driven”, he says.
“Demand disappeared, so Rolls-
Royce did what it needed to do,”
he says, adding he felt the company
had taken the right course of action.
But Erginbilgic says that the
costs have returned as the activities
have recovered.
“Cash generation
is unsatisfactory.
Too much of our
gross profit is
simply covering
overheads”
Tufan Erginbilgic
Chief executive, Rolls-Royce
“What we’re trying to do is really
intervene with that, starting from
this year, and create a more sustainable
and more competitive cost
base,” he says.
Erginbilgic says the issue this
time round is not about managing
liquidity, but putting the company
in a better position.
Large engine flying hours for R-R
increased further last year, but remain
35% below the pre-crisis level
of 2019. It expects this gap to reduce
to 10-20% this year with the
easing of travel restrictions in China.
R-R large civil engine deliveries
reached 190 – down slightly on the
195 handed over in 2021 – among
them 44 spares.
Spare engine deliveries accounted
for 23% of the total, above the
typical figure of 10-15%, because
R-R says it is working to “improve
resilience” for the global fleet.
It expects to have a similar
elevated level of spare-engine deliveries
this year and next.
R-R also handed over 165 engines
to the business aviation sector, up
on the previous figure of 114.
Its civil aviation activity for 2022
included large engine orders from
Malaysia Aviation Group, Qantas
and Norse Atlantic Airways, and
the company stands to benefit
from the recent agreement for Air
India’s fleet renewal that included
Trent XWB-powered Airbus A350s.
But Erginbilgic says R-R, despite
the higher figures, is “capable of
much more”, having benchmarked
its performance against peers.
He says a transformation programme
– including a strategic
review – is underway which will improve
efficiency and commercial
outcome and result in a “sustainable
reduction” in working capital.
The company aims to direct
investment priority to the “most
profitable opportunities”, he says,
adding that it will set out its findings
and medium-term targets in
the second half of this year.
R-R will look at cost efficiencies
and obtaining the “right reward”
for the risks it takes, while each
business unit will derive plans to
address “performance gaps”.
“This will require a winning culture,
underpinned by more effective
performance management and a
shared determination to deliver
cash and reduce debt,” says Erginbilgic.
“Our success will enable us to
reward investors for their support
and invest in future growth.” ◗
Rolls-Royce
28 Flight International April 2023