It is hard to believe that today, the 28th of April 2017, marks the thirtieth anniversary of what in stock market parlance we used to ‘Impact Day’ – the day that in this case when the shares of aero-engine manufacturer, Rolls-Royce were floated on the market for the first time since the company had been nationalised in 1971.
As an equity analyst through the 1980’s and all the way through until 2012, Rolls-Royce together with GKN and BAE Systems, have been ‘the’ three companies that I both admired and known best. Indeed, in my former guise and as a then service based supplier to the former Rolls-Royce Ltd, I well remember the very unfortunate events that led to the nationalisation of Rolls-Royce on the 4th February 1971 as if it was yesterday and of personally attending the creditors meeting in London shortly afterwards.
With so much having been written on the events that led up to the collapse of Rolls-Royce Ltd in 1971, I do not propose to add further comment here. I was 23 at the time, already a director of a private business and naturally, you will understand that I have many personal memories of that very awkward period of time for Rolls-Royce, its creditors and former shareholders. Declaring itself bankrupt, as Rolls-Royce had chosen to do on the back of unsustainable costs of developing the RB-211 engine, was thankfully not to be the end of Rolls-Royce though. It would however mark of steep change that would eventually lead to Rolls-Royce becoming a powerful world leading player that it is today. We should also recognise that such was the considered importance of Rolls-Royce by the then Heath led Tory Government in respect of its value to the economy, to skills, to sovereign capability and to employment that they should rightly chose the option of nationalising the company that they did. Divested of the motor-car manufacturing interests which were sold to Vickers, under the guidance and leadership of Chairman, Sir Kenneth Keith (later Lord Keith of Castleacre) and of Managing Director, Kenneth Wilkinson, the fortunes of this very important company quickly began to be turned round.
By the time of its privatisation Rolls-Royce was producing strong profitability. Impact Day – the 28th April 1987 – was a quite amazing time and one that by now wearing my professional stockbroking/analyst hat, is one that I relished. The shares were floated at 170p and I seem to recall that the Guardian said of Rolls-Royce at the time, “Rolls-Royce is the flashiest piece of family silver that the Thatcher Government had put up for sale”. The company it said “has the glamour of a global mega brand and the go-go promise of high tech”.
With hindsight these were to be well chosen words. Rolls-Royce was, as its then highly respected Managing Director, Ralph (now Sir Ralph) Robins said at the time, “returning to where we should be, on our own two feet”. Chairman Sir Francis (now Lord) Tombs said that “Rolls-Royce virtually went to sleep for sixteen years. It wasn’t their fault, they just couldn’t get [government] decisions fast enough [at the time]”.
By the time of the privatisation RR aero engines were in service with 270 airlines worldwide and by contrast, today the company’s engines power more than 35 types of commercial aircraft with in excess of 13,000 engines-in-service around the world. Back then the company had a mere 8% share of the global market for commercial aircraft engines but by the end of the current decade RR will have a near 50% global market share of wide-bodied commercial aircraft engines.
Between them, Ralph Robins who had joined the company back in 1955 and Francis Tombs who had joined the company as a non-executive director in 1982 (Tombs became Chairman in 1984 on the death of Sir William Duncan) created a strategy built of strong research, development and design, creating efficient facilities in which to build and sell engines at a competitive cost and by selling more and more engines, growing market share. Making commercial engines is a very costly business and the profit comes through the lifetime that the engine will be working for the airline. Call it incremental revenue if you like, but it is a strategy that has worked very well for Rolls-Royce.
In the years that followed Rolls-Royce has gone from strength to strength although the route to success was littered with a time requirement that an investment community operating through the 1990’s had become far too used too and of necessity to them, were seemingly interested only in short-term pay-back of investment made conditions tough for a long-term company that by nature Rolls-Royce had to be.
On Tombs retirement In October 1992 Robins became chairman and the CEO position was taken by Sir Terry Harrison who had come into the company through the acquisition of Northern Engineering Industries. On his retirement in 1996, John, (later Sir John) Rose and who had joined the company in 1984 was appointed CEO. Between them, Robins and Rose pushed forward with redeveloping Rolls-Royce into a global leader in commercial and defence aero-engine industry. Over the years Rolls-Royce placed additional emphasis on developing power, marine, nuclear and more latterly, its diesel engine activities. Apart from Northern Engineering Industries, the company also acquired the Allison Engine Company in 1995 and Vickers in 1999 and more recently, Tognum which brought MTU into the Rolls-Royce stable. The latter forms part of the Marine & Industrial Power activities.
Rolls-Royce has come a very long way over the past thirty years and it has run into more than a few problems as well. The analyst community was always quick to criticise and there have been periods when it felt as if Rolls-Royce had few friends in the ‘City’. I was rare as being amongst those that took a very different view of Rolls-Royce long term and amongst whatever successes I had during my 28 years in the ‘City’ my sometimes single handed support of Rolls-Royce will always stand out as being my proudest achievement.
While it is reasonable to say that Rolls-Royce performed very well in respect of earnings, dividends and cash flow through most of past seventeen years it is true that the last three years have proved difficult requiring more radical action to be taken. There have been some other regrettable issues that have also needed to be properly addressed by CEO Warren East. Today the task of placing Rolls-Royce into what I am sure will, following two more years of effort to ensure that the company can become more efficient and competitive together with being stronger financially and having excellent earnings potential, is well underway. Personally, I have no doubt that Warren East and his team will complete the task that they have set out to do over the next two years and that when the job is done, Rolls-Royce will be seen for what it is – a truly great UK based international company and one that has a superb future ahead of it.
I have had the pleasure to know personally all of those mentioned above and that have played a part in ensuring that Rolls-Royce not only survived but that it also prospered. I look forward to observing the next few years of development as new engines such as Advance and UltraFan that follow in the history of highly successful power plants such as the RB-211 and that in turn led to the development of the even more successful current generation Trent family of engines come on stream. Neither do I ignore the strength that Rolls-Royce has achieved military engines such as the RB-199 and EJ200 engines that power the Panavia Tornado GR4 and Eurofighter Typhoon respectively and of course the vita part that Rolls-Royce technology plays in the F-35 (B) STOVL variant of the Joint Strike Fighter.
Here’s to the next thirty years of success of Rolls-Royce.
CHW (London – 28th April 2017)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785