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Rolls-Royce – Protecting the Future By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

 

 

 

 

Having warned earlier this month that the impact of the COVID-19 pandemic was likely to lead to a smaller commercial aerospace market, one that along with the major aircraft manufacturers and many large airlines, Rolls-Royce viewed would take “several years” to recover and having already placed 4,000 of its UK based employees on the government ‘furlough scheme’ few will have been that surprised by the announcement this morning that the company plans to cut 9,000 jobs from its commercial aerospace division.

Sad though this clearly is, in doing so Rolls-Royce is not only doing what it needs to do in adjusting capacity to meet anticipated short to medium term demand but acting now to protect its longer-term future and ensuring that it has positioned itself to meet lower demand through the length of the current crisis and yet remain sufficiently fit for purpose when recovery eventually comes.

Clearly the years ahead are going to be more  difficult in the aerospace industry that any of us could have imagined just three months ago and while those at the leading edge are right to rebase capacity on adjusted order expectations, it is equally important that they remain ready for the upturn whenever that comes. 

While it may well be that the aerospace manufacturing and the wider commercial aviation industries face a period of five difficult years ahead before the industry recovers to where it left off the bottom line is that we really don’t know how long it will take and none of this takes account of how the aviation industry will in the meantime innovate to speed up the process of recovery. Remember too that economies rely on aviation and people will need to fly because there is no alternative. The same argument applies in respect of cargo.

Nonetheless, companies such as Rolls-Royce cannot stand still and they must adjust capacity downwards to meet lowering of demand. As a world-class manufacturer of very specialist technology along with being one of the largest and important manufacturing companies based in the UK, the plan to cut what amounts to one-fifth of its total global workforce of 52,000 is not only a response to a collapse in global air travel and expectations that recovery may take many years but also an approach that confirms the intention to be ready and fit for purpose when the demand situation improves.

The measures announced by Rolls-Royce today combined with other actions previously announced are intended to reduce company’s cost base by around £1.3 billion per year. Additional actions may well be taken but in my view that will not involve any change in overall strategy.

Could the government do more to help? This is a long-term industry and speaking on BBC Radio 4 this morning, CEO Warren East said that companies could not expect the government to continue ‘furlough’ schemes for several years and that the companies such as Rolls-Royce had to take actions to safeguard its own future.

Companies such as Rolls-Royce and Airbus must also do what they can to protect their respective supply chains just as they must also ensure that they retain the necessary skills they require for the future. Protecting the supply chain is crucial and that is perhaps where governments can and should do more in order to ensure that when we do come out of this crisis, crucial industries such as aerospace manufacturing have the necessary capacity and skills that they will need. 

With an estimated 16,000 of the world’s commercial aircraft grounded and stored, airlines doing whatever they can to delay delivery of ordered aircraft, cancel orders, some airlines falling into administration, many older aircraft now placed into store unlikely to fly again, commercial aircraft and engine manufacturers along with all those engaged in the important supply chain have been forced to act to ensure survival.

With Scheduled airline flights reportedly down by an average 65% compared to where they had been just three months ago governments may need to do more to protect the wider aviation industry. Indirectly, by providing financial support and other assistance to the wider aviation industry such as airlines governments will also be seen to be providing reassurance and additional confidence for the aerospace manufacturing industry as a whole. 

In the meantime, Boeing and Airbus have been forced to cut aircraft production and to cut staff and I suspect that in the months ahead we will see more job cut announcements across the sector and particularly within the aerospace supply chain.   

Never in the history of the aerospace or wider aviation industries have we witnessed anything like this and my view is that despite the hurt and the shock to those it will involve, Rolls-Royce has been absolutely right to propose such radical action and adapt now in order to safeguard its long-term future.

Confirming that the company had not yet concluded on “exactly” where job losses would occur and that it would soon begin consultations with trade unions, Warren East said earlier that “This is not a crisis of our making but it is a crisis that we face and must deal with”.

From a global perspective approximately two-thirds of Rolls-Royce employees are based in the UK spread across seven highly invested manufacturing sites which include Derby, Washington (Tyne and Wear), Rotherham, Scotland and with defence operations centred in Bristol.

While the company has said that it will review its future manufacturing footprint there are as yet no plans to alter the current portfolio of manufacturing locations. Neither, do I believe that there will be any change in overall corporate strategy.

With an estimated 16,000 of the world’s commercial aircraft grounded and stored, airlines doing what they can to delay or cancel aircraft and many of the older aircraft now in store unlikely to fly again, commercial aircraft and engine manufacturers along with all those engaged in the important supply chain have been forced to act to ensure survival.

CHW (London – 20th May 2020)

Howard Wheeldon FRAeS 

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

@AirSeaRescue  

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