01 Jun 15. In the first of two views on Rolls-Royce I will today look at what the company does and what it stands for. In the subsequent piece later this year I will look more at future power related technology and strategy, programmes and challenges ahead in the relentless pursuit of improvement. What follows is not intended to be considered a comprehensive account of Rolls-Royce – this is after all a massive global company that never stands still – but it is meant to be something of a guide and view as to the relevance and huge importance of Rolls-Royce as it is today:
Ask what Rolls-Royce does and probably the best answer is that it creates power. Recognised globally for its long time strength in industrial high end technology and advanced engineering the company designs, develops, manufactures and services integrated power systems for use in the air, at sea and on land.
As one of the world’s leading producers of aero engines for both civil and military use, world leader in fuel efficient, high speed diesel technology and reciprocating engines, a significant player globally in marine propulsion and operating systems and with substantial engagement in nuclear equipment business Rolls-Royce is unmatched in power based equipment scale and reach.
With a deep understanding of engineering materials, electronics, data managements and services that can be applied across all segments of the group the overall power systems strategy is based on continuous improvement through investment in product, people and business.
Operating in civil aerospace, defence, power systems, marine based activities that include naval, merchant and offshore plus also having the world’s largest portfolio of power, propulsion, complex positioning systems and deck equipment and nuclear, including both civil nuclear power generation and nuclear powered submarines Rolls-Royce strategy today is based around two strong technology platforms, gas turbines and reciprocal engines.
The common denominator across all parts of group is the pursuit of excellence combined with the ongoing commitment to innovate in order to develop the most efficient power systems in the world. This presents its own challenges just as it also provides the constant threat of risk. Success in technology and high end engineering does not come cheap. To stay ahead and retain what has been a hard-earned global market position has required a constant and ongoing process of product design and innovation. There are no short cuts at this end of the engineering and technology divide. Innovation requires long term investment and strategic thinking and planning that looks ten and twenty years ahead to what market requirements will be. In an investment world these days that prefers short term reward this presents its own set of challenges to a company like Rolls-Royce. It requires a strong board and strong leadership from the top.
In April Rolls-Royce announced that John Rishton who had succeeded Sir John Rose in the position of CEO in April 2011 would stand down from the position of CEO on July 2nd this year after four years in the role. Rishton will be replaced by Warren East who had, until 2013, been long-time CEO of the highly successful UK based technology company Arm Holdings. Warren East takes on the company at a particularly interesting time. With the acquisition of Tognum, a major German based industrial holding company specialising in power systems and that brought MTU into Rolls-Royce stable, now fully integrated and with production of the huge next generation family of Trent XWB engines now underway and for which Rolls-Royce has over 1,500 on order the company can move forward into a new era with great confidence. Although I can have no knowledge of intention at this stage I doubt that under the new CEO there will be any large scale change in an overall strategy that has served Rolls-Royce so well since it was originally put in place by Lord Tombs and Sir Ralph Robins back in the 1980’s and was to be further developed and enhanced by Sir John Rose and John Rishton in subsequent years.
With strong fundamentals built on the back of a sustainable investment led strategy suffice to say here that Rolls-Royce delivers a range of power based systems that are second to none. It is a whole systems integration approach in which scale provides resilience that in turn helps fund more research and development. At its heart are four basic principles, Customer, Concentration, Cost and Cash.
Rolls-Royce knows only too well that it cannot afford to stand still or rest on its laurels. To move forward and to continually break new ground means that there can be no let-up in investing in the business, its people and innovation.
With a sound balance sheet and annual revenue exceeding £14,6bn for 2014 of which £6.8bn was attributed to civil aerospace it is worth noting that revenue has risen by 2.5x since 2004 while profits have risen by 4x over the same period.
As a guide 52% of Rolls-Royce revenue emanates from original equipment supply and 48% from customers services or what we used to term aftermarket. The growth in services over the past decade is reflective on several factors not least of which has been innovative concept of offering commercial airline customers the concept of ‘TotalCare’ which is based on reducing potential customer risk through providing ‘power by the hour’ use of engines.
With customers in more than 120 nations around the world and a forward order book, including the latest Emirates order, that I could estimate that by year end could be close to or even exceed £80bn, Rolls-Royce looks set fare to continue enjoying significant success. In terms of employment the company now has 54,000 people working in over 50 plus countries internationally.
Whilst it is true that Rolls-Royce has over the past year suffered a decline in revenue and profit performance due to a variety of issues that impacted on the company including western sanctions placed on Russia, falling oil prices hampering customer investment decisions, contract award delays, western defence cuts combined with restructuring costs. Profit warnings last year and the early part of this year combined to dim investor confidence. However, I am in little doubt that from a financial performance perspective Rolls-Royce will bounce back next year and return to growth. The overall strategy of Rolls-Royce management and that has in my view been consistent to its growth and success over the past twenty years is certainly not in question although I accept that delivery of the communications aspect probably is. To the credit of senior management Rolls-Royce has accepted that it must improve communications with investors and I believe that it will certainly deliver on that promise.
So what is Rolls-Royce today and where is the company in the international market place? The answer is the second largest manufacturer of gas turbine engines in the world. With a vision that is based solely on delivering better power for a changing world it may be said that the overall aim of the Rolls-Royce strategy is to provide the finest, most technology advanced power systems in the world. To achieve set objectives required serious research and technology investment, innovation and investment in facilities, people and product. Engineering on this scale can never be completely risk averse and fostering the can do, will do approach is of necessity built into Rolls-Royce culture.
Rolls-Royce covers what we may comfortably describe today as the whole spectrum of power related product. This cover a multitude of activities ranging through commercial and defence aerospace, power systems, marine and nuclear. Having what most consider to be a well balanced portfolio of interests Rolls-Royce can today be considered as being not only the second largest producer of civil aircraft gas turbines in the world but also the world leader in fuel efficient, high speed diesel technology. In the civil aerospace sector Rolls-Royce has in excess of 13,000 engines in service around the world today powering 35 different aircraft types.
Today Rolls-Royce can rightly be considered one of the largest and most successful engineering companies operating in the UK. But it is also important to realise that Rolls-Royce is a global company manufacturing in various ‘home countries’ such as the US, Germany, Singapore, marine based businesses in Scandinavia plus many joint venture operations including with Hindustan Aeronautics in India, a partnership that has now existed for well over sixty years. Rolls-Royce has approximately eighteen regional offices around the world.
In terms of the largest divisional activity, civil aerospace, little more than a month ago Rolls-Royce received the largest and most significant order ever received in its long 109 year history. This was an order from Emirates Airlines for Trent 900 engines to power 50 of the four engine A380 super jumbo aircraft that the Dubai based airline now has on order from Airbus. Including Total Care the reported value for this important Trent 900 order was $9.2bn. It also confirmed Trent 900 as the A380 engine of choice with a market share for Rolls-Royce of in excess of 50%.
Rolls-Royce is a company that has got where it is today through vision, guts, determination and huge ambition. It is a company that has delivered on its promises and has grown very well on the back of an investment and innovation based approach.
The road to success has been long and hard and in a world that increasingly demands more to be spent by the industry to meet ever increasing environmental concerns there is no room for complacency. Even so, such is the advance in technological achievement as witnessed by the success of the latest Trent XWB development for which over 1,500 engines are now on order I am probably entitled to believe that ever increasing environment regulations play very well into Rolls-Royce established technology strengths.
With 15,500 engineers worldwide, annual investment in research and development in excess of £1.2bn and with the company working within no less than 31 University Technology Partnerships there can be little doubt that Rolls-Royce is determined to remain at the cutting edge of all the various technologies in which it has already established world leading positions. It continues to look for more as well and it is worth noting that with an average of 600 patent applications being submitted each this this number is by far the largest of any established UK company.
The Trent 900 engine is also now being produced in Singapore on a 154,000 square meter site that was opened by the Singapore Prime Minister. Lee Hsien Loong early in 2012. The facility includes capacity to build up an initial 250 Trent 900 and Trent 1000 engines per year. Singapore is also producing Wide Chord Fan Blade and contains an Advanced Technology Centre and Regional Training.
Leaving the corporate jet market aside for which the company produces the BR700 family of engines of which more than 3,000 have so far been built together with the AE 2100 and 3007 turboprop range here are the main civil aircraft engines in the Trent family that are in production by Rolls-Royce today. It is worth noting that combined and including the Trent 500, well over 70 million flying hours have been completed by engines within Trent family.
More than 1,500 Trent 700 engines are now in service worldwide or on order primarily on the hugely successful Airbus A330 family of aircraft for which it is the market lead power unit. Producing best performance, fuel burn, low emissions and noise compliance Trent 700 is recognised for both its efficiency and reliability in airline service.
Available with thrust ranging from 75,000 to 95,000lbs there are over 500 Trent 800 engines in service on some 220 aircraft operating today. The engine is the market leader on the Boeing 777 where it powers the 200, 200ER and 300 variants of the aircraft and has achieved a 41% market share.
Excluding the most recent order from Emirates which is already detailed the Trent 900 fleet already comprises approximately 300 engines for the A380 aircraft in service for which it is the engine of choice. In fact 11 of the 17 aircraft who operate the A380 have opted for the Trent 900 and over 4 million flying hours have already been achieved. The engine is certified at between 70,000 and 80,000lbs thrust and has the well-known features of low fuel burn, low noise, low emissions and low weight. The Trent 900 also has Engine Health Monitoring (EHM).
The fifth generation of Trent the 1000 was selected as the launch engine for the Boeing 787-8 ‘Dreamliner’ aircraft and more recently for the 787-9 variant. Producing up to 78,000 lbs of thrust the engine has already achieved a 60% market share on the 1,104 number of 787 aircraft ordered or delivered so far.
The engine of choice for the new generation of Airbus A350 XWB aircraft over 1,500 Trent XWB engines are already on order from Rolls-Royce. A lightweight three-shaft design with low fuel burn, weight savings of 15% plus aerodynamic efficiency improvements via use of compressor blisk technology.
The seventh generation of Trent this will be the exclusive engine supplied to the Airbus A330neo aircraft reducing fuel consumption by 10% and further reducing noise.
In large commercial aircraft engines operating on aircraft such as the Airbus A330, A350-XWB, A380 and the Boeing 787 Rolls-Royce has built up a commanding 55% global market share. By any standards of imagination that must be considered a great success. Note too that in determining the need to get closer to its vast range of international airline customers the company has a revenue mix of 48% original equipment to 52% customer service and aftermarket. Power by the hour plays a part in this success.
As the second largest supplier of aero engines to the military the company has approximately 16,000 engines in service with 160 military customers operating in over 100 countries worldwide. Again this is a formidable achievement and it has come about because Rolls-Royce has pushed barriers to produce innovative technology combined with and product excellence. An excellent example of this is the EJ200 engine that powers Eurofighter Typhoon and for which there is universal applause from pilots who fly the plane as well as military operators. The EJ200, a collaborative partnership through EUROJET that includes MTU, Avio and ITP which is led by Rolls-Royce.
Employing over 9,000 people in North America 7,000 of whom work in 26 US States manufacturing whole engines or engine components Rolls-Royce is a major player here. Of note is the production of T-56 engines and supporting of the already massive in-service inventory of Lockheed Martin C130J military airlifters for which the Rolls-Royce Allison has long been the sole supplier together with marine propulsion including providing gas turbine power units for the Littoral Combat Ship plus many other power related systems.
In collaboration with MTU, Snecma (Safran) and ITP Rolls-Royce is also engaged in the production of the TP400-D6 aircraft for the Airbus A400M airlifter of which approximately 750 engines have either been produced or ordered.
Importantly while the company continues to build the EJ200 engine for Typhoon and support the many RB199 engines fitted into the Panavia Tornado the company is heavily engaged building the Rolls-Royce Lift System that is used in the ‘B’ variant of the F-35 Joint Strike Fighter aircraft.
Marine and Power Systems
Away from commercial and defence gas turbines Rolls-Royce has no less than 800,000 power systems in service across marine, industrial, rail, defence, energy and off-road markets. With the world’s largest portfolio of power, propulsion complex positioning systems and deck equipment suffice to say that in the Offshore, Navy and Merchant vessel ship power arena the company has over 4,000 customers and equipment on over 25,000 vessels.
Various acquisition have been made over the years in the US and Europe including more recently Tognum in Germany, which is the largest to date. Importantly Tognum brought the MTU brand of high-speed engine and propulsion systems for ships, rail, heavy land, oil and gas industry and specialist defence vehicles into the Rolls-Royce portfolio. In terms of the Tognum/MTU acquisition I have yet any of these large and successful activities so will keep my powder dry. But what I will say is that bringing diesel based power back into Rolls-Royce was an exceptionally smart move.
Through the acquisition of Vickers back in 1999 and with it KaMeWa in Sweden Rolls-Royce is one of the largest and most successful manufacturers of controllable pitch propellers in the world. The company is also Europe’s largest manufacturer of rotary vane and actuator type steering gear for large vessels and also all forms of ship braking.
While Nuclear may be the smallest of the primary considered Rolls-Royce activities here it is worth noting that the company has and continues to be involved in approximately half the world’s civil nuclear reactors. Indeed, with civil nuclear equipment and services markets now estimated to be worth £220bn over the next 20 years and that of reactor support services being potentially valued at £140bn through the same period I take the view that there is no shortage of opportunities to look forward to in this segment. Furthermore, with the UK Trident replacement ‘Successor’ programme moving forward there would seem to be a steady stream of potential business in this segment for many years to come.
The above comments are but a brief description of what Rolls-Royce is and what it does. There are many aspects that I have no doubt missed.
The Future – Market outlook?
The benefits of having a balanced portfolio will play to the strengths that Rolls-Royce already has in abundance. The basic points for the future are that long-term and growing markets are and will be driven by increased travel and trade by both land and sea. Population growth and urbanisation will drive further demand for energy on land whilst environmental regulatory requirements can be expected to play into the technology based strengths.
In Civil Aerospace the global market for equipment and services is estimated at $1,900 billion over the next 20 years. Further growth in engine deliveries can be expected to drive what is put by the company as a $650 billion services market over that same period.
Importantly in terms of civil aerospace more than 90% of Trent engines are covered by long term service agreements such as TotalCare.
In Defence the equipment market is estimated to be worth up to $150bn over the next 20 years and the service support market worth $250bn over the same period. The period of defence cuts is drawing to a close and customer demands for greater efficiency and to be able to do more for less will less will play a part in future income growth. Again, this is about supporting a long term equipment supply just as it is for governments to need to think long term about for defence and security requirement. Innovative solution involving the private sector to do more will be required.
In Power Systems the outlook is also very positive. According to Rolls-Royce the total market for reciprocating engines is estimated to be around £500bn over the next 20 years and that of services worth as much as £150bn.
In Marine the figure is put at £170bn with services at £80bn over 20 years. While Marine is a fragmented market Rolls-Royce have a very well established position.
Similarly the market outlook for civil Nuclear is put at £220bn over the next 20 years and that of Reactor support services is potentially valued at £140bn over that time span. In military nuclear powered equipment the UK Trident replacement (Successor) programme is expected to provide a stable and ongoing revenue stream in the years to come.
CHW (London 1st June 2015
Howard Wheeldon FRAeS
Tel: 07710 779785