Rolls-Royce, says its finance director David Smith, is “seeing the negative effects of a very successful outcome last year”. For sure, to be a victim of success is better than being a victim of failure, but it would be happier times for the world’s number two aero engine maker if the challenge of managing an output gap between two Airbus programmes was the end of it.
Smith, detailing the whys and wherefores of a fourth profit warning in 18 months, was referring to a looming decline in Trent 700 sales as Airbus winds down the A330 programme, where orders are 84% Rolls-powered, and readies the A330neo, a hot seller that Airbus last year declared would be offered exclusively with the 700’s successor, the Trent 7000 – which will enter service from 2017.
But doth Rolls-Royce protest too much? There are, after all, some very attractive upsides for the core widebody engines business. Airbus is ramping-up production of its blockbuster A350 programme, powered exclusively by the Trent XWB. Boeing has hundreds of Trent 1000-powered 787s to deliver.
The Trent 700-to-7000 transition is not, in fairness, a small matter – and it is not the full extent of Rolls-Royce’s troubles, many of which flow from a marine business that many investors would like shot of. But the episode casts light on three problems at Rolls, all of them serious and all of them related.
Essentially, the company does not make enough money, the company does not invest enough money and the company may well be too diverse. Deciding what to do about these matters, and working out whether management has enough grip on quality and process control, is surely a priority for new boss Warren East.
East, who took over at Rolls the day before last week’s profit warning, knows a thing or two about competing successfully against industry behemoths: in his previous job as head of Cambridge-based microprocessor maker ARM he turned the British pretender into a serious rival to giants like Intel. That experience should serve him well in battle against GE, his new nemesis.
East will be keenly aware that while Rolls-Royce is a powerhouse, GE is half as big again – and much more profitable. When trying to manufacture cutting-edge products rapidly and to perfection while pushing the limits in research and technology, size matters.
Rolls-Royce is probably good enough – but is it big enough? If not, it needs more capital. To get that, East will need to show investors that more cash will actually turbocharge profits.
Source: Flight International
