How Rolls-Royce's new CEO took the UK's biggest manufacturer from a 'burning platform' to a 30-year-best stock return in just 12 months
In the space of a year, Rolls-Royce Holdings Plc has gone from being derided as a “burning platform” by its own chief executive officer to achieving by far the best annual return of any company across Europe.
But Tufan Erginbilgic, who took over as CEO in January, says he’s not guided by quick wins, focusing his sights instead into the latter part of the decade and beyond. That’s when the former BP Plc executive says Rolls-Royce’s overhaul will really bear fruit, making the company nimbler and vastly more profitable as a result.
Along the way, Erginbilgic is breaking with old habits. Gone are the days when the jet-engine maker would agree to loss-making contracts, hoping to recoup the money through maintenance work later. Going, too, is a complicated structure as Rolls-Royce combines business functions, cuts jobs and sells assets.
Instead, the biggest UK manufacturer is charting a path with bold bets like its UltraFan propulsion system, a cutting-edge technology that aims to give the company a seat again at the table for single-aisle engines, a market Rolls left more than decade ago.
“Between now and 2027 will be an exciting journey,” Erginbilgic said in an interview. “Frankly, given what we will do in that period, the following period will be a much better growth period for Rolls-Royce.”
Bumpy Road
The road that Erginbilgic has put Rolls-Royce on won’t be without bumps, as some business partners are finding out. Airbus SE has missed out on some big orders for its flagship A350 model as Rolls-Royce, which provides the engines for the planemaker’s largest aircraft, refuses to bend on pricing.
Erginbilgic is adamant that standing firm on pricing won’t just benefit Rolls-Royce but also Airbus in the long term, allowing the enginemaker to continue to spend on new products and deliver returns to shareholders.
Investors already got a taste of the new Rolls-Royce this year, boosting the stock of a traditional manufacturer in a way normally reserved for companies offering new products such as weight-loss drugs or artificial intelligence. The company’s shares, which had been on a downwards trend since 2019, have more than tripled in value, giving Rolls-Royce the best annual return in its three decades as a listed company.
“I’m not actually interested in short-term gains, I would run this very differently if it was about a couple of years,” the CEO said. “I’m very interested in Rolls-Royce being remunerated for the investments we make and the risks we take, and that needs to be fair.”
Steep Cuts
Erginbilgic’s widely cited “burning platform” analogy may have painted Rolls-Royce in an unfavorable light when he took over. But some of the deepest and most painful restructuring had already occurred under his predecessor, Warren East, who spent years pulling the company from the flames during Covid.
With the pandemic now in the past, airlines are purchasing aircraft in record numbers, allowing Erginbilgic to preside over the biggest-ever order haul for his large Trent-model jet engines. The rebound in long-haul travel means Rolls-Royce is on track for its best order performance in more than 15 years, with more than 370 Rolls-Royce powered aircraft set to be ordered by year-end.
The company is also looking to get back into the booming narrowbody market by the middle of next decade, where rival General Electric Co. dominates in a joint venture with France’s Safran SA.
“Heaven knows Rolls-Royce needed a bit of a shakeup,” said Samuel Johar, a headhunter at Buchanan Harvey who knew several of Erginbilgic’s predecessors. “He is certainly the right man for the job at this moment in time.”
With demand soaring, Rolls-Royce said last month it was on track to achieve free cash flow of £900 million ($1.1 billion) to £1 billion for the full year. The company’s debt has been upgraded by Fitch Ratings and Standard & Poor’s, with Fitch dangling the prospect of restoring the manufacturer’s investment-grade credit rating.
Erginbilgic says a strong financial footprint will allow the company to invest in its flagship UltraFan engine, moving ahead to flight testing in the next four years. The engine features carbon composite fan blades and a small core, making it more powerful and efficient at the same time.
Dubai Drama
Still, there are risks to the rebound. With ambitious targets for future performance — the company expects to achieve operating profit of as much as £2.8 billion and free cash flow of as much as £3.1 billion by 2027 — the pressure is on to meet those goals.
And airlines have begun pushing back against rising costs. In return, the CEO’s tough approach on pricing has riled some airline leaders used to getting their way.
That conflict was on display at last month’s Dubai Air Show, where heavyweight Emirates got into a bust up with Rolls-Royce about what its president termed “defective” engines on the A350-1000 variant. Erginbilgic didn’t show up at the event, leaving partner Airbus to ride out the public humiliation.
Erginbilgic acknowledged the risk inherent in taking a tougher stance with customers and said he’s aware of not pushing it too far, saying he’s seeking “sustainable relationships.”
David Perry, a JP Morgan analyst who dropped his “sell” rating in August and is now overweight on the stock, said that while the renewed focus on pricing is a “real game-changer” for Rolls-Royce, he’s keeping a close eye on the impact on customer relationships.
“This is quite a small market, much smaller than the narrowbody market, there’s probably 20 airlines that buy widebodies in any meaningful number,” said Perry. “If Rolls pushed it too hard and we felt they were losing a lot of market share, investors would be worried.”
