Rolls-Royce sets out ambitious plan to become a profit engine
CEO aims to grow earnings fourfold in five years, driven by a surge in profit margins
London — Rolls-Royce aims to quadruple profit in the next five years by boosting the performance of its jet engines and bearing down on costs in boss Tufan Erginbilgic’s masterplan for Britain’s most prestigious engineering company.
Setting out a strategy that has been almost a year in the making, the CEO said on Tuesday that he would deliver up to £2.8bn in annual operating profit by 2027, four times 2022’s outcome and double its guidance for up to £1.4bn in 2023 .
That would be driven by a surge in profit margins at its civil aerospace business to 15-17% from 2.5% last year.
Erginbilgic, a former BP executive who took over in January, said he will tackle Rolls-Royce’s inefficiencies by focusing on the widebody plane sector, where it is Airbus’ exclusive supplier, business aviation, defence and power systems.
Its electrical-powered aircraft business will be sold in a drive to raise up to £1.5bn from selling noncore assets, he said, while the company could re-enter the single-aisle jet market through a partnership, leveraging its next-generation UltraFan technology.
The biggest driver of profit will be a step change in margins in an engine business that powers nearly half of long-haul aircraft, including all Airbus A330neo and A350 models and some Boeing 787 planes. The new target would bring Rolls closer to rivals such as General Electric, its major competitor in wide-bodied planes.
Erginbilgic said it will be achieved by extending the “time on wing” of its engines between maintenance, reducing the costs of manufacturing and repairs, a new pricing strategy and tackling previous low-margin contracts.
Shares in Rolls-Royce, which have soared 161% in the year to date, gained 6.5% in early deals.
“We are setting compelling and achievable financial targets for the mid-term which will take Rolls-Royce significantly beyond any previous financial performance,” Erginbilgic said.
Agency Partners analyst Nick Cunningham said the targets imply Rolls-Royce is willing to shed revenues in exchange for better profitability. “If so, that is a deeper culture change from Rolls-Royce’s traditional market share optimisation approach of past decades,” he said.
Asked if he is willing to sacrifice market share, Erginbilgic said the company had a 55% share of widebody deliveries in 2022 and he expects that level to continue this year, with growth over the next five to 10 years.
“We will capture market share every year, but in a profitable way,” he said.
Rolls said it will sell noncore assets from across the group and create partnerships if that would create extra value.
Its finances were hit by problems with its Trent 1000 engine and by the pandemic, which grounded long-haul aircraft and wiped out Rolls-Royce’s revenue tied to engine flying hours.
Recovery under Erginbilgic has been rapid, with a five-fold rise in first-half operating profit reported in August, helped by increasing prices for maintaining its engines and tightly managing its cost base.
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