During his eight years as chief executive of Rolls Royce (RR.), Warren East had to face a series of crises. Some had been inherited; others came from external events. The most recent was the pandemic, which grounded international air travel – the generator of much of the group’s revenues. Rolls had to borrow heavily to stay afloat and introduced a radical restructuring, which cut 9,000 jobs in an attempt to save £1.3bn.
In his last trading update, for the period up to 31 October 2022, East emphasised the progress being made. “The continued recovery in large engine flying hours, record order intake in Power Systems and resilience in the defence business give us confidence in the future,” he said. “Our expertise and strong positions in established markets and investment in new markets place us well to pursue decarbonisation, net zero and evolutionary technologies that can create substantial long-term economic and social value.” A disposal had enabled the group to pay back a £2bn loan. Its debt had now become more manageable. Contracts were being renewed, orders were increasing, particularly in the Power Systems business, and the group was investing in new technologies. Despite Brexit, Rolls will be a partner in six of the 20 aviation research and innovation programmes being funded by the EU.
Its more recent media releases glowed with optimism: “Rolls-Royce supplies large-scale battery storage... to stabilise the Dutch power grid” reads one. Another said that it’s developing hydrogen as a means of storing electricity as well as powering aircraft. East expected its investments in electric aircraft and small modular nuclear reactors to produce annual revenues of £5bn by the early 2030s. It was all very reassuring. Rolls-Royce was coming out of the mire, and it was transforming itself at the same time.
Not so, according to his successor, Tufan Erginbilgic. “Every investment we make, we destroy value,” he told employees in late January. “We underperform every key competitor out there.” He said that investors were losing patience with the group. “This is our last chance. We have a burning platform... it cannot continue.” And then, as if trashing East’s record, he said: “Rolls-Royce has not been performing for a long, long time... Let’s be very clear. Covid created a crisis, but the issue in hand has nothing to do with it.” His message was hardly morale-boosting; the Financial Times described it as “brutal”. It was as though they were all doomed.
There had been rumbles last July, when Anita Frew, who chairs Croda (CRDA) as well as Rolls Royce, said that East’s replacement need have no experience of aerospace as long as he or she was “used to a big global complex industrial business.” Industry experts raised concerns. If neither of the top two senior positions came from the industry, how well would they understand how the long investment cycles work in this business? Would they succumb to seductive short-term solutions that disguised damaging long-term consequences?
She later justified Erginbilgic’s appointment by saying that he has “extensive strategic and operational experience and a firm understanding of safety-critical industries, including aerospace, as well as the challenges and commercial opportunities presented by the drive for low-carbon technologies.” He was recruited from Global Infrastructure Partners, a private equity firm known for its management of energy transition in large-scale investments, especially in energy and transport. Before that, he had worked at BP (BP.) for 20 years, where he invested in biofuels and set up partnerships for charging electric vehicles. He was, Frew said, used to leading “winning teams within complex multinational organisations”.
For Erginbilgic, a high-performance culture has no room for businesses that generate low returns. Jam tomorrow might never come. Employees need to “think differently, act differently, make a difference so this business corrects itself. We don’t have much time”. Rolls-Royce has traditionally sold its engines cheaply, and then made money from maintaining them according to how long they are in the air. He seemed to claim that this model doesn’t work. He was reported as saying that, even before the pandemic, its civil aerospace division was failing to generate adequate returns in either cash or profit. That suggests that the problem might persist even if long-haul travel numbers increase again. Some fear more job cuts.
Erginbilgic was probably trying to shake employees out of complacency by urging them to focus on the bottom line. A hard-headed objective analysis, or a naïve conclusion by an inexperienced outsider? There could be another reason. The best game plan for chief executives is to underpromise and overdeliver. Longer-serving ones such as East need to balance this by conveying optimism to justify their past performance; new ones prefer to lower expectations by finding faults wherever they can. It’s called kitchen-sinking. Whether or not Erginbilgic is an extreme example, investors seem relatively unfazed: the share price fell only slightly in response to his comments. The danger is that he might mean what he says.
