Business Week International International Business: BRITAIN
ROLLS-ROYCE IS LOOKING FOR A TAILWIND (int'l edition)
For Rolls-Royce PLC Chairman Sir Ralph Robins, Jan. 27 was no ordinary day. As the perennial underdog in the cutthroat jet-engine business, Rolls had just spent seven years and an estimated $750 million on a new engine, the Trent 800. On that day, it completed European certification tests three months ahead of schedule. It even clocked 6,000 pounds more thrust than the initial target of 84,000 pounds, making it the most powerful aircraft engine ever certified.
Developing the Trent 800 may have been the easy part. Now, Rolls-Royce needs to translate the success on the test bed into new sales--and soon. The civil airline industry has been stuck in a prolonged recession, and Rolls is up against two fierce competitors: General Electric Co. and United Technologies Corp.'s Pratt & Whitney. The three are locked in a Darwinian struggle to dominate the global jet-engine market.
In the key race, the three companies have spent more than $3.5 billion to develop superthruster engines to power the new Boeing 777 twin- engine jet. While the Trent 800 beat GE and its GE90 to market by several weeks, both were behind Pratt & Whitney. Its PW4084 had been certified several months earlier. The fight for sales will be so tough that some analysts are speculating that the "big three" may become the "big two," with Rolls the one most likely to lose its independence.
SPOTTY SALES. Robins dismisses such speculation, noting that after two years of tightening, Rolls is a more efficient machine. By closing eight plants and slashing the payroll by a third since 1990, Rolls is squeezing out as much as $230 million per year in costs. Although sales fell 10% last year, to $5.1 billion, pretax profits jumped 33%, to $160 million (chart).
To broaden its reach, Rolls late last year outbid GE and Pratt for Allison Engine Co. Rolls paid $525 million, which some say was too high. But Indianapolis-based Allison gives Rolls a U.S. manufacturing base and is expected to help it win both civil and military orders in the U.S. It also enlarges Rolls's range of small engines, including four newly developed turboprops.
But is it enough? GE and Pratt & Whitney also have attacked costs. Many analysts believe Rolls's future rides largely on its new Trent engines. "This product is very important to us," says John P. Cheffins, managing director of Rolls Royce Commercial Aero Engines Ltd.
The quest for market share can get mean. In recent bidding for a Korean Air deal, says a well-placed industry source, Rolls offered free engines and lifetime free spare parts on engines for the airline's new Boeing 777s. Robins denies this: "We are making offers, but we are not giving things away."
So far, Rolls's sales of its big engine have been spotty, amounting to only 20% of Boeing 777 orders. A big blow for Rolls came when longtime customer British Airways PLC opted instead for GE's GE90 for the 30 777s it's buying. However, Robins says the race has just begun, with an industry recovery expected to start in 1996.
WHO'LL BLINK? Both of Rolls's archrivals can wait longer for the upturn. GE has deeper pockets, and it can finance both aircraft purchases and engine sales in emerging markets through its airplane-leasing unit and GE Capital Corp. And both GE and Pratt & Whitney have a bigger base of installed engines, making their high-margin engine-servicing and spare-parts businesses more lucrative.
With margins on new engine sales cut to the bone, "someone has got to blink," says Robert A. Wolfe, head of Pratt's commercial-engine operation. Indeed, Pratt could see its advantage erode as engines are retired because of wear and tear, and as new noise and emission regulations start taking effect. So why wouldn't Rolls link up with Pratt? Analysts point out that together, the two would have about 50% of the world market, just about an equal match for GE and its joint venture with France's Snecma.
Robins says such merger speculation is hogwash. For one thing, he believes a $20 billion market for jet engines is plenty big for three players. "You can be assured we won't roll over," says Robins. "After all, we invented the damn thing." But it takes more than invented-here to turn a profit.By Heidi Dawley in London, with Tim Smart in Hartford