Rolls-Royce Holdings Plc’s appointment of Warren East as chief executive officer suggests the aero-engine maker will embark on a new era of engineering innovation as its existing products mature and rivals target markets where it no longer competes.
While the backlog of Trent engines for long-haul aircraft will spur profit for years, scope for further developing a program introduced soon after Rolls-Royce was privatized in 1987 is limited. At the same time, the company is now absent from the narrow-body sector where the next wholly new aircraft are likely to emerge in a decade’s time.
Unlike the engine arms of General Electric Co. and United Technologies Corp., Rolls-Royce lacks the backing of a conglomerate or even a joint venture through which to spread development costs. In East, an engineering graduate who made ARM Holdings Plc a world-leading semiconductor designer, it has snared a CEO whose whole career has been built on cutting-edge research and development.
“I call it David and Goliath,” Rolls-Royce Chairman Ian Davis said on a call with analysts after East’s appointment. “We’re up against some very big beasts. Warren has demonstrated just what it takes to succeed like that.”
Job cuts and restructuring aimed at avoiding a repeat of the reduction in earnings guidance that dogged London-based Rolls-Royce last year -- and weakened the position of outgoing CEO John Rishton -- will be high on East’s agenda when he takes over in July, as will the need to ramp up production in order to meet delivery commitments to Boeing Co. and Airbus Group NV.
Yet more strategic decisions on the company’s place in the narrow-body engine market, developing new technologies to power the next generation of aircraft and mapping out a successor to the Trent program are likely to define East’s career.
Rolls-Royce has been so successful in tapping Trent because the series of engines is based around a common core, allowing it to make enhancements without starting from scratch. All the same, production for Boeing’s 787 and the Airbus A350 and A380 stretched resources thin, preventing it from competing in the single-aisle sector simultaneously.
No new wide-body aircraft are now planned for years to come, with manufacturers instead tweaking existing engines to deliver improved performance. Rolls-Royce has agreed to provide an upgrade for the Airbus’s A330, and could do so on the A380 jumbo, while GE has an exclusivity agreement to power a Boeing 777 upgrade.
The company is currently developing a concept engine, the RB3039, as a potential successor to the Trent. The model will likely be Rolls Royce’s first modern powerplant with a composite fan to cut weight and improve efficiency.
Also on East’s agenda is Rolls-Royce’s absence from the narrow-body sector, focused on the Boeing 737 and Airbus A320 workhorses, where UTC’s Pratt & Whitney and the CFM International venture of GE and Paris-based Safran SA dominate.
The U.K. company had a foothold in the market until four years ago, when it quit the International Aero Engines consortium and sold its 32.5 percent stake to partner Pratt for $1.5 billion. Pratt has gone on to develop geared-turbofan technology as the basis for its next engine in the sector.
With the short-haul aircraft representing more than 70 percent of the market by volume and about half by value, Rolls-Royce is itself now working on new technology. It at least has a breathing space after Boeing and Airbus chose to offer revamps of the 737 and A320, with all-new narrow-bodies not likely to debut until late next decade.
That might mean bidding to power a new plane “in the early 2020s,” Sanford C Bernstein analysts said this week, while cautioning that “should the company choose the go-it-alone strategy we would expect a new narrow-body engine project will require significant investment.”
Pratt & Whitney had signed a joint agreement to work on future single-aisle technologies with Rolls as a relic of the agreement to break up IAE, though that accord was scrapped in September 2013. Rolls-Royce may work on developing so-called “open rotor” concepts but hasn’t ruled out other technologies.
East must map out Rolls-Royce’s future in the civil-engine sector while considering investor calls for a possible breakup that could see it exit land and marine engines. Rishton sought to expand in that market with a failed bid for Finland’s Wartsila Oyj.
Davis, while keen to reaffirm a commitment to a restructuring, was in no doubt that East had ultimately been brought in to expand Rolls-Royce, praising his “deep understanding of technology and of developing long-term partnerships.”
“There is a lot of opportunity to improve our operational efficiency and to restructure the manufacturing, but by far the bigger part of the story longer-term is growth,” Davis said. “Warren really, really epitomizes what it takes to build a global business.”