Rolls-Royce, at Your Service

Careful attention to customers is key to the British company's rebound in commercial jet engines. Can that give it the edge over GE?

The operations room at Rolls-Royce's sprawling facility in Derby in the English Midlands houses one of the world's most sophisticated help desks. Using live satellite feeds displayed on video screens, its technicians continuously monitor the health of some 3,000 engines for 45 airline customers.

On a recent day, the operators noticed that a line charting the "heartbeat" of one of the giant Rolls-Royce turbofans powering an Airbus A340 had veered off sharply from the straight patterns tracking its three fellow engines. "It could be a damaged blade," said Robert J. Hill, head of the Operations Room. "Better get [the engine] off in the next 100 flights."

Hill's center, which went live last year, is a crucial part of Rolls-Royce's drive to win a big share of engine orders for the new generation of Boeing (BA ) and Airbus aircraft. The airlines don't just want the best engine designs; increasingly, they desire elaborate service networks for decades after the purchase. Hill's people field calls, round up engineers, and solve problems. "In the past, different teams at Rolls-Royce didn't talk to each other enough," he says. "That impaired our services."


  More careful attention to customers' wishes is paying dividends for Rolls-Royce. Over the past 15 years, the London company has clawed its way up from bit player to No.2 in the market for commercial airliner engines, edging out United Technologies' (UTX ) Pratt & Whitney. Rolls, along with General Electric (GE ), has been selected by the two big aircraft makers to supply engines for all three of their major new planes: the Boeing 787, the Airbus A380 superjumbo, and the Airbus A350.

Far from being just a European champion, Rolls-Royce has forged a strong partnership with American Airlines and counts premier Asian carriers such as Singapore Airlines and Cathay Pacific Airways among its customers. Rolls scored a coup last year by winning the first engine order for the Boeing 787 on 50 planes for Japan's All Nippon Airways. "They're very aggressive in Asia and are being lifted by higher growth rates in these markets," says Richard Aboulafia, a vice-president at Teal Group, a Fairfax (Va.) aerospace consultant.

Rolls-Royce, with its vaunted history as both carmaker and builder of aircraft engines over 101 years, nearly went under in the 1970s before the British government took it over, hiving off the auto division. Its emergence as a global player is sweet vindication for the course charted by John Rose, a reticent former banker who became CEO in 1996. Rose, 53, has pushed hard to broaden Rolls's product offerings, not only in civil aviation, which accounts for about 51% of the business, but also in defense, marine engines, and energy and power.


  There's still work to do. Rolls-Royce's civil-aerospace business is less profitable than GE's larger jet-engine division, which chalked up margins of 21% for the first three quarters of this year, vs. 12% for Rolls in the first half. The British company suffers from not having an engine for the popular Boeing 737. Yet by broadening its offerings, Rolls has more than doubled its sales, to an average of 1,000 engines a year.

"If you don't get on the airframe or win a customer, it may be years before you have another opportunity," says Rose. At the end of 2004, Rolls-Royce had close to 11,000 engines in service, a number Steve East, an analyst at Credit Suisse First Boston in London, expects will grow by about 7% a year.

A growing fleet means a growing market for Rolls-Royce's service and maintenance business, where estimated margins of 30% far outstrip those for original engine sales (monster turbofans, which may list for as much as $13.5 million apiece, are often sold at big discounts to win orders). In the first half of 2005, servicing revenues increased by 18%, to $1.75 billion.


 Sandy Morris, an analyst at ABN Amro in London, is forecasting a 65% year-on-year increase in operating profits in 2005, to $1.19 billion, on sales of $11.9 billion for the Rolls-Royce Group. Investors, who hammered Rolls-Royce's shares during the aircraft downturn three years ago, have bid them up by 46% since the beginning of this year.

Rolls-Royce's recent rise has been built on the Trent family of turbofan engines, which have gained a leading position across the range of wide-bodied aircraft. The 700 series was developed to power Airbus 330s in the early 1990s. Models for the Boeing 777 and the Airbus 340 followed. At Derby, workers recently showed off a nearly completed Trent 900, which was to be fitted on the third flight-test model of the Airbus 380 superjumbo. The Trent 1000, developed for the Boeing 787, is scheduled for its first test-firing in December.

When airlines choose among engines, they weigh price, performance, and fuel consumption. Mike Terrett, Rolls-Royce's commercial aviation chief, says the Trent's three-shaft system has proved useful for generating the much greater electric power required by the Boeing 787. Jeff Livings, chief engineer at Virgin Atlantic Airways in London, adds that the layout of Rolls-Royce engines makes them easy to work on.


  Livings' point is a critical one: For carriers, maintenance is becoming an increasingly important part of the game. With considerable success, Rolls is persuading its customers to adopt an arrangement called TotalCare, under which they pay Rolls a fee for every hour the engine is in flight. In return, Rolls assumes the risks and costs of downtime and repairs.

"Rolls is incentivized to put expensive modifications into the engine to improve reliability," says Bob Reding, senior vice-president for technical operations at Fort Worth-based American Airlines, which operates 178 Rolls-powered planes.

Not all customers are thrilled. Geoffrey Shim, assistant general manager for engineering at Hong Kong Dragon Airlines, complains that Rolls-Royce's maintenance costs are well above those of the competition. "In the future, we will definitely want to evaluate different engine options," he says.


  For now, though, Rolls-Royce looks to be winning at least its share on the new models. The company says it has clinched 86% of engine orders for the new Boeing 787, and orders for the Airbus A380 are evenly split with GE.

However, there's a risk that Rolls could be bloodied as it battles giant GE, particularly on the Boeing 787. George David, chief of United Technologies, said at an investor conference in September that P&W "couldn't make the business case work for that engine." Rolls also has yet to clinch any engine orders for the Airbus A350, while GE says it has signed up 117 aircraft. Yet for Rolls, a company that once looked like road kill, the No.2 spot is not a bad place to be.

By Stanley Reed, with Diane Brady in New York and Bruce Einhorn in Hong Kong

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