April 24, 2023 could turn out to be a pretty crucial day for British engine manufacturer Rolls-Royce. Perhaps in ten or 15 years we will be able to look back and say that Rolls-Royce started a successful race to catch up in order to play a more important role in aviation engine construction again. On this day, the engineers launched the prototype of the “Ultrafan”, the latest generation of Rolls-Royce engines, for the first time.
However, it is anything but certain that the catch-up race will work, because the group is economically struggling and strategically in a difficult position. In order to put the company back on a more solid financial footing, CEO Tufan Erginbilgiç took tough action on Tuesday: the company will cut up to 2,500 jobs. This corresponds to around six percent of the 42,000 employees worldwide. It is still unclear how badly the 11,000 employees in Germany will be affected. Technology boss Grazia Vittadini, who only took up her job a year ago and previously worked in the same position at Airbus, will also have to leave in April 2024.
“This is another step in our multi-year transformation journey to build a powerful, competitive, resilient and growing Rolls-Royce,” said Erginbilgiç. The CEO wants to reduce duplication, especially in administration. Among other things, development work is to be consolidated into a single unit and purchasing and relationships with suppliers are to be managed more centrally.
The company had already cut a total of 14,000 jobs in 2018 and 2021. “With this action, Rolls-Royce is shaking the last remaining trust in top management,” commented IG Metall board member Jürgen Kerner. “Despite booming markets, the company is apparently unable to position itself successfully – in complete contrast to its European competitors.”
The corona pandemic hit Rolls-Royce hard
Rolls-Royce is one of three major engine manufacturers in civil aviation, but has increasingly allowed itself to be pushed into a niche. The other two are American competitors GE Aerospace and Pratt & Whitney. Of the three, GE is the only one that has a presence in both long- and short-haul routes, including the Boeing 777 and 787 models and the Airbus A350. Above all, GE, as part of the CFM International consortium with Safran Aircraft Engines, has the monopoly as an engine supplier for the Boeing 737. At Airbus, GE is on all programs except the A330neo. Pratt & Whitney, on the other hand, only supplies engines for the short-haul A320neo, Rolls-Royce for the long-haul A330neo, A350 and Boeing 787.
Economically, two factors in particular have hit the British company hard in recent years: billions in additional costs have been incurred because the Trent 1000 engines for the Boeing 787 were initially far less reliable than intended. They had to be extensively retrofitted and customers received high compensation. The corona pandemic also hit Rolls-Royce harder than the other two because long-haul traffic was affected the most and for the longest time. All engine manufacturers earn most of their money from maintenance contracts that they conclude with airlines. But if the machines don’t fly, the engines don’t need to be repaired.
At the beginning of 2023, Erginbilgiç described his company as a “burning platform” and thus did not exactly help calm the situation. But since then, at least the key figures have improved for the first time. Sales in the civil division increased by 38 percent, and the operating profit margin was a good twelve percent. And yet the burdens of the past continue to weigh heavily.
Not only the employees feel this, but also the customers and indirectly also Airbus. Erginbilgiç has made it clear that Rolls-Royce primarily wants to renegotiate loss-making service contracts and no longer wants to grant anywhere near such large discounts in the future. According to reports behind the scenes, Airbus is very concerned that this could affect the competitiveness of the A350 and A330neo series.
The future should belong to the Ultrafan engine, because Rolls-Royce promises 25 percent lower fuel consumption than previous engines. So far there are many doubts in the industry that the company can carry out a development program that will cost billions. In addition, Boeing and Airbus have no new models planned for the next few years. An opportunity could arise if Airbus decided to approve an engine manufacturer other than Pratt & Whitney for a new version of the short- and medium-haul A220. But GE Aerospace is already waiting for this opportunity. So Erginbilgiç still has a lot of convincing to do.