New Rolls-Royce boss launches strategic review despite profits rise

The new boss of Rolls-Royce has launched a sweeping review of the aircraft engine maker pledging there was “much more” to come after last year beat expectations, sending shares up nearly 20%.

Tufan Erginbilgic, who joined as chief executive 1 January, said the FTSE 100 manufacturer had been “underperforming financially for years” and outlined key areas for reform that he said would deliver “materially higher profit, cashflows and returns”. It followed his warning to employees last month that Rolls-Royce is a “burning platform” that must transform to survive.

Erginbilgic pledged to do better even as the company reported a 57% increase in underlying profits to £652m, £505m generated in cash, and revenues up 16% to £12.7bn in 2022 – well above analysts’ expectations.

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Rolls-Royce shares rose by nearly 18%, hitting 129p on Thursday morning, their highest level for over a year as investors welcomed the stronger-than-expected recovery. The company, which earns maintenance revenues depending on the hours flown by the engines it makes, said engine flying hours were at 65% of pre-pandemic 2019 levels, and were expected to rise to 80-90% of 2019 levels this year thanks to the easing of travel restrictions in China.

The pandemic presented a serious threat to Rolls-Royce as revenues from its civil aerospace business dried up. Yet Erginbilgic, who replaced the retiring Warren East, said Rolls-Royce had serious problems before Covid-19 struck, and outlined plans to increase the company’s profitability.

Erginbilgic, previously a senior executive at oil company BP, raised the prospect of big changes at the company, including announcing a review of where to invest in the future and potential changes to “footprint” that will probably raise fears over the possible closure of some factories or offices. The new transformation programme follows thousands of redundancies in recent years under East, including 7,000 job cuts in response to the pandemic.

Erginbilgic said it would be “very, very premature to speculate either way” on whether his review, due to report in the second half of this year, would include further job cuts. However, he said the company would look at finding synergies and simplifying the business, and “we will also look at the footprint.”

The company’s civil aerospace business – making and servicing jet engines – and its power systems business – making engines for vehicles such as yachts and trains – will be a focus of the review as he hopes to increase investor returns, which he repeatedly highlighted were lagging rivals. On the other hand, the defence business is “an enormously good business” with high returns, he said.

Erginbilgic’s comments focused on improving financial returns, but he also re-committed to Rolls-Royce’s goal of producing net zero carbon emissions. Sustainable aviation fuel – synthetic fuel using carbon from the air, rather than fossil fuels – will play the key role in that goal, he said. Hydrogen fuel cells are a “longer-dated technology potential”, he said.

He also said the company’s small modular nuclear reactors “can actually play a big role in net zero for the UK” as well as ensuring energy security. But he said there should be a “sense of urgency” for the UK government to commit to orders of the reactors. Rolls-Royce and rivals in Europe and the US are hoping to build smaller reactors in factories, which would theoretically allow them to be produced more cheaply.

Asked about how the staff would respond to the prospect of further upheaval, Erginbilgic said: “There is more excitement than anything else. Who doesn’t want to work in a successful company?”