On Oct. 1, Rolls-Royce announced its intention to raise £3 billion ($3.75 billion) through an equity issue and a bond offering to help shore up its balance sheet as it keeps bleeding money amid the worst crisis in its history. This is just the latest piece of bad news about a company whose fate looks increasingly like that of a fallen hero in a Greek tragedy: a victim of both misfortune and its own hamartia, punished by the gods and forced to navigate through titanic storms and raging seas until it either finds redemption or suffers eternal damnation.
There is indeed much to feel sorry about for Rolls-Royce, once the jewel of the British high-tech industry. After suffering a record $6.75 billion loss for the first half of the year and witnessing its credit rating being downgraded to junk by Standard & Poor’s in May, the recent cash call announcement has now brought its stock price to the ground (see chart). The 100-year-old, $19 billion-revenue corporation, which once stood for engineering artistry and world-class technology, is now valued at less than $4 billion. By comparison, 17-year-old Tesla, which is about the same size in revenues and staff, is valued at close to $400 billion!
Such a reversal of fortune raises a lot of questions about what led to such tragedy. Of course, one cannot blame the company for finding itself in the midst of an unprecedented collapse in air travel. But one could argue that this crisis is just laying bare and amplifying Rolls-Royce’s underlying weaknesses and past mistakes. Ultimately, a company’s success rests on three main pillars: culture, strategy and leadership. It looks like Rolls-Royce lost its way on each of these.
Culture shapes a company’s resilience, its ability to consistently perform under any circumstances. Rolls-Royce’s culture of innovation, superior quality and work ethic used to be its strongest asset. Yet over the last few years, lingering quality issues with the Trent 1000 engine have cost the company billions in corrective actions and undermined its reputation with customers. This reputation was further damaged when Rolls-Royce was indicted in the UK and the U.S. on multiple counts of conspiracy to corrupt, false accounting and failure to prevent bribery over the span of three decades. The case was settled in 2017 with the payment of an $800 million fine. Somehow, over time, Rolls-Royce’s business culture had strayed far away from what its legendary Chief Executive Ernest Hives once described as the “moral business standard of the Rolls-Royce company,” adding: “We must never allow a question of profit to jeopardize this position.”
While product quality and commercial practices are somewhat unrelated, it does suggest that the company’s culture has been impacted by an increasing focus on financial management and shareholder return. It is therefore probably not a complete coincidence if the company’s stock price increased fivefold between 2009 and 2013 while problems were building below the surface.
As far as strategy is concerned, the most questionable decision was the company’s exit from the lucrative single-aisle market. While Rolls-Royce was a founding member of the IAE consortium that developed the V2500 turbofan for the Airbus A320 family, it sold its stake to Pratt & Whitney (P&W) in 2012. By doing so, Rolls-Royce not only exited the most profitable aeroengine market segment but also marginalized itself at a time when its main competitors—GE, Safran and P&W owner United Technologies—were all beefing up their product and service portfolio to position themselves as “super tier-ones.”
Ironically, it was the second time in its history that P&W—as the big beneficiary of this exit—could thank Rolls-Royce for its luck. At the beginning of the Cold War, the experience that Pratt gained from a licensing contract to produce two Rolls military engines enabled it to become one of Rolls-Royce’s major competitors.
As for the company’s leadership, it is hard not to notice how many top executives have come and gone over the last decade. Since 2010, there have been three CEOs, four CFOs and four different heads of the civil aerospace business. Such a high management turnover, unprecedented in Rolls-Royce history, certainly impacted the company’s performance and is either a cause or a consequence of failed leadership.
At least one thing has not changed at Rolls-Royce: its Britishness. Almost all the top executives and board members have always been and still are British. In a global industry like aerospace, this may be the company’s most tragic flaw: its culture, strategy and leadership have all but reinforced an insularity that, compounded with Britain’s imminent exit from the European Union, could prove fatal.
The views expressed are not necessarily shared by Aviation Week.
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