Rolls-Royce plc is growing very well. It is a global power systems company headquartered in the UK. It is the world’s second-largest maker of aircraft engines and also has major businesses in the marine propulsion and energy sectors. In the past five years it has nearly doubled sales to over £11 billion and spends just under £1 billion on R&D. It has a large forward order book of over £59 billion for engines across the civil and military aviation as well as in the marine and energy sectors. It supplies the likes of Airbus and Boeing, as well as many of the world’s commercial airlines and governments, and, as a result, it has built very close relationships with them. While this partly keeps its future sales in healthy shape, more recent attention has been on its technology and innovative business model.
Media commentary in recent years has focused primarily on the latter of these two and in particular the TotalCare service that Rolls-Royce provides to its customers. Changing from an old model of selling engines and then, several years later, spare parts to one of being a service provider, where Rolls-Royce provides airlines with ‘power by the hour,’ this has now become the standard approach across the aviation sector. The company is still developing and selling high-performance engines, but the means by which customers access and pay for the product has changed and is now wrapped up in a different service model. With over half of Rolls-Royce’s revenues and around 70% of its profits coming from the TotalCare service business model, it has proved to be a wise move. It is not difficult to understand that this shift is what many companies find interesting about Rolls-Royce and has been a primary area of focus for bilateral discussions over the past few years.
However, while TotalCare is evidently a great success, it, and the rest of the Rolls-Royce business, still relies on the company producing great products that are higher performance, more efficient, and increasingly more compact. Whether for airlines, military, marine or energy customers, the expectation is that new engines and turbines will be far more effective in terms of energy and material consumption than previous generations. Given the high levels of technological sophistication of the products, demanding requirements around systems integration, and increasing expectations around product support, Rolls-Royce and peers such as General Electric have developed key capabilities in many of the related areas. The barriers to entry into this market are therefore very high but the competition between existing players is extremely vigorous with multi-billion dollar contracts supported by close customer support relationship the name of the game. Over the next 20 years, the aviation industry is forecasting 137,000 new engine sales worth over $800 billion for the commercial sector – largely driven by Asian growth – and around $160 billion worth of engines for the military sector plus aftermarket services of up to $270 billion. Add in projected demand for over $200 billion of marine power systems and $70 billion of turbines for the energy sector plus aftermarket support of another $175 billion and you can see why competition is intense. Pivotal to success in these markets is therefore technology leadership.
Rolls Royce has built and managed a focused portfolio of deep long-term research and technology partnership that provides it with a strong platform for continued growth.