Are turbulent times ahead for Rolls-Royce?
The take-off of Rolls-Royce shares is the talk of the City. The engineering giant, synonymous with British manufacturing prowess, saw its share price hit a record high this month in one of the most remarkable comebacks ever seen in the Square Mile.
Garlands have been strewn over its Turkish-born boss, Tufan Erginbilgic, who took the helm in 2023 and has been hailed as a miracle worker for bringing the aero-engine maker back from the brink of financial ruin in the pandemic. Not only has Rolls-Royce recovered, it has become one of the best performers in the FTSE 100 index.
But there's a rule in the world of big money: if something looks too good to be true, it probably is. This could be the case for Rolls-Royce and 'Turbo' Tufan, who earned the nickname due to the ferocious pace at which he works.
Amid all the excitement, the City has overlooked a damaging row between Rolls-Royce and airlines including British Airways and Virgin Atlantic – which some believe could soon bring the engine maker and its share price back to earth. The issue is Rolls's Trent 1000 engines, which power Boeing's 787 Dreamliner. The Trent 1000s proved popular but are showing their age after clocking up more than 20 million flying hours.
And they have been dogged by serious maintenance problems stretching back nearly a decade, with hundreds of planes grounded and even routes cancelled.
Both BA and Virgin were forced to cancel hundreds of long-haul flights and re-routed passengers when planes were taken out of service for unscheduled repairs.
BA's prestigious routes to the Gulf States have been among the more prominent casualties.
There was a furore last year when the airline scrapped direct flights from Heathrow to Bahrain and Kuwait, two of Britain's closest allies in the region, because of problems with the Rolls engines, some of which are prone to maintenance problems in hotter climates.
Although flights to Bahrain were reinstated after a campaign led by The Mail, the Kuwait route and flights to Abu Dhabi remain suspended. This is a setback when businesses are desperate to forge trade links to the Gulf.
Technical faults on the Trent 1000 have dogged Rolls since 2016, when a design flaw – which led to cracks forming in the turbine blades of some engines – was identified.
According to Shai Weiss, the Virgin Atlantic boss, the Trent 1000 needs three times the attention of other turbines. The problems have so far cost Rolls up to £3 billion in repairs and payments to the airlines – and the row shows no sign of being resolved. If anything, it is likely to intensify as the summer travel season unfolds.
Rolls-Royce has been spared President Trump's punishing trade tariffs under the recent US-UK trade deal. But it has been hurt by his America First policies: it missed out on one of the biggest ever engine orders from Qatar last month, losing to US rival GE.
Not everyone, then, is convinced by the Rolls-Royce renaissance.
The company's harshest critic is Willie Walsh, the former BA boss who now leads the International Air Transport Association trade body. The blunt Irishman has described the rise in Rolls shares as 'baffling' – and that was back in December, when the price was a good deal lower than today.
Walsh accuses Rolls of basic engineering failings and of luring airlines to buy its turbines with, effectively, false claims.
'They built the engines and promised us great things,' he said.
'What they didn't say is: this engine is going to be 25 per cent more fuel efficient. But, by the way, you're going to have to change it every couple of months.
'I doubt anybody would have bought their engines if that's what they were saying.'
But investors seem happy to set aside these concerns. Shares continue to be swept up in the hope Rolls will win lucrative defence contracts as Britain rebuilds its military strength. There's some sense to this: as well as making turbines for passenger planes, Rolls-Royce produces engines for combat vehicles, fighter jets, submarines, ships and helicopters.
Rolls has also chosen to build the next generation of mini nuclear reactors. These factors have helped it overtake drugmaker GSK and data provider Relx to become Britain's sixth-largest company, with a valuation of £75 billion. Credit is certainly due to Tufan, who conducted a root and branch overhaul after taking charge. He put every aspect of the business under the microscope and imposed what he describes a 'zero tolerance for mediocrity' regime.
Such is his obsession with performance that he instigated a three-and-a-half-month-long study of how Rolls fared against its rivals before he even arrived.
This delved deep into internal processes and was the basis of a highly detailed strategy to rebuild the balance sheet and improve profitability. So far as the stock market is concerned, the medicine is working. There has been an astonishing £68 billion rise in the value of Rolls-Royce shares in the two years since Tufan arrived.
Having lost £4 billion in a year in the pandemic, Rolls made an operating profit of £2.5 billion last year, its highest ever.
Any investor shrewd enough to have bought £1,000 worth when he joined would now have a holding worth almost £8,500. That is an alchemy of wealth creation that even the tech giants of Silicon Valley would struggle to match.
'It's been a monster performer,' says Jamie Murray of Shore Capital stockbrokers.
Rolls has a loyal army of 150,000 small shareholders who have stuck with the company through thick and thin since it was privatised under the Thatcher government in 1987.
Younger investors are also enjoying the ride. Rolls is one of the most popular shares on investment platforms such as Trading 212 which are used by newer generations of share owners.
There is no denying Tufan's actions – cutting costs, slashing 2,500 jobs and re-negotiating loss-making contracts – have been a big factor in transforming the 119-year-old company's fortunes.
Naturally, Tufan has reaped personal rewards. He has pocketed £18 million in salary and bonuses in the last two years, including £7.5 million to persuade him to leave his former employer, BP.
His performance is all the more impressive given the tough climate facing aviation – particularly a post-pandemic shortage of components and spare parts.
Rolls-Royce is not the only manufacturer facing complaints.
Problems with turbines made by American rival Pratt & Whitney have led to more than 40 of Wizz Air's planes being grounded.
And investigators are still looking at what caused an Air India flight from Ahmedabad to Gatwick to crash just after take-off this month, killing 270 people. The Boeing Dreamliner, which was powered by recently serviced GE engines, had 'a clean history', Air India's chairman said this week.
The question, then, is this: can Rolls-Royce's gravity-defying performance continue?
Those with long memories know that Rolls – which was declared insolvent in 1971 due to cost overruns and development problems with its RB211 engine – has had a chequered past.
Nationalised by Edward Heath's Conservative government, its fortunes have yo-yoed ever since.
The famous car-making arm was separated out in 1973 and is now owned by BMW.
Some say Tufan, a British and Turkish citizen with a background in engineering, has been a lucky general. His arrival at Rolls coincided with a post-pandemic bounce in flying among business passengers and holiday makers.
But Tufan and Rolls-Royce will need more than luck in the months ahead. The problems with the Trent 1000 and other engines in the core civil aerospace business – which accounts for just over half of Rolls's £17.8 billion of sales and the bulk of profits – remain a dangerous Achilles' Heel.
While Tufan cannot be blamed for the difficulties he inherited, he has so far not managed to draw a line under them – certainly not so far as the airlines are concerned.
BA, for example, told The Mail on Sunday it was 'very disappointed' that it had been forced to make changes to its schedules because of the failings. 'Our teams continue to work closely with Rolls-Royce,' a spokesman added.
And, while the original design faults on the Trent 1000 engines have now been fixed, Rolls accepts the supply chain shortages could last for another 18 months, meaning more delays, more grounded flights – and even higher air fares.
'The supply chain environment remains challenging,' said the spokesman, admitting that there had also been 'a significant increase in Trent 1000 major refurbishments' last year.
Rolls has responded by committing £1billion to a series of upgrades across the Trent family of engines aimed at reducing the number and frequency of repairs.
Erginbilgic hopes to put a new high-pressure turbine blade into all the engines in the Rolls fleet over the next two years in a move that will more than double the amount of time the Trent 1000 spends in the air.
The improvements cannot come soon enough for customers and passengers. And, as for what this means for the stellar share price, experts are divided. Analysts at Bank of America think the company could be worth up to £100 billion – in other words, the shares could climb significantly higher.
Its long-term success depends on whether the company can deliver cleaner, greener, quieter engines – and, in that respect, the Trent 1000 saga does not augur well.
For the moment, Rolls is flying high. But its critics, while still in a small minority, are adopting the brace position – in case of a sudden and troubling loss of altitude.
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