Rolls-Royce has staged a remarkable recovery under chief executive Tufan Erginbilgiç, but the British engineering group is now entering a more challenging phase as it looks to turn its transformation into sustained growth.
Erginbilgiç, who took over as CEO in January 2023, has made two major bets that could shape the company’s next chapter: a return to the narrow-body commercial aircraft engine market and the development of small modular nuclear reactors (SMRs).
The turnaround so far has been striking. When Erginbilgiç first addressed employees, he described Rolls-Royce as a “burning platform” and warned that the company was underperforming its major competitors.
Investors have since taken a very different view. Rolls-Royce shares, which traded at around 99 pence when Erginbilgiç became CEO, have climbed to about £14.67, putting the stock’s rise in the same broad league as some of the technology sector’s biggest winners.
The question now is whether that transformation can translate into another period of growth.
From BP operator to Rolls-Royce turnaround chief
Erginbilgiç brought an operational and financially focused approach from his two decades at BP. Before becoming head of the oil company’s downstream business, he spent time as chief of staff in the CEO’s office, a role that gave him a broad view of how to tackle problems across an organisation.
People who worked with him describe a direct management style combined with strong relationship-building skills, particularly with senior executives, customers and governments.
He left BP in 2020 after Bernard Looney was chosen for the top job and subsequently moved into private equity. His appointment at Rolls-Royce came as the aviation industry was still dealing with the fallout from the pandemic and the company’s financial performance was under severe pressure.
One of the central problems was the reliability of its civil aircraft engines.
Rolls-Royce’s business model depends heavily on long-term service agreements, under which airlines pay according to how many hours its engines remain in operation. Aircraft sitting on the ground during the pandemic therefore had a direct impact on the company’s revenue.
The Trent 1000, which powers Boeing 787 Dreamliners, had added to those problems. Reliability issues, including premature deterioration of turbine blades, forced airlines to ground aircraft and contributed to Rolls-Royce losing market share to General Electric.
The recovery in global air travel helped, but the company also embarked on a longer-term programme to improve engine durability and renegotiate contracts with airlines that had been signed on terms considered too favourable to customers.
A leaner and more profitable business
The changes have extended beyond the civil aerospace operation.
Earlier management had already begun modernising Rolls-Royce’s manufacturing and design processes and reducing its reliance on manual systems. Headcount was cut as layers of middle management were removed.
Erginbilgiç subsequently brought several former BP colleagues into senior positions, reinforcing a corporate culture that placed greater emphasis on profitability and financial discipline.
The strategy appears to have delivered results. Improved engine reliability means aircraft spend longer in service between maintenance events, generating more revenue for Rolls-Royce while also keeping airline fleets operating.
Its defence business has benefited from increased military spending, while the company’s power systems division has gained from the rapid expansion of data centres, which require substantial amounts of reliable backup and distributed power.
The improvement has been reflected in financial forecasts. In July, Rolls-Royce lifted its annual profit guidance from between £4 billion and £4.2 billion to between £4.7 billion and £4.9 billion. Its shares have also risen by roughly 20% so far this year.
The narrow-body engine gamble
The next stage will be considerably more demanding.
Rolls-Royce is preparing to return to the narrow-body aircraft market, which it abandoned in 2011 when it sold its stake in a joint venture with Pratt & Whitney for $1.5 billion.
The company is developing a new engine aimed at the next generation of single-aisle aircraft being planned by Airbus and Boeing. Re-entering the sector would give Rolls-Royce access to one of the largest segments of the commercial aviation market.
Erginbilgiç, however, wants government backing for the project. He has argued that the programme could generate as many as 40,000 jobs and complained that Rolls-Royce’s international competitors receive substantially greater levels of state support.
The British government has identified securing a role for UK-made engines in future narrow-body aircraft as one of the country’s biggest aerospace opportunities over the coming decades. But funding decisions have been delayed amid political changes and competing demands from other aerospace companies operating in Britain.
Rolls-Royce will also need an industrial partner capable of helping manufacture the engines. The company has acknowledged that it cannot pursue the programme entirely on its own.
The financial risk is substantial. General Electric already has a dominant position in the narrow-body engine market, meaning Rolls-Royce would need a compelling technological advantage to justify the cost of rebuilding market share.
Nuclear power adds another major bet
The company’s other major growth project is in an industry far removed from commercial aviation.
Rolls-Royce is developing small modular reactors, which are designed to provide nuclear power with potentially lower construction costs and shorter delivery times than conventional large-scale plants.
The technology is attracting renewed attention as governments look for reliable low-carbon electricity amid rising power demand, volatile fossil-fuel markets and pressure to reduce emissions.
For Rolls-Royce, nuclear power could also provide a useful diversification away from an aviation business ultimately dependent on fossil-fuel-powered aircraft.
But SMRs remain an unproven commercial proposition. The promised cost advantages have yet to be demonstrated at scale, leaving Rolls-Royce exposed to another significant technological and financial challenge.
From turnaround to growth
Analysts broadly agree that Erginbilgiç has delivered a successful transformation, but they distinguish between fixing a troubled business and creating entirely new sources of growth.
That distinction will become increasingly important as the easy gains from restructuring and stronger aviation demand begin to fade.
The narrow-body engine programme and SMRs could determine whether Rolls-Royce’s spectacular rise in value since the pandemic represents the beginning of a longer-term expansion or the high point of a successful turnaround.
For Erginbilgiç, the next few years will show whether the skills that made him an effective turnaround chief can also make him a successful growth CEO.
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