Rolls-Royce aims to become a much more profitable business with a goal to increase its civil aerospace margin to 15-17% from 2.5% last year, in boss Tufan Erginbilgic’s new masterplan for Britain’s most prestigious engineering company.
Setting out a strategy that has been almost a year in the making, the chief executive said he would deliver up to 2.8 billion pounds ($3.53 billion) of operating profit in the medium term compared with its forecast guidance for up to 1.4 billion pounds this year.
Erginbilgic, a former BP executive who took over in January, is the latest CEO to try to tackle Rolls-Royce’s inefficiencies.
He is seeking a step change in margins by around 2027 in an engine business that powers nearly half of long-haul aircraft. The new target would bring Rolls closer to its rivals, such as General Electric, its major competitor in the widebody sector.
Shares in Rolls-Royce, which have soared 161% in the year to date, gained 4% in early deals following the announcement of the new targets.
“We are setting compelling and achievable financial targets for the mid-term which will take Rolls-Royce significantly beyond any previous financial performance,” Erginbilgic said on Tuesday.
Agency Partners analyst Nick Cunnigham said that the targets imply that Rolls-Royce is willing to shed revenues in exchange for better profitability.
“If so, that is a deeper culture change from Rolls-Royce’s traditional market share optimisation approach of past decades,” he said. The company, which also has defence and power systems units, announced a group-wide divestment programme, targeting up to 1.5 billion pounds in the next five years, as it focuses capital on core parts of its business.
Rolls-Royce, which sacrificed profitability to build scale in the widebody market, powers Airbus’s A330neo and A350 aircraft and its engines are one of two options on Boeing’s 787.
Its finances were hit by problems with its Trent 1000 engine and by the pandemic, which grounded long-haul aircraft and wiped out Rolls-Royce’s revenue tied to engine flying hours.
Recovery under Erginbilgic has been rapid, with a five-fold rise in first-half operating profit reported in August, helped by increasing prices for maintaining its engines and tightly managing its cost base.
Erginbilgic said Rolls was well positioned to re-enter the narrowbody market through partnering on the next new engine programme, with its next-generation UltraFan technology being a vital step.
(Reporting by Paul Sandle; editing by Sarah Young, Kate Holton and Barbara Lewis)