British Enginemaker Edges Up on Americans

The biggest airframe customer for Rolls-Royce is Boeing; its biggest military customer is the U.S. Department of Defense, and its biggest airline customer is American Airlines.

Those remarkable facts underscore the international scope of a company often thought of as "British," which a decade ago would have listed its major customers in the UK or Europe. Indeed, Rolls-Royce is on the verge of overtaking Pratt & Whitney and giving GE Aircraft Engines a run for its money as the world's largest supplier of aerospace powerplants.

"Today we power more types of civil aircraft than any other manufacturer-32 in all, from helicopters and business jets to the largest airliners-and offer the widest range of military engines," chief executive John Rose told Show News.

Rolls-Royce claims to have won 34% of the available world market for civil turbofans last year (statistics for the exclusively CFM-powered Boeing 737 aren't included), and more than 80% of the market for new large twin-engined aircraft, where its Trent family has established a strong position. Yet its turnover of $6.88 billion remained shy of the $7.4 billion reported by Pratt and the $7.8 billion at GE Aircraft Engines.

One reason is that Rolls' aftermarket revenue accounts for only 30% of the total, compared with 50% at GE. Why? "We're all at structurally different positions in the business cycle," explained Rose, suggesting that Rolls' time is yet to come.

"Pratt had an extraordinary 90% of the market in the 1970s and their installed base of engines, which drives aftermarket revenues, is derived from that. GE has been very successful in the CFM and CF6, with considerable market share, and that will flow out into a larger aftermarket.

"We've been gaining market share through the late 1980s and 1990s, and we're still gaining. That installed base will mature at a different time, so we're at different parts of the cycle."

For Pratt, the share of revenues from aftermarket versus new engine sales was high last year as it had only 14% of the market, Rose pointed out. Rolls-Royce is still building market share-an activity that is less profitable than aftermarket service. "When you reach stability in your market share and your installed base, you get the sort of balance GE has achieved," he said. "Their market share hasn't been growing recently, but they've kept it consistent." Rose noted that GE also has a narrower product range than Rolls-Royce. "As long as the Boeing 737 and Airbus A320 do as well as they do, GE will do very well," he said.

To some extent that is sour grapes as neither Pratt nor Rolls-Royce can get their joint IAE V2500 engine on the best-selling Boeing 737.

Nonetheless, Rolls-Royce claims its range of engines--the widest of all manufacturers, thanks to its acquisition of Allison Engine Company--will generate double-digit earnings growth at least through 2002. "We're ensuring we get maximum value from the revenue generated from the engine sales," said Rose. Revenues from the aftermarket will grow in absolute terms, "but will be a function of our success in growing market share, so they are unlikely to increase significantly in the short term," he said.

Also crucial to Rolls-Royce's future success is its "Better Performance Faster" initiative, equivalent to Six Sigma in its goals, which it launched at the beginning of 1996. The aim is to develop products and services better and faster while beating its competitors on cost, quality and delivery. Some results are already apparent: the lead time for Trent and V2500 compressor blades has fallen by 50% over the last two years, and sales per employee have risen nearly 60% from five years ago.

"This is a very important part of the equation, which is why we are putting so much effort into the program," said Rose.