It wasn’t an imagined nightmare: Rolls-Royce really was flat on its back in 2020 during the early stage of the Covid pandemic. Cash was flowing out of the engine-maker at an annual rate of £4bn as the commercial airline industry, like the rest of us, went into lockdown.
Management was modelling a “severe but plausible downside scenario” in which things could get even worse. The finance director skipped off to Ocado, which, at the time, had a stock market value three times that of Rolls. An emergency rights issue to raise £2bn at the miserable price of 32p a share was eventually launched that autumn, with the government playing a supporting role as guarantor of £3bn of the company’s debt.
To say the skies have cleared would be to grossly understate matters. Thursday’s full-year numbers for 2023 showed record cashflow of £1.3bn and a surge in underlying profit of almost £1bn to £1.6bn. Almost unbelievably, the share price, up another 8% to 357p even after the 220% gain in 2023, is now heading towards an all-time high when adjusted for the dilutive effect of the rights issue. Rolls is worth £30bn and is a top-20 FTSE 100 company again. (Ocado’s shares, incidentally, have nose-dived since 2021: terrible timing by one Stephen Daintith).
An open question is whether the 2027 targets set by Tufan Erginbilgic, Rolls’s chief executive for the past year, will now be reached early. The ambition – operating profits of up to £2.8bn, profits margins of up to 15%, annual cash inflows of up to £3.1bn and a return on capital of up to 18% – felt optimistic when set last November, but nobody is saying that now.
If the civil aerospace division, the largest, can produce an 11.6% margin in 2023 when flying hours (critical for service revenues) were still below pre-pandemic levels, it doesn’t require a great leap to think a fatter figure is possible if, as predicted, former levels of activity will be surpassed this year. Meanwhile, the defence division is nicely supported by the Aukus submarine defence agreement between Australia, the UK and the US. Erginbilgic is clearly ahead of schedule.
A question from the other direction, though, is whether he was guilty of hyperbole when, on arrival, he described Rolls as “a burning platform”. The answer to that one is probably also yes: he was overdoing it. The trajectory of the airline industry was already upwards. Improvement has allowed some easy wins: a £100m debt owed by one airline (Rolls didn’t name it) that was previously viewed as unrecoverable can now be pursued. That’s handy.
None of which is to deny the force of Erginbilgic’s impact. He has raised expectations, credibly, of what the company is capable of achieving. It is a meaningful difference to hear a Rolls boss talk aggressively about renegotiating contracts to recognise the real commercial value of the technology.
But the new man would do himself a favour by acknowledging that his inheritance wasn’t quite as rotten as supposed, which was the gist of a sharp letter to the Times last month from Sir John Rose, Rolls’s chief executive between 1996 and 2011. Erginbilgic has “the luxury of not chasing market share today”, said Rose, which is surely true: it is easier to throw your commercial weight around when you start with a 30% share in wide-body aircraft engines and have excellent kit. Harvesting the gains was always part of the longstanding script.
Erginbilgic is doing a terrific job, but it would do him no harm to say the flames were subsiding when he arrived. Since he got his £7.5m-worth of “golden hello” shares at 91p, and they’re now worth £29m, it would almost be polite.
