Rolls-Royce: Full Thrust Ahead

If you're not particularly interested in aviation, the name “Rolls-Royce” perhaps makes you think of opulent cars driven by chauffeurs for some of the richest people in the world. But from its origins as a luxury automaker, it has evolved into one of the world's top aerospace engine manufacturers. Throughout its over 120-year-long history, it has navigated soaring highs and crushing lows while constantly pushing the limits of engineering. This is the story of how Rolls-Royce became a byword for quality, survived near-collapse more than once, and is again reinventing itself for a new era.

Key insights

• Pivot into aircraft: The demands of war pushed Rolls-Royce to start developing aircraft engines. The company supplied the RAF during both WWI and WWII, including the Merlin engine for the iconic Spitfire.

• Bankruptcy and rebirth: Issues with a new engine in the 1970s led to a death spiral of production halts and ultimately a bankruptcy, which was followed by intervention from the British government.

• Streamline and refocus: In the decades after the post-bankruptcy split with its motor division, Rolls-Royce focused its business on civil aerospace, defense, and power systems.

• LTSAs: A major part of Rolls-Royce's revenue is based on long-term service agreements, which are based on usage after the original engine has been sold.

• The turnaround: Since Tufan Erginbilgic took over as CEO in 2023, Rolls-Royce has undergone a remarkable period of transformation and growth.

Engines relit

Before we head back to early 20th-century Britain to where the story of Rolls-Royce began, we would like to give you a preview of what's to come. After the pioneering and predominantly successful past of Rolls-Royce, the company underwent a tumultuous downfall during the pandemic.

Lockdowns led to travel bans and stranded aircraft fleets across the world. Rolls-Royce faced a “last chance to change” when Tufan Erginbilgic stepped in as new CEO. Less than three years later, it's likely that Rolls-Royce has never been better positioned, and the transformation under his watch has been astonishing. Since he took over, the stock is up over 10x, and the financial turnaround speaks for itself:

Three decades of Rolls-Royce

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We will soon return to just how this happened, but first, let's rewind to when Rolls met Royce.

A test drive in Manchester

In early May 1904, two men met at the Midland Hotel in Manchester, England. Through the Royal Automobile Club, the talented engineer Henry Royce was introduced to Charles Rolls, a Cambridge man who, with the help of his father, had started one of the first automobile dealerships in Britain. Royce had developed a 10-horsepower motor car, and after some pleasantries had been exchanged, Rolls was going to take it for a spin.

Upon returning to the Midland Hotel after what must have been an impressive test drive, the two men struck a deal. Rolls would sell as many cars as Royce could produce, under a partnership by the name Rolls-Royce.

They might seem an unlikely duo at first. Royce came from a family of farmers and millers, and Rolls, the son of a Baron, had grown up among aristocrats in London's West End. But they both shared the same goal: to build the best car in the world. Royce was what can only be described as an engineering genius, and Rolls brought a natural talent for marketing (and knew plenty of wealthy potential clients). Together with business manager Claude Johnson, who the modern company refers to as “the hyphen in Rolls-Royce”, they got to work.

Rolls-Royce Ltd. was incorporated in 1906, and that same year, it introduced what was to become its first flagship model, the six-cylinder Rolls-Royce 40/50 horsepower. It soon earned a nickname that rolled off the tongue a little more smoothly: the Silver Ghost. Painted silver and with an unparalleled ride experience, it became an overnight success.

The iconic Silver Ghost: Rolls-Royce's first flagship model, introduced in 1906.

But the Silver Ghost didn't generate headlines only for its luxury and comfort. In 1907, it completed the brutal Scottish Reliability Trial without a single mechanical fault. Sure, completing it was extraordinary in its own right, but the car then drove 15,000 miles more or less nonstop right after, only stopping to fill up with gas. To say that the endurance run created a reputation for reliability and almost otherworldly engineering would, to say the least, be an understatement.

Even as its fame grew exponentially, Royce never hit the brakes. He was, in almost every sense of the word, a perfectionist who was obsessed with one thing and one thing only: quality.

The company adopted a single-model structure to ensure every component lived up to the highest of standards. The policy meant exactly what it sounds like: if a customer wanted a Rolls-Royce, the Silver Ghost was the only option available.

At the same time as the company was selling cars as fast as it could produce, Charles Rolls had become an avid aviator. Doesn't sound too out of character for a wealthy young man with a passion for speed, but in 1910, it was a very, very dangerous hobby. While participating in a flying display in Bournemouth, the tail of the biplane he was piloting broke off, and he was killed in the subsequent crash. At age 32, he became the first Briton to die in a powered aircraft accident.

Rolls' untimely death was a devastating blow, but Royce and Johnson pressed on. In the years that followed, Rolls-Royce would expand both its product line and its ambitions. In what can partly be described as cosmic irony, the company was preparing to break into a brand-new field that would come to completely redefine Rolls-Royce, and in the long term, help save Great Britain from destruction: aircraft propulsion.

World War I forces a pivot

As the German army roared through Flanders on its way to France, and England went to war to protect Belgium's neutrality, Rolls-Royce was still primarily a luxury car maker. But the demands of war soon forced a pivot. Military aircraft were still very much a novelty, primarily used for reconnaissance, with pilots occasionally using their pistols to take potshots at one another. With that said, it didn't take a military mastermind to realize the potential applications that airplanes could have on the battlefield. The men in charge of the British war effort wanted new engines for their aircraft, and they wanted them built by the best.

At the urging of the War Office, Rolls-Royce agreed to apply its expertise to developing aircraft engines. Britain was in desperate need of upgrading its underpowered military aircraft, and despite initial reluctance, Royce ultimately set his engineers to the task. The result was unveiled in 1915: the Rolls-Royce Eagle, a 12-cylinder aero engine delivering roughly 225 horsepower. Just like the Silver Ghost, it proved to be a masterpiece of reliability, arriving not a moment too soon for Britain's underpowered early military aircraft.

Throughout World War I, Rolls-Royce struggled to meet the military's voracious engine demands. Henry Royce insisted on strict quality control, resisting pressure to license production to other firms for fear of compromising quality and instead opting to expand its factory in Derby. In addition to the Eagle, it developed a series of smaller aero engines during the war. When the guns eventually fell silent across Europe, the Rolls-Royce name had become as respected among pilots as with the upper classes of British society.

A brief intermission of peace

Just as it had proved its mettle in war, the Eagle had its applications in peace as well. In June 1919, a pair of Eagles powered the first non-stop transatlantic flight. Pilots John Alcock and Arthur Whitten Brown flew a modified Vickers Vimy bomber, fitted with two Rolls-Royce Eagle engines, from Newfoundland to Ireland in just over 16 hours. Their daring flight accomplished two things: firstly, it made them instant heroes, and secondly (and more pertinent to our story), it further propelled Rolls-Royce in the emerging aviation industry.

In the 1920s, Rolls-Royce navigated the difficult transition to peacetime with its newfound dual identity as both a prestigious car maker and a premier aero-engine company. On the automotive side, the post-WWI recession hit demand for ultra-expensive, luxury cars. Rolls-Royce responded by introducing a smaller, slightly more “affordable” model, the 20-horsepower Rolls-Royce Twenty. This ended the company's one-model policy and broadened its customer base beyond the ultra-wealthy, into the “slightly less rich, but still very rich” category of car buyers.

In 1931, Rolls-Royce acquired Bentley. Its chief British rival in luxury cars had run into financial trouble during the Great Depression, and Rolls-Royce swept in. Rather than continue Bentley's grand 8-liter model (which threatened Rolls-Royce's own Phantom sales), the new owners shut down Bentley's racing-oriented programs and re-launched it as a more affordable, sportier model compared to Rolls-Royce. But in many ways, its automobile division was increasingly taking a back seat. By the late 1920s, aircraft engines had grown from a sideline into the company's primary business.

Henry Royce himself continued to innovate, with engineering perfection as his north star. In the war's aftermath, he began work on a new V12 design that would become legendary: the Rolls-Royce Merlin. Based on lessons from the company's record-setting “R” racing engine, it was first tested in 1935. Capable of over 1,000 horsepower with supercharging, the Merlin was fitted to several British military aircraft. Most famously, it came to power the legendary Spitfire.

A Spitfire aircraft in action, powered by a Rolls-Royce Merlin engine.

Royce was made a Baronet in 1930 and given the title of “Sir” for his contributions to British Aviation, but did not live to see the impact of his creation. Sir Henry Royce died in 1933 at age 70. The Merlin, on the other hand, would earn immortality as Britain was once again thrown into war.

Merlin's moment

During World War II, Rolls-Royce became, in the words of the British Minister of Aircraft Production, “the arsenal of democracy's air power.” As the Luftwaffe began ferocious bombing raids all over the British Isles to prepare for an eventual invasion, the Merlin-powered Spitfires were sent up to fight the German planes. From the Battle of Britain in 1940 through the final days of the war, Merlin-powered aircraft gave the Allies a critical edge. It was reliable, its performance was unmatched, and it was relatively fast to produce.

Rolls-Royce's contribution to the war effort extended beyond the Merlin. The company adapted the Merlin for tanks as the Meteor engine, which was used in British Cromwell and Centurion tanks, among others. As the current engine technology reached its zenith, Rolls-Royce was also instrumental in ushering in the jet age.

In an extraordinary mid-war development in 1943, Rolls-Royce took over development of an innovative jet turbine engine project from Rover. In a deal struck over a humble “five-shilling meal”, Rolls-Royce's Ernest Hives and engineer Stanley Hooker agreed with Rover's management to exchange some assets, and Rolls-Royce assumed responsibility for perfecting the top-secret jet engine prototype.

The commercial potential of the jet engine was, of course, immense, and the likelihood that Rover would've handed it over to Rolls-Royce in peacetime was minuscule. However, both companies had winning the war as their utmost priority, and if that meant handing over cutting-edge technology to a competitor, it was an easy decision. The Rolls-Royce Welland jet engine powered Britain's Gloster Meteor, the Allies' first operational jet fighter, before the war's end.

In 1945, Rolls-Royce had firmly entrenched itself as a leader in both piston and jet engines. The company's Derby and Crewe factories, and additional shadow factories, churned out tens of thousands of engines. By war's end, Rolls-Royce had become a national strategic asset, and the British government would remain deeply invested (literally) in the company's fate in years to come.

The jet age arrives

After 1945, Rolls-Royce yet again faced the challenge of transitioning from wartime production to a peacetime footing. The postwar era saw new Rolls-Royce models like the Silver Wraith and Silver Dawn in the late 1940s, and later the Silver Cloud in the 1950s. These cars maintained the image of the Rolls-Royce brand, albeit in a world suddenly more economically strained.

Thus, selling luxury cars in postwar Britain was no easy task, and sensing the shifting winds, Rolls-Royce began to branch out. In 1948, it started developing diesel engines, seeing opportunities to apply its engineering know-how to more utilitarian markets. By 1951, Rolls-Royce diesels were in production, finding uses in everything from heavy vehicles and industrial equipment to marine vessels and power generators.

The biggest opportunities, however, lay in the skies. Commercial aviation was booming, and Rolls-Royce poured resources into jet engine technology. In the late 1940s and 1950s, the company rolled out a series of successful turbine engines. Entering the 1960s, Rolls-Royce was positioned as a leader in the nascent British aerospace industry at a time when the British aerospace industry was undergoing significant consolidation.

In 1966, Rolls-Royce completed a landmark merger by acquiring Bristol Siddeley, its chief UK rival in engines. The takeover brought with it a suite of important designs and cemented Rolls-Royce's status as Britain's dominant engine company and one of only a few firms worldwide capable of developing large jet engines from scratch. By the late 1960s, it was supplying engines to airlines, oil rigs, armies and navies, utilities, and everything in between. In short, Rolls-Royce was not just a car maker or even just an aero-engine maker anymore, but an engineering giant and a linchpin of Britain's high-tech exports.

All of this success, however, belied growing challenges beneath the surface. Developing new, more efficient jet engines was becoming staggeringly expensive, pushing the limits of Rolls-Royce's finances. Profit margins were increasingly found not in selling engines themselves but in the long-tail contracts to service those engines over decades. This business model would later prove both lucrative and risky, and we're going to have several chances to return to it.

But in the 1960s, it was simply necessary. The company had to invest heavily in R&D to keep up with American rivals General Electric (GE) and Pratt & Whitney, even if that meant thin profits in the meantime.

Bankruptcy and bailout

In the mid-1960s, Rolls-Royce set out to develop an engine unlike any it had built before: a high-bypass turbofan for the next generation of widebody airliners. The project, designated RB211, aimed to power the Lockheed L-1011 TriStar, a new American widebody jet. Winning the Lockheed contract in 1968 was a major victory for Rolls-Royce at first, beating out American engine makers and gaining a foothold in the burgeoning jumbo jet market.

But the RB211 program was plagued with problem after problem, eventually causing a death loop that was impossible to straighten out. Technical failure brought on by other technical failures and numerous setbacks caused development to stall and costs to skyrocket. Rolls-Royce had badly underestimated the development expenses in its bid to Lockheed, and combined with the setbacks in production, it was now taking huge losses on each engine. By early 1971, the company was effectively insolvent.

On February 4, 1971, Rolls-Royce Limited collapsed into receivership. One of Britain's most prestigious companies and some 80,000 jobs were suddenly at risk. In Parliament, it was called a “major national tragedy” and “grave blow” to Britain's industrial prestige. After frantic emergency meetings, the British government stepped in and nationalized the core of Rolls-Royce's business. The company was simply too important to national security to be allowed to fail.

However, not everything would be saved by the British government. Rather than take on the entire company and all its liabilities, the government created a new state-owned entity, Rolls-Royce (1971) Ltd, to buy out the viable parts of the business. In other words, the strategically vital operations in aero-engines, industrial turbines, and marine turbines were kept alive under government ownership.

The Rolls-Royce brand was thus split. The motor car division, along with the non-aero engine businesses such as diesel engines, was not absorbed by the nationalized companies. Instead, those were sold off by the receiver. A separate company, Rolls-Royce Motors, had already been hastily incorporated in April 1971 to carry on the car-building and diesel-engine operations. Rolls-Royce Motors was eventually taken public on the stock market in 1973 as a distinct entity. For the next decade and a half, “Rolls-Royce” the car manufacturer and “Rolls-Royce” the aero-engine maker would be completely separate companies.

So, what happened to Rolls-Royce Motors? The rest of this article will be focused on the aerospace division and how it transformed into the company that we know today. The story of what happened to Rolls-Royce Motors and the twists and turns that it went through almost warrants its own article, but that's not why we're here. Instead, we're going to jump to the end: Rolls-Royce Motor Cars has, since 2003, been a wholly-owned subsidiary of BMW.

When we say Rolls-Royce from now on, think aerospace and engines, not cars.

In the short term, the government's intervention stabilized Rolls-Royce's business. The RB211 program, now backed by taxpayer money, was able to continue, and soon the TriStar's RB211 engines were finally performing to specification. Lockheed, which had been staring at its own potential bankruptcy due to the engine delays, was thrown a lifeline by the British rescue. The first TriStar powered by Rolls-Royce engines was delivered to an airline (Eastern Air Lines) in April 1972. It would go on to become a commercial success and a technical cornerstone for Rolls-Royce's future big-fan engines.

After 1971, Rolls-Royce (1971) Ltd. spent the rest of the 1970s rebuilding under government ownership and focused on what it did best: aircraft engines (civil and military), gas turbines, and marine power systems. On December 31, 1977, the company finally earned the right to drop the “(1971)” tag, as the government restored its historic name.

De-nationalization in the 80s, and Rolls-Royce finds its stride

By the early 1980s, Rolls-Royce had recovered enough that Britain's government was eyeing privatization. Margaret Thatcher and her government were on a campaign to return state enterprises to the private sector, and Rolls-Royce was an obvious candidate. In 1986, Rolls-Royce Limited was restructured as Rolls-Royce plc, a public limited company, as a prelude to a share offering. In April 1987, the government sold 100% of its Rolls-Royce shares to investors in a heavily advertised public offering.

Rolls-Royce plc entered the late 1980s optimistic and outward-looking. It had a strong position in global aerospace as one of only three major engine makers for large airliners. Its engines for civilian aircraft were performing well in the market, and on the military side, Rolls-Royce was a partner in the development of the engines for the upcoming Eurofighter Typhoon. The company also built helicopter turboshafts and even nuclear submarine reactors (the Rolls-Royce Marine division handles the UK's submarine propulsion). In short, by 1990, Rolls-Royce had transformed into a diversified company, far removed from relying on a single product.

Yet the ethos of engineering excellence from Royce's days persisted. In practical terms, Rolls-Royce poured resources into improving engine efficiency and service life, knowing that an engine's true profitability often came from decades of maintenance contracts. The late CEO Sir Ralph Robins (who had guided the company through privatization) described Rolls-Royce's business as “exceptionally long-term”, as a single engine program might span half a century from development to the last spare part installed.

Rolls-Royce set its sights on global growth in the 1990s. The end of the Cold War and a boom in air travel opened new opportunities, but also new competition. To defend its position, Rolls-Royce made several strategic acquisitions and partnerships. One of the more notable was the acquisition of Allison Engine Company of Indianapolis, which specialized in smaller turboprop and turboshaft engines. The acquisition gave Rolls-Royce a stronger foothold in the U.S. defense market and a suite of products for regional aircraft and helicopters.

Another partnership came with Germany's BMW in the early 1990s. The two firms formed BMW Rolls-Royce GmbH in 1990 to develop jet engines for regional and corporate jets. This joint venture produced the BR710 and BR715 turbofan engines, which power Gulfstream and Bombardier business jets and the Boeing 717 airliner. By 1999, Rolls-Royce bought out BMW's share, renaming the business Rolls-Royce Deutschland and making it a wholly owned subsidiary.

That same year, Rolls-Royce moved beyond aerospace by acquiring Vickers plc, producer of propellers, stabilizers, and diesel engines for ships, and supplied, among others, the Royal Navy. Rolls-Royce saw marine propulsion as a natural extension of its gas turbine business, and the acquisition made Rolls-Royce a significant player in the marine power market overnight.

Back to civil aviation, the 1990s and early 2000s saw Rolls-Royce firmly establish its Trent family of large turbofan engines. It supplied engines through Airbus and Boeing to airline operators across all continents winning roughly 40-50% of new widebody aircraft orders in competition with GE and Pratt & Whitney. The company also partnered with competitors when sensible, allowing Rolls-Royce to participate in the narrowbody market (single-aisle jets) without bearing the full development cost alone. But despite this, challenges loomed on the horizon.

The late 2000s brought a spike in fuel prices and the global financial crisis of 2008, which had a significant impact on the aviation sector. Rolls-Royce proved resilient through the downturn, thanks in part to its diversified business as defense contracts and services revenue helped cushion declining engine orders. Back in the 1910s, Henry Royce had been wary of taking on government contracts, fearing that it would create an overreliance on them. But now, as the world went through the greatest financial crisis since the great depression, it kept Rolls-Royce afloat.

Turbulence and transition

Entering the 2010s, Rolls-Royce's broader strategy can be simplified as: streamlining the company, reducing costs, and doubling down on aerospace and defense technology. In civil aviation, Rolls-Royce scored a major win being the exclusive engine supplier for Airbus's new long-range A350 XWB.

A Rolls-Royce Trent XWB engine at the Learning and Development Centre in Derby, UK.

It also began developing a new model (the Trent 1000) for Boeing's 787 Dreamliner. But, as had been the case in the 70s, technical problems with a new engine would lead to a negative spiral and mounting costs. By 2016-2018, numerous problems with the Trent 1000 in service were suffering from premature blade cracking and other issues, causing airlines to ground aircraft for repairs. Rolls-Royce had to undertake an expensive retrofit program, announcing an estimated spend of £1.3B over 2018-2020 to overhaul the Trent 1000 fleet and improve durability.

Rolls-Royce also faced a black eye from a global bribery scandal. In 2017, the company agreed to pay £671M in penalties to UK, U.S., and Brazilian authorities to settle long-running investigations into corrupt practices. Investigators found that between the 1990s and 2010s, Rolls-Royce intermediaries had bribed officials in multiple countries to secure engine and equipment contracts.

As if engineering setbacks and legal scandals weren't enough, Rolls-Royce had also been navigating significant leadership changes amid the chaos. Longtime CEO Sir John Rose, who had led the company's global growth from 1996 to 2011, retired and was succeeded by a series of new chief executives. John Rishton (2011–2015) presided during the bribery investigations and initiated some of the cost-cutting, and in 2015, the company brought in former CEO of ARM Holdings, Warren East.

East undertook a major restructuring, slashing thousands of jobs and flattening the management structure. He also doubled down on “digital engine” initiatives, leveraging data analytics to improve engine maintenance and performance.

By the late 2010s, Rolls-Royce's financial performance was under strain. The combination of Trent 1000 repair costs, a slowdown in new orders, and the UK cutting its defense budget led to financial turbulence. Still, East's changes were laying the groundwork for a more efficient Rolls-Royce going forward, but would soon be confronted with one of its biggest challenges yet.

Trouble ahead

It's safe to say that 2020 would prove to be a watershed moment for Rolls-Royce's civil aerospace business. As the world came to a standstill due to the pandemic, global lockdowns and travel restrictions threw the global economy into chaos. One of the most severely impacted industries was aviation.

Rolls-Royce found itself in the thick of it, with the structure of its engine business leaving it acutely vulnerable. From the total revenue generated during the lifetime of an engine, Rolls-Royce (and other engine manufacturers) partly receives payment for the original equipment, but the bulk is generated from long-term service agreements (LTSAs). Of its Civil Aerospace revenue, which was around half of the company's total, approximately two-thirds was revenue from 4,100 large engines directly based on LTSA contracts.

These agreements are based on engine flying hours. When planes are flying like normal, Rolls-Royce generates cash. When practically all of global aviation comes to a screeching halt, so does the cash. These LTSAs are crucial to understanding how Rolls-Royce's business model works, and we're going to take a closer look at them later.

In 2019, Rolls-Royce's large engines logged 19.4 million flying hours. At their lowest point in April 2020, large engine flying hours plummeted 80% compared to the same period in the year prior. Rolls-Royce felt the downturn more than most, as its focus on widebody engines exposed it to a segment that not only declined faster but also took far longer to recover. For the full year 2020, large engine flying hours collapsed to just 43% of 2019 levels. Long story short: the business was hemorrhaging cash.

The financial implications were immediate and brutal. Rolls-Royce's revenue fell 26% from £15.5B in 2019 to £11.4B in 2020, posting an operating loss of £2B. Still, much of the downside was mitigated by its resilient Defence segment (again, government contracts proved to be a lifeline). Free cash flow swung from £873M in 2019 to a £4.2B outflow in 2020.

The pain didn't end in 2020 as recovery proved agonizingly slow. In 2021, large engine flying hours improved modestly to just 48% of 2019 levels. Although revenue remained depressed at £10.9B and Civil Aerospace revenue continued to fall, Rolls-Royce returned to an operating profit of £414M, but recorded another free cash outflow of £1.5B. It clearly wasn't past the turbulence.

During these crisis years, Rolls-Royce's net debt position deteriorated dramatically from £1B in 2019 to a peak of £5.2B in late 2021. This led to the major rating agencies downgrading it to junk status. The company even took the drastic action of raising £2B through a rights issue in November 2020.

To combat all of the challenges it was facing, Rolls-Royce launched a massive restructuring, announcing plans to eliminate at least 9,000 roles and target run-rate savings of at least £1.3B by the end of 2022. By year-end 2021, the company had exceeded both commitments a year ahead of schedule, while also bringing in much-needed liquidity of £2B from disposals of business segments.

In 2022, the broader recovery of traveling continued, but large engine flying hours were still only at just 65% of 2019 levels. But inside Rolls-Royce, things were beginning to change. The restructuring was complete, costs had been permanently reduced, and a new leadership team would soon arrive to transform the company.

Ready for takeoff

In mid-2022, Rolls-Royce announced that Tufan Erginbilgic would become its new CEO as of 1 January 2023, replacing Warren East. Erginbilgic came in with experience in engineering and had previously worked as CEO of BP Downstream, where he had made a name for himself as someone capable of leading large, international businesses. In Rolls-Royce's H2 2022 earnings call (sourced through Quartr Pro), Erginbilgic made his first appearance as CEO and made an honest assessment of the situation:

Erginbilgic's key in his turnaround strategy was creating culture and alignment. One part of this was reshuffling leadership and roles within the company. Shortly after his arrival, he brought in a new CFO, appointed a new President, and made several other upper management changes to support the transformation. He also appointed a Chief Transformation Officer, launching what he described as “the boldest change program Rolls-Royce has carried out in many years.”

Erginbilgic's main priority was Rolls-Royce's Civil Aerospace segment. In 2022, revenue from the segment had rebounded from 2021 lows but was still nearly 30% lower than pre-pandemic levels. During the same period, the aforementioned Defence division hadn't faltered, growing 10% over those years, while its Power Systems segment had recovered virtually all of the pandemic impact already by 2022.

For Civil Aerospace, one of the most important actions was tackling what Erginbilgic described as “£1.4 billion in onerous contract provisions”. These were LTSAs where Rolls-Royce was contractually locked into providing maintenance at prices below cost, effectively losing money on every shop visit. Many contracts had been signed years earlier with unfavorable terms that didn't reflect the true cost of servicing engines or included inadequate price escalation clauses. After initializing internal investments to ensure that Rolls-Royce was delivering improved operational performance, the company began discussions. Erginbilgic captured Rolls-Royce's stance on the H1 2023 earnings call:

Erginbilgic personally engaged with every customer holding unprofitable contracts, establishing joint task forces to renegotiate terms toward “win-win solutions”, reaching “partner terms in favor of the earlier supplier terms”. By 2024, Rolls-Royce had successfully renegotiated nearly all original equipment and a significant portion of aftermarket contracts, delivering £617M in total contractual margin improvements that year alone.

The company also kept driving down costs. It streamlined the organization and planned to reduce headcount by a further 2,000-2,500 roles by the end of 2025. A new organizational design introduced in June 2024 created a leaner structure with fewer layers and clearer accountability. Procurement was centralized to capture cross-division synergies, and zero-based budgeting was rolled out to support a targeted £1B in third-party cost savings. The overhead program also tightened working capital, with new processes to improve inventory management and recover overdue receivables.

Finally, it focused on technical enhancements to improve engine reliability, particularly "time on wing" (the duration engines can remain in service between major maintenance visits). Since Rolls-Royce generates revenue per flying hour, improving time on wing implies that it incurs fewer maintenance expenses. It also served as an important lever in negotiations, as the improvements clearly benefited airlines, allowing aircraft to spend less time on the ground.

This was especially critical for the Trent 1000, which had suffered persistent durability issues requiring premature shop visits. Rolls-Royce invested £1B to develop solutions, including a new high-pressure turbine blade that would more than double the Trent 1000's time between major overhauls. By 2024, the company had raised its target from a 40% improvement in time on wing across modern engines to more than 80%, a goal which it hoped to reach for a significant portion of already by the end of 2025.

Along with these operational changes, Erginbilgic continued to improve alignment and ensure that it spread across all departments and roles. As part of this, he introduced new performance management processes linking five-year plans to strategic initiatives, annual budgets, and in-year tracking, with rigorous intervention when targets were missed. To guarantee organization-wide accountability, over 1,200 employees self-nominated as "change makers". In a 2024 episode of In Good Company, Erginbilgic emphasized the importance of empowering employees:

By year-end 2024, the company returned to a net cash position for the first time in years. With the balance sheet restored, rating agencies upgraded their credit ratings from junk back to investment grade, an independent validation of the remarkable turnaround achieved in a short time.

The Tufan Erginbilgic turnaround

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Business breakdown

Rolls-Royce of 2025 is a company with momentum under its wings. Breaking down its £18.7B H1 TTM 2025 revenue, slightly more than 50% comes from Civil Aerospace, which is also the fastest growing segment of the three core. The remaining half is split almost perfectly between Defence and Power Systems. Both of these have increased revenue by over 10% annually since the pandemic, but don't compare to Civil Aerospace, growing by over 20% annually since 2021.

The aviation industry

Before we break down this fast-growing core business of Rolls-Royce, we will give a short overview of the key dynamics shaping the aviation industry.

The aerospace sector operates through a structured value chain with multiple tiers of specialized players. A simplified overview of the wider upstream end includes component manufacturers like TransDigm and HEICO, large system integrators and suppliers such as Safran, and engine manufacturers Rolls-Royce, GE Aerospace, and Pratt & Whitney. The next more distinct tier, where these engines are integrated into aircraft, consists of the duopoly of Airbus and Boeing, before it is ultimately delivered to and operated by commercial and cargo airline operators.

What distinguishes the aviation industry from many others is the deeply embedded nature of relationships throughout this value chain. Airbus and Boeing represent the clearest examples of cemented industry players, with their dominance creating stable, long-term partnership structures across the entire ecosystem. Most of these are multi-decade commitments built on extensive certifications, engineering integration, and operational interdependence.

Because of this, the industry's participants rely heavily on each other through complex and incredibly long-term contractual frameworks. Engine selections are made early in aircraft design programs, locking in relationships for the life of those platforms. This interdependence extends to aftermarket services, where ongoing maintenance and support continue throughout an engine's operational life, which can stretch to decades. These structural characteristics create high barriers to entry and (besides when a pandemic pauses traveling worldwide) generate predictable, recurring revenue streams across the value chain.

Civil Aerospace

Rolls-Royce's Civil Aerospace segment involves the development, manufacture, and sales of commercial aero engines and the lengthy commitment to aftermarket services for these.

While Rolls-Royce physically delivers engines to airframers like Airbus and Boeing for installation on new aircraft, the airline operators themselves select which engines they want. This creates a dual customer dynamic: the initial original equipment sale of the engine is to the airframer, but the real long-term business is directly with airlines through aftermarket services and its LTSAs.

As we touched on earlier, these are contracts where airlines pay Rolls-Royce based on engine flying hours, and in return, Rolls-Royce assumes responsibility for maintaining those engines throughout the contract period, often extending 8-15 years beyond the original equipment sale. Under LTSAs, Rolls-Royce transfers service and maintenance cost risk from airlines to itself. Airlines pay a predictable rate per flying hour as planes operate, while Rolls-Royce bears the uncertainty of when engines will require expensive shop visits and what those visits will cost.

Cash is received as engines fly, providing immediate cash inflow, while major cash outflows and revenue recognition occur later in time, as engines require shop visits for maintenance. Because of this structure, under normal conditions, LTSAs create favorable working capital dynamics, as Rolls-Royce generates cash upfront rather than building up receivables before it provides maintenance services. It also creates strong incentives for Rolls-Royce to improve engine reliability and reduce maintenance costs, since the benefits of these flow directly to its margins. All of Rolls-Royce's contracts in its Civil Aerospace segment are covered by these, yet their structures can differ widely from one to the other.

The two major parts of this segment are widebody aircraft engines (large international commercial aircraft like the Boeing 787 and Airbus A350) and business aviation (private and corporate jets), accounting for over 70% and 20% respectively. Breaking it down further, across these two, the original equipment stands for roughly a third of revenue, while services contribute to the remaining two-thirds.

The constant competitors of Pratt & Whitney (a subsidiary of RTX Corporation) and (the now spun-off entity) GE Aerospace continue to share the entire widebody market with Rolls-Royce, with the latter holding the largest share. However, from the end of 2022, Rolls-Royce has held a market share of over 50% of new engine deliveries, which has taken its share of the installed global base from 32% to 36%. In terms of engines for the business aviation market, the same trio compete against each other. But in that one, Rolls-Royce is the clear leader with an approximate 70% market share of the total aircraft in service.

As you know by this point, Rolls-Royce's commanding position in the sky wasn't built overnight but over more than a century of engineering excellence, massive capital investments, and the cultivation of deep, multi-decade relationships with partners across the value chain.

Its engines power transportation infrastructure where reliability and performance are unwavering requirements as every component delivers mission-critical performance where lives directly depend on the technology. These factors create barriers that have taken decades to establish and have put Rolls-Royce in a position that is brutally hard to threaten. However, as we've seen through its history, the downside of this model is that issues and failures hit extremely hard and can have long-lasting consequences.

The company currently participates in the narrowbody market only through partnership, representing just 4% of Civil Aerospace revenue. Rolls-Royce has stated that it aims to focus more on this opportunity in the future, but can only do so when Airbus or Boeing develops new narrowbody aircraft or upgrades their current models, which is not expected until the 2030s. In the meantime, it remains focused on strengthening its dominant market positions in both widebody and business aviation.

Defence

Rolls-Royce's Defence segment has (indirectly) been active since WWI. The core parts of this segment are engines for combat aircraft, nuclear reactor design, supply and support for submarines, and engines for military transport and patrol aircraft. Each of these makes up roughly a third of this segment.

Interestingly, in mid-2023, approximately 50% of its Defence revenue came from the US Department of Defence and roughly 30% from the UK's counterpart, with the remaining 20% coming from export markets. Similar to its Civil Aerospace business, the life-cycle of the agreements in Defence tends to be extremely long-term:

We've been over this earlier, but it's worth emphasizing the robustness of the Defence segment. The reliability of government contracts implies that if civil aviation faces issues, the decades-long terms help reduce the total impact.

Power Systems

Rolls-Royce's Power Systems segment, operating under the mtu brand, has over 114 years of history providing integrated power and propulsion solutions. Half of this segment is revenue associated with power generation, which is diesel and gas power solutions built around modular engine platforms, most famously the S4000.

These solutions are designed as backup and continuous power sources, serving customers such as data centers and industrial manufacturing facilities. The first-mentioned data centers' orders increased by 42% year-over-year in 2024 from the previous year, showing the momentum from a sector driven by trends in cloud computing and AI demand.

The remaining half comes from governmental, marine, and industrial, all delivering similar solutions but to very different needs. As the company puts it: “Invent once, use many times”, Rolls-Royce has sold over 60,000 S4000 engines across nearly every use case.

Aftermarket services

From the group's topline of £18.7B H1 TTM, approximately £10B is attributed to aftermarket services across its three segments. The largest and most profitable portion comes from Civil Aerospace, where services generated £6.5B of the revenue.

The services segment of Civil Aerospace primarily operates through LTSAs, such as TotalCare and CorporateCare. These contracts cover comprehensive maintenance, repair, and overhaul services (MRO), along with continuous engine monitoring throughout the contract period. As touched on earlier, customers don't pay for each individual service event. Instead, they pay recurring fees based on engine flying hours.

Therefore, time on wing is directly linked to profitability. When engines stay operational longer between shop visits, customers continue paying the hourly usage fees while Rolls-Royce incurs fewer maintenance events. That's why the transformation of the past years largely focused on just this aspect, as Erginbilgic emphasized on the H1 2025 earnings call:

While Defence and Power Systems are also structured with long-term aftermarket service contracts, the service share is lower in these segments. Defence services represented 57% of segment revenue at £2.6B in H1 TTM 2025, while Power Systems services accounted for 31% of that segment's revenue at £1.4B.

Rolls-Royce revenue from aftermarket services

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On the other side of transformation

When Tufan Erginbilgic took the helm in January 2023, the new CEO said that at Rolls-Royce “every investment we make, we destroy value” and that it faced a “last chance to change” (Financial Times, 2023). Just before his arrival, in 2022, the company generated £13.5B in revenue with an EBIT of £837M, translating to a meager 5.1% EBIT margin. What has unfolded since represents one of the most remarkable turnarounds in recent years.

For H1 TTM 2025, revenue has surged to £18.7B while EBIT has more than tripled to £3B, driving margins to 16.3%. The transformation is visible across all three core segments. Civil Aerospace margins exploded from 2.5% in 2022 to 24.9% in the first half of 2025. Simultaneously, Defence margins have expanded from 11.8% to 15.4%, while Power Systems has increased from 8.4% to 15.3% in H1 2025.

Central to this turnaround and specifically the Civil Aerospace segment, is Rolls-Royce's improving LTSA structure, which (under normal conditions) generates highly predictable recurring revenue. This has been achieved through three components that we mentioned earlier: increasing the installed base, contract renegotiations, and time on wing improvement.

Rolls-Royce's investments in recent years mirror CEO Tufan Erginbilgic's transformation agenda. Capital expenditure climbed from £512M in 2022 to £699M in 2023 and £876M in 2024, driven by disciplined investments in high-return initiatives, primarily the £1B time-on-wing improvement program (2023-2027) and MRO capacity expansion to support 50% more shop visits. Multi-year investment cycles like these imply that free cash flow conversion can vary significantly depending on program maturity, with most cash benefits materializing beyond the midterm. However, despite the 71% shift in CapEx, free cash flow surged from £505M in 2022 to £2.4B in 2024, with H1 2025 alone increasing to £1.6B.

On the back of this impressive performance, management has exceeded guidance not once but six times since early 2023, most recently in H1 2025 by upgrading its 2025 guidance to £3.1-3.2B in EBIT and £3.0-3.1B in free cash flow. This track record of outperformance has not only rebuilt investor confidence but also heavily rewarded investors.

After the transformation and with a significantly improved balance sheet, Rolls-Royce reinstated dividends in 2024 after a five-year hiatus. Simultaneously, management announced a £1B share buyback for 2025, the company's first in a decade. Along with these returns for its shareholders, the stock has performed unprecedentedly well. Since Tufan Erginbilgic's arrival in January 2023, it is up more than 10X(!).

One could argue that he arrived at a company that had been primed for a turnaround by his predecessors. Even if there could be some truth to that, you have to give credit where it's due.

Closing thoughts

While there are many things that we can say that would summarize the type of company that Rolls-Royce is, its place in history and current performance speak for themselves. So, instead, we're going to leave you with the words of one of the founders, which still act as Rolls-Royce's official mantra:

"Take the best that exists and make it better” - Sir Henry Royce