Rolls-Royce engine manufacturer benefits from US contract

Richard Aboulafia of Teal Group (courtesy Teal Group)

Few major UK companies have been hit as hard by the pandemic as Rolls-Royce Holdings, the maker of aircraft and marine engines. (Not to be confused with the luxury automaker of the same name; the two became separate entities 50 years ago.)

As commercial aviation collapsed last year, Rolls-Royce Holdings plunged into a loss of nearly $ 5.5 billion, laid off 9,000 employees and was forced to sell assets and raise money. new capital.

“They are almost exclusively exposed to international traffic due to their strong presence on jumbo jets,” said Richard Aboulafia of consulting firm Teal Group. “And, of course, this part of the market was hit first and longest by the downturn.”

The company’s problems were compounded by its business model. Rolls earns its money not by selling its engines, but by repairing and maintaining them. It is paid according to the use, the number of flight hours of its engines.

“Usage has been affected by this slowdown more than at any time in aviation history,” Aboulafia said.

But today, things are accelerating for Rolls. A flurry of good news has driven the share price higher in recent months and the outlook for the company, which has been clouded by corruption scandals and concerns about engine safety even before the pandemic, suddenly looks high. brighter. This is in part thanks to developments in the United States.

The US decision to ease restrictions on transatlantic air travel was a major boost for Rolls, as well as unexpected success in winning a big contract from the US Department of Defense. Faced with fierce competition from its American rivals General Electric and Pratt & Whitney, the British company was awarded a $ 2.6 billion contract to supply 650 engines for the US Air Force’s B-52 bombers.

“It’s an extraordinary number of engines,” said Guy Norris of Aviation Week. “Nowadays, if you win an engine contract, it’s usually two engines per plane. The good old days of four-engine airplanes like the 747s are fading away. But here you are, all of a sudden, with an eight-engine plane, so numbers like 650 engines don’t come up every day.

Aviation Week Guy Norris
Agreements to supply 650 engines “don’t come up every day,” says Guy Norris of Aviation Week. (Courtesy of Norris)

The prospect of another big defense deal also arose unexpectedly, this one involving submarine warfare. Rolls supplies the propulsion systems for the British Navy’s nuclear-powered submarines, and some investors believe the company could now earn much more business from the AUKUS Submarine Pact between the United States, the United Kingdom. United and Australia unveiled, unexpectedly, last month.

The company’s nuclear expertise opens up an even more attractive prospect.

In the pursuit of net zero greenhouse gas emissions, interest has grown in nuclear power as a low-carbon energy source and, unlike wind or solar, a constant source of energy.

Tim Yeo, who heads the New Nuclear Watch Institute – a think tank funded by the nuclear industry – applauded the work Rolls-Royce is doing on a new generation of small modular reactors to help fight climate change.

"I think the future may well be small modular reactors," said Tim Yeo of the New Nuclear Watch Institute.  (Courtesy of Tim Yeo)
“I think the future may well be small modular reactors,” says Tim Yeo of the New Nuclear Watch Institute. (Courtesy of Yeo)

“They are modular in design, so the components can also be built in factories, and we would expect this to speed up the process and most likely – although not yet proven – very likely to turn out to be cheaper. “Yeo said.

By one estimate, they’re likely to cost less than $ 3 billion per person, a fraction of the cost of a large custom-built reactor.

“I think the future may well be small modular reactors,” said Yeo, “and this is particularly interesting for the UK as Rolls-Royce is one of the world leaders in the development of this technology. ”

The CEO of Rolls said the company may one day eclipse the entire existing business as the export markets could be huge. But not everyone buys this rosy scenario.

“Well, the problem is, it takes a massive leap of faith,” observed Steve Thomas, professor emeritus of energy policy at the University of Greenwich. It’s still untested technology and it would take some $ 40 billion in taxpayer dollars to get started, he said.

Steve Thomas, Professor Emeritus of Energy Policy at the University of Greenwich.
Steve Thomas, Professor Emeritus of Energy Policy at the University of Greenwich. Small modular reactors require “a massive leap of faith,” he says. (Courtesy of Thomas)

“It’s a very big bet of public money on something that may or may not turn out to be an economic winner,” Thomas said. “I don’t think it’s going to happen.”

Whether Rolls achieves its nuclear ambitions or not, the resumption of aviation and an anticipated increase in defense spending in the West looks set to provide further stimulus for the company.

Traveling, hopefully, is often better than arriving. And Rolls-Royce is certainly traveling with more hope today than a year ago.

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