The Rolls-Royce share price chart since January last year makes alarming viewing. It takes the form of a headlong plunge ending yesterday morning in a cliff. The cause of the 20 per cent drop in a single day was a profit warning from the new chief executive, Warren East — the fifth such warning in 21 months.
Since April this year the standard-bearer of British precision engineering has lost half its market value at a time of steady growth in the broader economy. The company can complain of “headwinds” in export markets, but the root cause of its troubles is a failure of management. Rolls-Royce has misread trends in aviation and the world economy that rivals have understood with greater clarity. This was a company that took pride in not having to advertise. It may have to swallow that pride as it sets about repairing a legendary brand that is a pillar not only of the FTSE 100 index but of high-tech, high-value British manufacturing.
As Rolls-Royce reels, BAE has announced the loss of more than 300 jobs because of slackening demand for Typhoon fighter jets. These companies employ engineers whose skills are a strategic national asset. They need to be retained for the long-term health of the economy, but they will quickly go elsewhere if not kept busy here.
Mr East has warned of looming job cuts from among Rolls-Royce’s 2,000 senior managers. The cuts are necessary because of complacency under his two predecessors, John Rishton and Sir John Rose, but on their own will not be enough. If the company does not emerge from the turbulence ahead more nimble and alert to its fast-changing market, a vital sector of the British economy will be at risk.
Mr Rishton and Sir John were both lionised as titans of industry in their time at the helm of Rolls-Royce. Costly errors of judgment on their respective watches are more obvious now. During Sir John’s time the company opted to specialise in large engines for wide-bodied jets such as the Airbus A330, only to see demand for such aircraft plateau while demand for smaller models soared. Justifications were offered: the company was playing to its strengths and stepping back from markets in which it was not well-placed to compete with US rivals. Yet those rivals now have a virtual lock on engine contracts for the workhorse Boeing 737 and the Airbus A320, currently being assembled in Toulouse at the staggering rate of nearly 60 a month. There should have been room in this market for Rolls-Royce.
For much of Mr Rishton’s tenure, starting in 2011, Rolls-Royce enjoyed the cushion of an order book worth more than £60 billion based on rising demand for engines for big jets and lucrative long-term contracts to service them. The company failed, however, to respond quickly to the 2014 oil price slump, or to grasp its implications.
Cheap oil has reduced the pressure on airlines to re-equip their fleets with new and more efficient engines. It has also cut orders for corporate jets from Russian and Middle Eastern oil tycoons, reducing Rolls-Royce profits from engines and maintenance contracts in a sector in which it hoped to increase market share. Mr Rishton had been hailed as a potentially transformative chief executive. In the event he left the Rolls management culture largely unchanged but for a taint of scandal from allegations of bribery in China and Brazil.
The company that built the engines that powered the fighters that won the Battle of Britain remains one of only three in the world able to build and mass-produce jet engines from scratch. Its order book is worth £75 billion and even after yesterday’s warning it expects profits of £1.3 billion this year and £700 million in 2016. Its engineers are second to none but they have been let down by management. Rolls-Royce has plenty of strengths to focus on, and no excuse for failure.