Rolls-Royce’s remarkable British revival

How ‘Turbo Tufan quelled the flames on an engineering giant’s burning platform

Tufan Erginbilgic, who took over Rolls-Royce just a few weeks ago, called a nervous staff to huddle at the company’s Derby headquarters.

The Turkish executive, who was meticulous in his research and analysis of the FTSE 100 firm, spent the last month talking to investors that were all but fed up.

He had a blunt message for the 42,000 Rolls employees. The company was “a burning platform”, and they all stood on it.

He warned, “Given all I know, it’s our last chance.”

The tactic of shock and awe divided opinions. Some critics branded it as a “Gerald Ratner Approach”, the British jeweller who called his company’s products a “total —“.”.

A few months later at the annual general meeting of the company, an angry shareholder scolded Erginbilgic over “destabilizing” the business.

Erginbilgic did not apologize and continues to do so.

He tells that he was simply telling people they were in a false world. (He admits that his comment about the “burning platform”, however, was meant only to be heard by him).

“The company was effectively at a stage where we could not do anything that we wanted to. What we could do was not much.

I thank everyone who has contributed to the history and development of Rolls-Royce. “But we must talk about some facts.”

In just over a month, the world has changed dramatically.

Analysts call Erginbilgic “Turbo Tufan”, but he is now being hailed as a hero in the City for finally getting the Rolls-Royce to fire on all cylinders.

Rolls reported record profits and free cash flow in its blockbuster results for the year ending February.

Under Erginbilgic, the share price of Rolls has increased by 350pc and its coveted “investment-grade” status was restored by rating agencies. (Perhaps a stepping-stone towards the return to dividends after a four-year hiatus.)

Erginbilgic will not receive the same hostile reception as he received at last year’s AGM with just a little over a week left until 2024.

The startling turnaround, both internally and externally has been attributed to Erginbilgic’s sheer personality and the cultural changes he has implemented since taking over.

One analyst recalls that Tufan was virtually unknown when he arrived. “His ‘burning-platform’ remarks were the first thing that most of us heard from him.

You have to sit straight up at this point, as you realize that something is going to happen.

Phil Townley, Rolls-Royce director of future programs at the defence campus in Bristol says: “Tufan requires certain standards and it’s clear that everyone is raising their game.

It’s just reenergized people.”

Another analyst says: “It is hard to know whether people are reacting out of fear or inspiration, but it’s clear that he’s galvanised his workforce.”

Rolls is known for its passenger jet engines, but it also produces turbines for fighter planes and warships. It also manufactures nuclear power reactors for UK subs, and diesel-burning engine used for electricity generators, trains, and yachts.

The government is working on a new generation small modular reactors, or mini-nuclear energy stations. They hope that will play a key role in.

The company is worth £36.8bn and is an important national asset. It’s a pillar for both Britain’s national security and industrial base. Its revival is more than just a benefit to its employees and investors.

While few would dispute that the situation has improved under Erginbilgic’s leadership, some critics believe he gets too much credit for this turnaround.

Sir John Rose who ran Rolls from 1996 until 2011 claimed that celebrating Erginbilgic’s genius was premature.

The veteran industrialist wrote to a newspaper that the strongest impact on the results of [2023] will not be the new chief executive, but rather the actions of Warren East’s predecessor, the strong US Dollar, the recovery of flying, and the performance of diesels, and defence.

Rolls earns money by the number of “flying-hours” that its passenger jet engines clock up. The recovery of the international aviation industry, spurred on by China’s post Covid reopening late in 2022, has had a huge impact. This is independent of any actions taken by Erginbilgic.

Erginbilgic is not surprised to hear that he does not want to be credited for the success of other people.

The 64-year old says, “This is my third change.” “I have seen the same thing in all three cases: the leadership stopped talking about the results after a certain time, and people didn’t know if the company was in good or bad shape.

“They think we’re doing well because they’ve delivered on their plan, and they’re getting a bonus.”

Erginbilgic, pronounced “air-gin bil-gitch”, is a dual Turkish and British citizen who studied business administration in Istanbul.

He has spent most of his career working in the oil and gas industry. From 1997 to 2020 he rose through the ranks at BP to become the head of “downstream”, which includes refineries, chemicals, and petrol stations.

The married father of two gained a reputation for being a ruthless, efficient operator. He worked as a chief of staff directly under the ex-BP CEO Tony Hayward.

Hayward, the man who succeeded Lord Browne but resigned from his position in 2010 due to the Deepwater Horizon oil leak, described Erginbilgic, as “one the best executives I have ever worked with”.

Erginbilgic left BP in 2020 after Bernard Looney won the position of chief executive. He moved to Global Infrastructure Partners as a private equity adviser.

It was a bit of a shock when Dame Anita Frew appointed him as Rolls’ chief executive in July 2022.

Erginbilgic said that he was attracted to this role in part by the company’s long history. This includes the famous Merlin engines built for Spitfires and Hurricanes fighter planes during World War II.

Rolls, however, had only just survived a near death experience when he was there. The pandemic of coronavirus shut down the aviation industry overnight, forcing the company to raise billions in emergency funds.

The City had already been trying to be patient with the giant engineering company. The company had been in a turnaround mode for the past decade with little tangible result.

Rolls was supposed to be revitalized by Erginbilgic, the predecessor of East, the cool-headed former head of Cambridge-based Arm Holdings chip designer.

“Warren brought in to modernise our company.” “He was supposed to have been this type of technology figure,” says a senior company official.

He spent the majority of his time putting out the fires. This included the aftermath of the major corruption scandal, and the problems with Trent 1000 engines, which cost the company more than £2bn as compensation to airlines.

Rolls had shed about 10,000 employees during the pandemic. However, it was still seen as a “fixer upper” by the time East left.

The company’s biggest problem was its huge profit gap with its main competitors like General Electric and Pratt & Whitney.

Rolls-Royce made less money, despite its dominant position in the supply of engines for widebody aircraft and business jets.

The company’s market share in widebody – industry jargon for planes with two aisles including jumbos – is almost 40%. It is the exclusive engine supplier for Airbus A350, A330neo, and competes with GE for engines on the Boeing 787 Dreamliner.

Rolls’ civil aircraft business, which accounts for just under half of the group’s revenue, only managed a profit margin of 5pc, compared to rivals who were able to achieve 20pc. Rolls left the narrow-body aircraft market in 2012, which was dominated by smaller planes like the Boeing 737.

Rolls also had problems with its power systems division in Germany, which accounted for a quarter of the company’s revenues. Erginbilgic said that he was shocked at the fact that margins were falling while revenues increased. He said that this had been “grossly managed”.

He was also of the opinion that Rolls had been investing money ineffectively with a poor track record for returns dating back before the pandemic.

He says: “There was not a strategy for the allocation of resources. It was also very decentralised. Everyone came up with their own budget.

“Now we have a brand new process.” We don’t consider anything that isn’t in line with the strategy.

Erginbilgic was ruthless when it came to his attempts to get the business in order.

He eliminated back-office positions in finance, human resources and procurement to “unify” the three divisions. Now, these functions are centralised and businesses have to compete for capital.

He also replaced the majority of the top executives, and reduced the costs associated with the supply chain.

Erginbilgic, on the other hand, dared to ask Rolls customers for more cash, something that previous management teams were afraid to do.

“Rolls hasn’t really wanted to do it because they were afraid of losing market share,” says an analyst who regularly speaks with Erginbilgic.

Erginbilgic’s direct approach was less cautious.

“He’s a very tough, hard man,” the analyst adds. “He’s a tough, hard-working man”, the analyst continues.

“Warren East is a nice man and I really like him, but he doesn’t seem to be a tough man.”

Former BP colleagues described Erginbilgic as incredibly intelligent but lacking “emotional Intelligence”.

Rolls’s CEO now leads an investment committee which vets each new major deal the company makes. He has also successfully renegotiated contracts that were losing money.

Simon Burr describes his boss, who he promoted to the position of Group Director for Engineering, Technology and Safety last year, as “extremely direct and focused”.

“Tufan is focused on goals, accountability and doing what we said we would do,” says he. “And honestly, I’m comfortable with that.”

Erginbilgic believes that the turnaround of Rolls is due to its focus on performance and pricing, not just an increase in air travel.

He says, “I know everyone is focused on the civil aviation.” “But we achieved it across all divisions. Last year, power systems delivered its highest profit [ever].

When people say “Tufan, You are benefiting by flying hours” – power systems don’t work like that.

The recovery of aviation has helped, no matter what.

After the reopening in China, Erginbilgic was able to recover the international flying markets from 62pc.

Erginbilgic says that Rolls already has record cash flow without regaining 100pc traffic.

The chief executive acknowledges that the turnaround is still far from complete.

He stresses that “I don’t think we’re done yet, as it’s been only one year. This is a large organisation.”

By 2027, the company promises profits between £2.5bn to £2.8bn with an operating margin between 13pc-15pc. This will require increasing margins from 10pc to 15pc-17pc in the civil aviation sector.

Erginbilgic also ordered an upgrade programme worth £1bn for its Trent 1000, Trent 7000 and Trent XWB engine as part of their efforts to reduce the time they spend in maintenance.

Emirates has publicly blamed its decision to delay ordering 50 Airbus A350s until November on complaints about the durability and dustiness of the XWB.

Rolls has borrowed technologies from its Ultrafan experimental turbine to double the XWB 97’s time on wing in harsh conditions before 2028.

The company’s giant testing chamber in Derby is undergoing round-the-clock tests, with technicians literally passing large quantities of sand to test the turbine.

Erginbilgic: “We will reach the highest level of competitiveness in three years.”

With all my engines I will get more flying time and less shop visits.

Focus is about avoiding distractions. Rolls also wants to get rid of its electric air taxi operation to save money.

Erginbilgic, who has praised the embryonic venture of the company for small modular nuclear reactors (SMRs), has also warned that it cannot be continued indefinitely without the Government issuing orders.

A second executive stated that the SMR business would run out of money by the year 2024. The long-delayed SMR Competition of the Government is not expected to be completed until this summer. This could lead to a major crisis if there are any more delays.

Erginbilgic, for his part insists that SMRs and even smaller “micro-reactors” Rolls are working on represent a true strength.

He says that the nuclear capability of Rolls-Royce makes it so unique. If we don’t become the market leaders in this area, we haven’t managed our business well.

Erginbilgic’s impressive opening salvo earned him valuable credibility within the City.

The days of burning platforms are long gone. Erginbilgic instead talks up future growth prospects. The company will benefit from projects such as the Aukus programme for nuclear submarines and the development of the Tempest jet fighter.

If you take a step back and consider the future that we are creating at Rolls-Royce in the next phase, our mid-term targets will only be viewed as a milestone.

The resident “hardman” of Rolls-Royce says: “The Future is a Lot Better.”