Warren East says it has been a “privilege” to lead Rolls-Royce for seven years as he prepares to retire on New Year’s Eve. But it has also brought considerable pain.
East’s battles range from a £671million settlement for a massive bribery and corruption scandal that predated his time, to finding costly cracks in his jet engines. Then Covid-19 hit, grounding planes whose engines are built and maintained by Rolls-Royce.
The crisis was existential for Britain’s most illustrious industrial company. East set about raising more than £7billion from investors and lenders and cut 7,000 jobs.
Now, he says, “the tools are there” for his successor, former BP executive Tufan Erginbilgic, to improve his financial performance – and perhaps even emerge from the state of constant crisis. Erginbilgic, two years older than East, 61, will take over on January 1.
“I certainly hope he has an easier time in terms of problems,” says East, sitting in the Rolls-Royce office in London.
East, an Oxford-trained engineer, joined Rolls-Royce’s board in 2014 but was hastily installed as chief executive following the abrupt departure of his predecessor John Rishton. It was something of a surprise second act: East had, in 2013, announced his “retirement” as chief executive of Arm, the Cambridge-based chip designer he had built into the most successful UK (before it was later taken over by Japan’s Softbank).
Rolls-Royce is a very different company, with 44,000 employees in 14 countries. Based in Derby, it sells jet engines at a loss and makes a profit on maintenance later – so when during the pandemic flying hours plunged to just around 10% of 2019 levels, it was a disaster. After generating just under £1bn in cash in 2019, it has burned £4.2bn in 2020, even with help from the UK government’s furlough scheme to pay salaries.
However, East says the company, which was nationalized in 1971 after going into receivership due to inflated development costs for the RB211 engine, “never asked the government” for direct support this time around (although £2 billion loan facility was backed by a government body). The luxury car business of the same name was separated from the main jet engines at the time of nationalization.
“I think the world is different from the 1970s,” he says. “I’m not sure that bailing out the state would have been politically practical.”
Engine hours flown are back above 70% of pre-pandemic levels, but even as its recovery continues, fear of the pandemic has added weight to investors’ longer-term concerns.
Even so, there are reasons to be optimistic about East’s successor. In China, where wide-body twin-aisle jets and Rolls-Royce engines are often used for short-haul routes, China’s Xi Jinping’s zero Covid policy has meant flying hours are still around 30 %. But China’s decision to reopen its airspace and end quarantine rules for inbound travelers, taken after the interview, will boost the aviation industry.
Does Rolls-Royce have the financial clout to go it alone? East is dismissive when asked about long-awaited consolidation in the sector, such as a takeover by the American Pratt & Whitney. “Yeah, I mean, there are always these tendencies,” he sighs.
He maintains that the company is doing “absolutely well”. He scaled his divisions building engines for boats and large land vehicles and his defense business making submarine nuclear reactors, and he also points to his 50% share of engines for large twin-aisle aircraft.
However, if Rolls-Royce is to win new contracts – and in particular if it wants to enter the faster-growing market for single-aisle aircraft – it will have to wait for aircraft manufacturers Airbus and Boeing to commit to a new plane. It could take years. Boeing is still trying to recover from the 737 Max disasters, while Airbus has the luxury of waiting and making easy profits.
East says Rolls-Royce is “absolutely certain there will be another jumbo jet” with two aisles. Throughout the pandemic cuts, it continued to invest in a new engine capable of powering 200-ton planes while consuming a fifth less fuel.
Richard Aboulafia, a consultant at Aerodynamic Advisory, said it was impressive that Rolls-Royce had “stayed intact” during the pandemic and also continued to invest in the new engine, known as the UltraFan, “despite the lack of a clear application and despite severe pressure on the company’s engineering budget”.
East said Rolls-Royce may end up recouping the UltraFan investment before it even builds an engine because of advancements in areas such as materials and cooling techniques it can apply to older engines.
How to propel new planes?
There is another major factor holding back the development of a new aircraft: the deep uncertainty about how it will be propelled. Airlines have committed to net zero carbon emissions by 2050, but without a clear plan.
Rolls-Royce is experimenting with new technologies. He has flown a battery-electric single-seat plane at 345 mph (555 km/h) and last month he carried out the world’s first test of an aero engine using hydrogen. However, these efforts are not advanced. Rolls-Royce only employs a dozen people directly on hydrogen, East says.
The aviation industry is betting rather heavily on sustainable aviation fuel (SAF) – derived from substances such as used cooking oil – to bring it to net zero. Planes will still emit carbon, but it will come from the air rather than underground fossil fuels. It will be a critical technology for the entire aviation industry, and East estimates there will be demand for SAF for at least 60 years. Relying on hydrogen is not an option.
“We cannot, as an industry, wait for hydrogen,” he says, given doubts about its use. “What if we were wrong? »
East is an avid church organ player – he does weddings – but he hints that his final retirement will still involve working on energy transition beyond Rolls-Royce, just not as a leader of a big business. He will also remain on the board of ASML, a Dutch company that plays a crucial role in the global economy as the only manufacturer of the most advanced semiconductor production equipment.
Given his experience running two FTSE 100 companies, it wouldn’t be surprising if East was asked by the UK government to help with industrial policy. East is careful not to criticize the ministers for the recent industrial strategy of heating and cooling. He will only say that the government has had “a lot to do” in recent years.
But he argues there is a possible lesson for UK industrial policy to be learned from its work producing small modular reactors (SMRs), particularly given the energy crisis caused by the invasion of the Ukraine by Russia. Rolls-Royce is hoping for strong demand for cheaper factory-built reactors for small power plants to supplement intermittent renewables.
SMRs are a “niche, but it can be a fantastic niche,” East says. He sees the role of government as “the lubrication of the machine, the catalyst of the reaction”, with investments that can eventually pay for themselves.
East is optimistic about the prospects for British manufacturing and Britain’s ability to produce new industrial champions.
“We create great engineers here,” he says. “We have a fantastic supply chain of small businesses based in the UK who can do amazing things and certainly punch above their weight globally. It’s a matter of coordination and coming together, and having the will to go out and do it.
“It’s very easy to get caught up in the daily battles that happen in any business,” he says. “Once in a while, remember how good it is.”