Aviation Research Paper on Rolls-Royce Engine Company

Rolls-Royce Engine Company

Abstract

Rolls-Royce Engine Company is one of the largest engine manufacturers in the world. The company operates in the global engines industry, which has few players with General Electric, Rolls-Royce and Pratt & Whitney being the major players. General Electric is the market leader of the industry, with Rolls-Royce following as a close second. The three are the major industry players, the rest being small companies or joint company ventures. The purpose of this essay is to give a brief background of Rolls-Royce, perform an analysis of the global engines industry as well as the company’s SWOT analysis. Among the company’s strengths include a strong market presence and research and development. Further, the essay will delve into an analysis of the company based on Porter’s five forces, Royce’s key competencies, and a PESTLE analysis of the engines manufacturer. From the analysis, it is apparent that the company needs to diversify its revenue sources, given that its major revenue source is currently its wide body civil division. Global defense budgets and energy consumption are currently on the increase, all of which are considerable revenue sources.

Rolls-Royce Engine Company

Introduction

Rolls-Royce Engine Company is one of the largest engine manufacturers in the world, based in the City of Westminster, London. The Royce began in 1884 as an electrical and mechanical enterprise, having been established by Henry Royce (Rolls-Royce, 2014). The first of the company’s car was built in 1904, the very year of Royce and Charles Rolls meeting (Rolls-Royce, 2014). Rolls-Royce as a company was however founded in 1906 following an agreement for a joint venture between Rolls and Royce, which also saw the company launching the six-cylinder Silver Ghost in the same year, a car that was rated as the best in the world then (Rolls-Royce, 2014). At its establishment, the company was a luxury car manufacturer, and later diversified into aircraft engine manufacturer. While the production of luxury cars remained its major activity, the company spun off its car division in 1973. Due to financial problems, however, the engine manufacturer (now known as Roll-Royce Limited) was placed under administrative receivership and later nationalized; later, in 1987, it was privatized as Rolls-Royce plc, later changing to Rolls-Royce Holdings (Rolls-Royce, 2014). According to rolls-royce.com, the company’s mission statement is part of the vision statement; “provide better power for a changing world” (Rolls-Royce, 2014).  On the other hand, the company’s vision statement expands on the mission statement indicating that the company is “committed to innovation and continuous pursuit of improvement” (Rolls-Royce, 2014). It is perhaps the mission and vision statements that have helped the company to remain relevant and successful in the competitive engine and power systems manufacturing industry. The company also competes in the civil aerospace market, where competitors include Pratt & Whitney and General Electric (The Times 100, 2000). It is one of the oldest and the largest engine manufacturers in the world. This essay will look at the global engine manufacturing industry. With focus on Rolls-Royce, the essay will conduct a SWOT analysis, analysis based on Porter’s five forces analysis, core competencies, as well as the company’s PESTLE analysis, with a summary at the end of the key issues and recommendations for the company’s success.

Global Engine Industry

The global engine industry, particularly in large civil aircrafts has few players, with General Electric, Rolls-Royce and Pratt & Whitney being the major players (Ganston, 2006). These three are often referred to as the big three, owing to their dominance in the aviation engine manufacture business (Forbes, 2014). With a 22.5 percent of the global engine market share, General Electric is the market leader in the aviation engine industry, with Roll-Royce and Pratt & Whitney accounting for 13.7 and 10.2 percent of the market share (Kingsley-Jones, 2014). Joint ventures formed by smaller and other large companies hold the rest of the market share. Among the joint ventures are The Engine Alliance, CFM, International Aero Engines and PowerJet.

GE Aviation and Pratt & Whitney are 50/50 owners of The Engine Alliance. On the other hand, CFM is a joint venture between GE Aviation and SnecmaMoteurs a 50/50 venture, while International Aero Engines has Rolls-Royce with a 32.5 percent share, Pratt & Whitney (32.5%), Japanese Aero Engines Corporation (23%) and MTU Aero Engines (12%). For PowerJet, both NPO Saturn JSC and SnecmaMoteurs hold 50 percent of the joint venture (Rudd, 2012). Of the dominant players in the industry (General Electric, Rolls-Royce and Pratt & Whitney), only Rolls-Royce is a non-American company; both GE and Pratt & Whitney are subsidiaries of large American conglomerates. The aviation industry largely falls within three categories of regional, narrow-body and wide body. Of these, GE competes in all the three categories, while Pratt &Whitney has presence in the regional and narrow body segments. Rolls-Royce, on the other hand, largely operates in the wide-body category (Forbes, 2014).

SWOT Analysis

SWOT analysis is among the most important management tools. It involves the evaluation of an organization’s internal strengths and weaknesses, as well as the organization’s growth and development opportunities and threats posed by the external environment. The strengths and weaknesses are largely in-house, while opportunities and threats come from the external environment within which the organization operates (TFME, 2013). Part of the tool’s popularity stems from its simplicity and flexibility, the ease in understanding it, as well as the fact that it does not require intricate knowledge for its implementation.

While it is simple to construct, SWOT analysis has far greater importance than its construction simplicity to a company. The analysis particularly condenses many situational factors in such a way that they are manageable to the company (TFME, 2013). This way, it is possible to conduct in-depth analysis of these factors and therefore execute remedial actions. Additionally, the analysis provides a company with an unbiased view of its internal and external situations; this way, the company can begin working on matching and converting both the external and internal situations to its advantage. Matching in this case looks at converging organizational strengths and opportunities to gain competitive advantages, as well as converting either the threats or weaknesses into opportunities or strengths (TFME, 2013).

Rolls-Royce SWOT Analysis

InternalStrengthsWeaknesses
Research and developmentStrong market presence Strong order backlogOver-reliance on the civil aerospace sectorInadequate awareness of new market entrantsLawsuits
ExternalOpportunitiesThreats
Rising demand for nuclear and civil aerospace equipmentAn expanding marine businessStrategic contractsGrowing global defense expenditure  Government spending in the industry is reducingThreat from rival companiesConstant delays in delivering aircraft engines to customers, causing complaints from clientsPerceived high price of the Rolls-Royce brandAircraft engine raw materials are rising in priceConstant fluctuations in the exchange rates of foreign currency

Strengths

Rolls-Royce has a great focus on research and development. This enables the company to gain competitive advantages over its competitors given that it is capable of developing high performance and technologically advanced products (Strategic Defense Intelligence, 2014). Through the company’s engineering and technology division, and with more than 12,000 engineers, the company is capable of conducting extensive research on its products. Moreover, the company spent GBP908 million in R&D, which helped in developing advanced products (Strategic Defense Intelligence, 2014).

Royce has a robust market presence with a strong control in all its operating markets. This has enabled the company to not only attract new customers, but also retain its loyal customer base (Strategic Defense Intelligence, 2014). Even more is that the company has greatly diversified its business operations to include civil aerospace, defense, marine and energy. With a strong 34 percent of the market share, the company is currently the market leader in civil aerospace (Strategic Defense Intelligence, 2014).  The company specifically has a strong presence in the European market holding the number one position, while at the same time having a 64 percent market share between the Boeing 787 and Airbus A350 XWB family of civil aircrafts.

Royce’s future revenue is currently secure due to the company’s strong order backlog. According to the Strategic Defense Intelligence (2014), the company’s order backlog as of 2011 stood at GBP62.20 billion. The bulk of the order backlog is from civil aerospace (GPB51.90 billion), while defense, marine and energy segments accounted for GBP6 billion, GBP2.7 billion and GBP1.5 billion respectively (Strategic Defense Intelligence, 2014). These backlogs ensure a constant stream of revenue as well as enable investment in R&D, innovation in new technologies and business operations’ expansion.

Weaknesses

            According to the companies’ revenues and order backlogs, the civil aerospace segment is the major revenue earner for the company (Strategic Defense Intelligence, 2014).  Overreliance on this segment may however be a weakness as any slump in the segment may mean reduced revenues for the company. Moreover, the civil segment is vulnerable to economic changes, which can easily affect orders and revenue streams from customers.

            The aerospace industry is presently experiencing new entrants. Engine Alliance, PowerJet and CFM are among the new entrants; these are joint venture between small companies and the dominant players, which Royce is currently unaware. Such ventures can easily eat into the company’s market share and revenue streams, especially if they offer better quality at cheaper prices.

            Lawsuits against the company can easily impact on the company’s bottom line in addition to damaging the company’s strong brand name. Currently, Royce is facing a multi-million lawsuit filed by Qantas over the company’s (Royce) engine woes for the A380 aircraft (Malone, 2010; Strategic Defense Intelligence, 2014). The lawsuit for the A380 engines also includes a whistleblower’s suit claiming the company’s awareness of the engine even before delivery. Such lawsuits can have damaging effects on the company’s business and reputation.

Opportunities

The International Energy Agency has forecast a global demand for energy in gas, oil and power generation at 20%, 35% and 60% respectively (Strategic Defense Intelligence, 2014). This forecast will increase the demand for aero derivative gas turbines, which the company produces. Additionally, the company has expertise and experience in nuclear processing and machinery, which may increase its revenues, as countries look into nuclear for part of the 60% increase in power generation. Even more is that the company is a major supplier of power systems for onshore and offshore oil and gas exploration equipment, all of which offer growth opportunities for Rolls-Royce as the demand for these equipment increases. Additionally, although the global financial crisis greatly impacted the airline industry, the industry has been showing improvement with a stabilizing global economy (Strategic Defense Intelligence, 2014).  More airline companies are making orders for new planes, which translate to more engine supplies to plane manufacturers such as Boeing and Airbus.

The marine business, like the airline industry is also showing signs of increased activity. With an improving economy, more people are considering vacations on cruise ships, production in industries, and therefore transportation via the sea, is increasing. Freight and cruise companies are therefore placing orders for ships, which increase the demand for marine gas turbines that the company (Rolls-Royce) manufactures (Rolls-Royce, 2014).

Opportunities for growth, market share boosting and revenue also lie in strategic contracts with companies and governments. Rolls-Royce has received such contracts with Fiji’s Pacific Air for the airline’s Trent 700 engines, which power the Airbus A330 aircraft. The contract is worth US$210 (Strategic Defense Intelligence, 2014). Moreover, the company has also signed a contract on management of fuel with Royal Australian Air Force, expected to bring fuel efficiency for the Air Force’s C-130 transport fleet. Such a contract holds the opportunity to expand the contract, as well as to receive similar contracts from other airlines and air forces.

Further, there has been a global increase in defense expenditure globally, which is a potential for growth for Rolls-Royce. The defense expenditures for China, Russia and India are all expected to grow by 9.9%, 17.7% and 6.60% respectively (Strategic Defense Intelligence, 2014). Moreover, the marine power and propulsion systems industry has an estimated $200 billion in value according to Rolls-Royce focus, all of which are potential markets for growth for the company.

Threats

After the 2008-2009 global economic crunch, most government gave funds to many manufacturing companies as part of the economic stimulus plan. Boeing was among the recipients of the funds, and one of Rolls-Royce customers. However, governments have since reduced their spending in the industry due to budgetary constraints and financial uncertainties especially in Europe and the US (Rolls-Royce, 2010).

With the recovering economy, there are constant fluctuations in the exchange rates of foreign currency. Such fluctuations affect pricing, particularly of raw materials, which have been on the rise, as well as of the finished products, which then make the company’s products more expensive.  Moreover, there is constant pressure from the company’s rivals who apart from investing more in R&D, are also forming conglomerate and strategic alliances as cost-cutting measures (Rudd, 2012). These developments are a threat to Rolls-Royce business.

Rolls-Royce has built a reputation of quality goods. However, this has come with its threat as most customers consider the company’s products as highly priced, and therefore opt for other fairly priced products. This is a threat as the company can easily lose its customers. Besides, there have been complaints of constant delays in delivering aircraft engines to customers, causing complaints from clients. The company’s reputation and business are all at stake following such complaints.

Porter’s Five Forces

Porter’s Five Forces are a set of competitive forces that mold an industry, helping in the determination of the industry’s weaknesses and strengths. Formulated by Michael Porter, he indicated that industry configurations differ, making each industry unique in its own way (Porter, 2008). The five forces include competition, new entrants, suppliers and customers power and substitute products in the particular industry (Porter, 2008).

Competitive Rivalry

The aero-engine industry has three dominant players: General Electric, Rolls-Royce and Pratt & Whitney. These three operate in an oligopolistic industry that is capital intensive and requires colossal investment in the advancement of technology and for R&D (Times 100, 2000). With none of the players dominating the industry, the competitive rivalry is therefore intensified.

The competition also intensifies as the players battle for increased sales volume and market share (Pugh, 2001). Moreover, each of the players currently has gas turbine engines, which have become a standard and mature product. This therefore intensifies rivalry, as each looks into technological advancement as a differentiating factor and for competitive advantage (Times 100, 2000).

Threat of New Entrant

This threat is remarkably low given the difficulty in entry into the aero-engine industry. This is largely due to the intensity in capital investment and R&D, as well as the specialized and advanced nature of the designs of the engines (Times 100, 2000). Moreover, the current dominant players have established customer loyalty, which any new entrant will need to deal with. Even more is the need for intensive and extensive testing of the engine before approval from authorities, which presents a hurdle to any new entrant (Times 100, 2000).

Power of Buyer

The power of the engine buyers is high given that the buyers largely set the prices for the engines. Moreover, aero-engine buyers are considerably few, which leaves the engine manufacturers with no choice but to have the buyers set the price (Times 100, 2000). Even more is that the decision to purchase an engine takes long, which translates to a long dry spell if a manufacturer fails to get orders for engines.

Power of Suppliers

Most engine manufacturers have more than one source of suppliers for raw materials. Therefore, the power of suppliers is considerably low given the number of suppliers operating in the industry (Times 100, 2000). Only suppliers of high specification equipment have considerable power, although even these have several rivals, thus reducing their power.

Threat of Substitute

Currently there are no substitutes for aero engines, and demand for air travel has been on the increase in the recent past (Times 100, 2000). Therefore, although video conferencing and high-speed train travel may influence travel decisions, they are less of threats especially given that trains do not go overseas and not all countries have high-speed internet access to support video conferencing, in addition to difference in time.

Core Competencies

Core competencies are the key expertise, traits and assets brought by an organization to the marketplace. These competencies are as a result of extensive and intensive knowledge of the skills appropriated by years of experience in the field of operation (Gorman & Corbitt, 2002). For an organization, the achievement of the core competencies follows a synergistic blending of the skills and knowledge brought by individual employees to the workplace on a daily basis. An organization’s portfolio of competencies is far more important than the business portfolio, since with a core competencies portfolio an organization can not only reinvent itself, but also become a leader in innovation and evolution of markets (Prahalad & Hamel, 1990).

Roll-Royce’s key competencies lie in its technologies, product and people. As such, the company has invested in the development of the people in the organization. Specifically, the company has a dedication to its human resource, securing and training key personnel in the company from an early age. This ensures that these key personnel not only grow with the company, but also understand the workings of the company and share in the vision the company tries to create (Rolls-Royce, 2009). Additionally, the company put the same dedication to its products, leading in innovation of technologies employed in designing its products such as the energy systems. Products such as nuclear reactors have enabled the company to stand out, having designed and built a nuclear reactor from scratch. The company’s array of gas turbines, diesel engines and marine engines with intricate technology and performance as well as fuel efficiency are among its core competencies (Rolls-Royce, 2014).

Yet another of the company’s core competency is its brand reputation, particularly in quality and performance. The Rolls-Royce brand is synonymous to quality around the world, attested by the backlog of orders in both defense and civil contracts. This reputation enables the company to stand out from its competitors as well as enjoy unparalleled customer loyalty.

R&D perhaps is Rolls Royce’s major competency. The company has the Rolls-Royce University Technology Centers where it conducts its R&D and employee personal development. Additionally, the company has research and development facilities spread across the world in Japan, US, Germany and UK among other countries. These R&D facilities constitute the company’s think tank, which invents, innovates and works on ways of improving the company’s technologies, products and services, as well as testing any of the company’s products to ensure that the products are market ready and fault free (Rolls-Royce, 2014).  R&D for the company involves three categories of people, research and technology and University Technology Centers. The company has been increasing its R&D investment from £864 million in 2009 to £1,118 million in 2013 (Rolls-Royce, 2013).

Rolls-Royce PESTLE Analysis

Political Factors

Current political environment is both favorable and in other instances unfavorable to the company. Most EU plane manufacturers support Rolls-Royce, which is good for business. However, terrorism and war particularly in the Middle East is a cause of worry for many travelers, who opt out of travelling, reducing the demand for aircrafts. Even more is that both the EU and US governments have favorable political will (Wiseall, Kelly & Kelly, 2001). The EU government has provided subsidies to manufacturers, while the US government has tax breaks for manufacturers, all of which are favorable for Rolls-Royce business. The Open Skies package of 2008 is additionally favorable for the airline industry as it allows airlines to launch services between US and the EU; this is bound to increase the number of flights, airline operators and demand for aircrafts, which is welcome by Rolls-Royce and other engine manufacturers.

Economic Factors

Current interest and inflation rates are low (Oxlade, 2015). At the moment, the low interest rates are driving Rolls-Royce stock prices, which are high. Additionally, the low interest rates are favorable for borrowing and expansion of Rolls-Royce as banks currently charge 0.5% on loans (Oxlade, 2015). However, with the long low interest rates most banks are reluctant to give loans, as they would only experience losses on the loans given.  The current low inflation rate on the other hand, is good for the company, as the company can continue in its savings. With the current inflation rate at 1.6% in the UK (Burn-Callander, 2014), the company can continue to experience higher exports as the cost of goods are relatively low. However, this affects imports, as suppliers have to pay more for getting raw material into the UK. 

 As of 2010, there has been a change in the global economic growth pattern, where new firms are entering the export market. However, established firms have also increased their export volumes (Department for Business Innovation & Skills, 2010). With engines as the major export product, Rolls-Royce is losing on opportunity to export other products. Prospects are however present in countries establishing their own plane manufacture companies such as Japan and China. 

Social Factors

            Many developed countries are experiencing decline in population, as well as less travel as most of the population is aging. With the baby boomers retiring, there is a significant amount of business travel that is cut from the population. However, emerging economies such as China, Brazil, India and Russia are experiencing a growth in the middle class, who want to travel more, boosting air travel. Moreover, many cities in these emerging economies are experiencing congestion, which increases demand for larger aircraft, which is a specialty of Roll-Royce (Forbes, 2014).

            With globalization comes the need for cultural interactions. This may be a challenge especially with the need to deal with a cross-cultural clientele in both the consumer and industry markets. With cross-cultural interaction additionally comes a change in cultural trends. The company has to deal with these cultural trends, particularly dealing with different age groups in the same company.

Technological Factors

Companies in the aero-engines industry are constantly involved in R&D. To remain relevant, Rolls-Royce must also invest more in R&D. moreover, the company should also be aware of changes in technology such as improved fuel efficiency, produce and service as well as within the manufacture of the engines and its parts. As companies move towards automation and with incremental technological complexity in the engines, Rolls-Royce should consider training for its global clientele for the use of the engines to ensure safety (Department for Business Innovation & Skills, 2010).

Legal Factors

International safety standards require compliance with the regulations. Qantas has filed a suit against the Rolls-Royce over the engine woes for the A380 aircraft designed by Rolls-Royce (Malone, 2010). Such suits have the potential of damaging the company’s reputation. Further, changes in consumer and labor laws have a huge impact on the operations of the company, where labor laws protect the company’s employees from dismissal, health and safety, while consumer laws dictate that the safety of consumers must be guaranteed with the use of the company’s products.

Environmental Factors

The world is becoming more concerned of the climate. Many international treaties have been signed as means of addressing climate change, which put pressure on companies to use environmentally friendly processes and materials, some of which are expensive. Changes in weather patterns additionally affect flight patterns, some of which must be considered during the design of the engines. This is in addition to geographical locations of airports all of which need consideration during the design and manufacture process of the engines.

Conclusion

Rolls-Royce has strong competitors in the aero-engines industry. These competitors constantly invest in R&D to produce innovative products. The battle within the industry is largely over market share and sales volume. Royce has a strong reputation of quality and innovative products, as well as an advanced R&D division. However, it faces challenges with lawsuits, which may taint its strong reputation. The company relies heavily on its civil and wide body engine manufacture divisions. The narrow and regional body aircraft divisions show a lot of promise especially in emerging economies, into which the company should consider venturing. Additionally, with projected increase in defense budgets, the company should consider acquiring defense contracts to boost its revenue.

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