Rolls-Royce: from pandemic rescue to a profit rebuild

The situation

In January 2023, a few weeks after taking over as chief executive of Rolls-Royce, Tufan Erginbilgic gave a global address to staff from the company’s site in Derby. Parts of it were reported by the Financial Times on 27 January. “We do have a burning platform,” he said, adding that “Every investment we make, we destroy value” and that the company underperformed “every key competitor out there”. He was clear about what was not to blame: “it has nothing to do with Covid, let’s be very clear.” And he told staff that, from what he had heard from investors, “this is our last chance”.

The speech came at an odd moment. The worst of the crisis appeared to be over. Rolls-Royce had survived the pandemic by raising £7.3bn of new money in 2020, cutting about 9,000 jobs and selling businesses. Long-haul flying was coming back. The shares had risen 22% since the start of January. But they stood at 114p, against a pre-pandemic high of 337p. In 2022 the group made an underlying operating profit of £652m on revenue of £12.69bn, a margin of 5.1%, and the civil aerospace division, still the largest, earned a margin of 2.5%. Net debt was £3.25bn.

The case has two decisions in it, made three years apart by different leaders. The first, in 2020, was how to survive a near-total loss of the company’s main income. The second, in 2023, was whether recovery in air travel would be enough or whether the business needed to change how it priced, invested and organised itself. This case covers both, and what followed.

Background

Ownership and history

Rolls-Royce Limited was registered in 1906. Its aero engine business went into receivership in February 1971 after the cost of developing the RB211 engine for the Lockheed TriStar ran out of control, and the government took it into public ownership. It was privatised in 1987 and has been listed in London since, as a member of the FTSE 100. Through the 1990s it grew by acquisition, buying Vickers’ marine engineering business for £575m, among other deals.

The four businesses

By 2020 the group had four main divisions. Civil Aerospace made engines for wide-body airliners, such as the Trent XWB on the Airbus A350 and the Trent 1000 on the Boeing 787, and for large business jets. Defence made engines for military aircraft, including transport and combat types, and propulsion for submarines. Power Systems made engines and power generation systems for industry, ships and governments. ITP Aero, a Spanish components business, was the fourth. In 2020 Civil Aerospace had underlying revenue of £5.09bn, Defence £3.37bn, Power Systems £2.75bn and ITP Aero £705m.

How it made money

The civil business earns most of its profit after an engine is sold. Airlines pay for engines partly up front and partly through long-term service agreements (LTSAs), under which Rolls-Royce is paid a fixed rate for each hour an engine flies and takes on the maintenance. When aircraft fly, cash arrives. When they are parked, it stops. This model, known as Power by the Hour or TotalCare, is examined in a separate case. Here it matters because it explains why the pandemic hit Rolls-Royce harder than most industrial companies.

Weak before the crisis

Rolls-Royce’s problems pre-dated Covid. Durability faults on the Trent 1000 engine for the Boeing 787 led the company, in November 2019, to estimate in-service cash costs of about £2.4bn over 2017 to 2023 and to take an exceptional charge of about £1.4bn in 2019. In 2019, a record year for engine deliveries, the group’s underlying operating profit was £808m on revenue of £15.45bn, a margin of 5.2%, and civil aerospace made £44m on revenue of £8.11bn. Warren East, then chief executive, said at the time that the company was “creating a tangible and sustainable cultural and performance shift”.

The industry

Large civil jet engines are an oligopoly. In wide-bodies, Rolls-Royce’s main rival is GE Aerospace, which reported 2024 revenue of $38.7bn and a 26.2% margin in its commercial engines and services segment, on an installed base of about 45,000 commercial engines. In single-aisle aircraft, the largest market by volume, the engines come from CFM International (GE and Safran) and Pratt & Whitney. Rolls-Royce has had no presence there for more than a decade. In wide-bodies, it said its share of the installed fleet rose from 32% at the end of 2022 to 36% at the end of 2024, and that it had won more than half of new wide-body engine deliveries over the previous two years.

The industry’s economics explain both the 2020 collapse and the later recovery. Development costs are enormous and fixed. New engines are priced keenly to win places on aircraft, and profits come from decades of servicing. Entry barriers are close to absolute, so a firm with a strong installed base has a long income stream that competitors cannot easily take. The same structure means that when flying stops, revenue falls far faster than costs can be cut.

Supply is a second force. Since 2021 shortages of parts and labour have slowed engine production and repair across the industry. Rolls-Royce put the cash cost of supply chain problems at £150m to £200m a year in its 2024 and 2025 guidance and said in February 2025 that the issues would last another 12 to 18 months. Rivals have had their own setbacks: in September 2023 RTX took a $3bn charge after finding a powder metal defect in Pratt & Whitney’s geared turbofan, which meant hundreds of extra engine removals.

Defence and power markets work differently. Defence revenue comes from long government programmes and is less cyclical; Rolls-Royce has a defence installed base of more than 16,000 engines. Power Systems sells power generation, marine and government systems. In nuclear, the UK government ran a competition from 2023 for a small modular reactor (SMR) design, in which Rolls-Royce SMR, a majority-owned subsidiary, competed against Holtec and GE Hitachi.

The decision

2020: surviving the stop

In 2020 large engine flying hours averaged 43% of the 2019 level. Free cash flow went from an inflow of £873m in 2019 to an outflow of £4.19bn. The board under East and the chairman, Ian Davis, had to find enough money to last an unknown period with the main income stream nearly gone.

Four options were available, and each had a cost. More borrowing would add to a balance sheet that had moved from net cash of £1.36bn in 2019 to net debt of £1.53bn by the end of 2020 (excluding leases), and would push the company further from an investment grade rating. A rights issue would dilute shareholders at a share price that had fallen by about two thirds during the year. Asset sales in a crisis risked poor prices. Cost cuts on the scale required meant thousands of jobs, in towns such as Derby and Barnoldswick where Rolls-Royce is the main employer.

East’s argument for doing all four at once was that the company needed to remove doubt. Announcing the equity raise in October 2020, he said the aim was to take “any liquidity questions off the table through this crisis”. Davis said the equity was also meant to reassure lenders, citing “the effectiveness of this equity raise in reassuring debt markets”.

2023: recovery or reset

By the start of 2023 the company had survived. Flying hours were climbing, free cash flow had turned positive in 2022, and disposals had cut net debt from £5.16bn in 2021 to £3.25bn. One view, held by some investors, was that the business needed time: as long-haul flying returned, the per-hour income would come back and profits with it.

Erginbilgic took the opposite view. His argument, as reported in January 2023, was that Rolls-Royce had “not been performing for a long, long time”, that it destroyed value on its investments and that it trailed its competitors. Recovery in volume would help but would not close the gap, because the problem lay in pricing, costs, contract terms and how the company chose where to invest. The alternative to a deep reset, on his account, was continued decline. The FT noted the echo of Nokia, whose chief executive Stephen Elop had used the same “burning platform” phrase more than a decade earlier; Nokia’s phone business was sold to Microsoft less than three years later.

There were risks in his approach. Staff had just been through 9,000 job cuts. Telling them the company was failing could damage morale and push talented engineers to leave. Customers might resist harder terms. And a public statement that the company was destroying value could unsettle investors and lenders as easily as it could rally them.

What they did

Phase one: liquidity and cost, 2020 to 2022

In May 2020 Rolls-Royce announced at least 9,000 job cuts, mostly in Civil Aerospace. About 7,000 roles, permanent and contractor, had gone by the end of the year. It targeted a £1.3bn cut in operating costs and capital spending against 2019, with the full saving by the end of 2022, and made more than £1bn of in-year cash savings in 2020.

The funding came in October 2020. Shareholders approved a rights issue of ten new shares for every three held, at 32p, a 41% discount to the theoretical ex-rights price, raising about £2bn. A bond issue raised £2bn, double its £1bn target, and a two-year bank loan added £1bn. In total the company secured £7.3bn of new liquidity during 2020, including £5.3bn of debt, and ended the year with £9.0bn of liquidity: £3.5bn of cash and £5.5bn of undrawn facilities. It also had a £2bn term loan with an 80% guarantee from UK Export Finance, extended by £1bn in March 2021. Under the loan terms, dividends were restricted until after 31 December 2022.

Disposals followed. The company set a target of at least £2bn by early 2022. It agreed to sell Bergen Engines for €63m and its civil nuclear instrumentation and control business, and then the largest piece, ITP Aero, to a consortium led by Bain Capital for about €1.7bn. East said ITP Aero would remain “a key strategic supplier” to Rolls-Royce. The 2022 results said the disposal programme had been completed.

The cuts met resistance. At Barnoldswick in Lancashire, where 350 of 550 jobs were at risk from a plan to move fan blade work to Singapore, members of the Unite union began a three-week strike in November 2020. Unite said the plan would make the factory “potentially unviable”. Rolls-Royce said the site would stay open and that it was working to mitigate any risk to customers.

Phase two: the reset, 2023 to 2025

Erginbilgic, a former BP executive who joined from private equity, succeeded East at the start of January 2023. After the January address, he launched a programme of changes that ran through the year.

In October 2023 the company said it would cut 2,000 to 2,500 roles worldwide, close to 6% of a workforce of about 42,000, and merge its engineering, technology and safety functions into one team. Erginbilgic said the aim was “a more streamlined and efficient organisation”. The 2023 results later put the expected annual benefit at about £200m and the severance cost at £200m to £250m.

On 28 November 2023 a capital markets day set out the plan in numbers. It set mid-term targets, with 2027 as the reference year, of £2.5bn to £2.8bn of underlying operating profit, a margin of 13% to 15%, free cash flow of £2.8bn to £3.1bn and a return on capital of 16% to 18%. Each division got its own margin target.

Exhibit 1: Divisional operating margins, 2022 starting point, 2023 targets and 2025 outcome

Sources: Rolls-Royce capital markets day press release, 28 November 2023; Rolls-Royce 2025 full year results, 26 February 2026.

The plan was specific about where the money would come from. In Civil Aerospace it named six levers for wide-body service contracts: longer time on wing, lower shop visit costs, lower product costs, keeping engines earning, a value-driven pricing strategy and tighter discipline on contract terms. The 2023 results reported that all key contract renegotiations with civil airframers and major airlines had been concluded or were progressing. Durability work went alongside. An improved turbine blade, fitted to 20% of the Trent 7000 fleet by early 2024, roughly doubled time on wing, and in February 2025 the company raised its target for average time-on-wing gains on modern engines from 40% to more than 80%.

The portfolio choices were explicit. Civil Aerospace would focus on wide-body and business aviation and would return to narrow-body engines only through a partnership, with the UltraFan demonstrator as a step. Defence would grow in transport, combat and submarines. Power Systems would concentrate on power generation, government and marine customers. The SMR venture would bring in partners to cut its future calls on cash. A divestment programme targeted £1.0bn to £1.5bn of gross proceeds over five years, and Rolls-Royce Electrical, a business developing electric propulsion for small aircraft, would be sold or reduced to a minority stake. Efficiency measures were to save £400m to £500m a year in the medium term.

The financial framework was also set out: reach an investment grade profile, cut gross debt, close some expensive undrawn facilities, and restore shareholder distributions once the balance sheet was strong enough.

What happened

Results ran well ahead of the plan. In 2023 underlying operating profit was £1.59bn on revenue of £15.41bn, a margin of 10.3%, and free cash flow was £1.29bn. In 2024 operating profit rose to £2.46bn on revenue of £17.85bn, a margin of 13.8%, and free cash flow to £2.43bn. Net debt of £1.95bn at the end of 2023 became net cash of £475m. The company restored its dividend at 6p a share, launched a £1bn buyback and raised its mid-term targets to £3.6bn to £3.9bn of operating profit by 2028.

The 2024 profit was already close to the bottom of the range set for 2027 only fifteen months earlier. In 2025 it passed the top. Underlying operating profit was £3.46bn on revenue of £20.06bn, a margin of 17.3%. Free cash flow was £3.27bn, return on capital 18.9% and net cash at the year end £1.9bn. The total dividend for 2025 was 9.5p. The company completed the £1bn buyback, announced a further £7bn to £9bn of buybacks for 2026 to 2028, and raised its 2028 targets again, to £4.9bn to £5.2bn of operating profit and an 18% to 20% margin. Efficiency savings since 2022 reached £0.6bn against a target of £0.5bn, and gross procurement savings £1.2bn against £1.0bn.

Exhibit 2: Rolls-Royce group results, 2019 to 2025 (underlying, £m)

Sources: Rolls-Royce full year results for 2019, 2020, 2022, 2023, 2024 and 2025. 2021 figures are as restated for continuing operations in the 2022 results. Net debt for 2019 and 2020 excludes leases; later figures are the company’s headline measure. The 2019 margin is calculated. The 2025 flying hours figure is derived from the reported 8% growth on 2024.

Exhibit 3: Targets against outcomes

Sources: Rolls-Royce capital markets day 2023; 2024 and 2025 full year results.

The share price followed. Shares ended 2024 at 568p. On 26 September 2025 the company’s market value passed £100bn for the first time in its 121-year history, and on 29 September the shares traded above 1,191p, making it the fifth most valuable company on the London market, behind HSBC, AstraZeneca, Shell and Unilever. That compares with 114p in January 2023.

How much of this was management, and how much was the market? The company’s own account gives most weight to contract pricing, time on wing, cost control and portfolio choices. The numbers give some support to that: flying hours in 2025 were only about 11% above 2019, yet the group margin was 17.3% against 5.2%, and Power Systems, which has no link to flying hours, lifted its margin from 8.4% in 2022 to 17.4% in 2025. But the market helped too. The 2019 baseline was depressed by Trent 1000 costs, long-haul travel came back strongly, and the share price was helped by outside events: in late September 2025, for example, defence shares rallied after a change in the US president’s stance on the war in Ukraine, according to City AM.

Other views

Employees and unions

The 2020 cuts fell hardest on manufacturing towns. The Barnoldswick strike, over a plan that Unite said would make the plant unviable, was the most visible dispute. The 2023 round was smaller. Euronews’s report on the October 2023 cuts recorded no union statement, and this case has not found a public union response to that round. The January 2023 address itself drew comment because it told staff who had lived through 9,000 job losses that the company was still failing.

Investors

Fund managers were largely supportive by 2024. Speaking to Trustnet in March 2024, Richard Hallett of Marlborough expected margins to rise from about 11% to above 15% within a couple of years, and Steve Woolley of Ninety One described aircraft engines as in effect a duopoly. There were warnings too. James Henderson of Henderson Opportunities Trust said the easy cost savings had already been made, that the next generation of engine would be capital intensive and that long-term carbon pressure was “a big question”. Ed Legget of Artemis warned that the civil business depended on a few engine programmes, so that if one ran into trouble “there is not much diversification”.

Pay

Executive pay drew press attention. Erginbilgic’s total pay was £13.6m for 2023, largely because of a £7.5m share award compensating him for leaving his private equity role, and £4.1m for 2024, when his annual incentive almost halved to £2.5m after a change in how bonuses were paid. More of his 2024 incentive was to be paid in shares in later years, which ties his eventual reward to a share price that has risen partly for reasons outside the company’s control.

Customers

Harder commercial terms affected airlines. In November 2023 Emirates’ president Sir Tim Clark said the Trent XWB-97 was achieving only about a quarter of the expected time on wing in Gulf conditions and said Emirates would not order the A350-1000 until durability improved. Rolls-Royce denied the engine was defective and introduced a new coating for harsh environments. Airlines’ trade body IATA has also campaigned against what it calls restrictive aftermarket practices by engine makers in general.

Reading it through a framework

Kotter’s eight-step change model

John Kotter’s model of organisational change has eight steps: create a sense of urgency, build a guiding coalition, form a strategic vision, communicate it, remove obstacles, generate short-term wins, sustain acceleration and anchor the change in the culture. The 2023 sequence at Rolls-Royce maps onto it closely.

The “burning platform” speech is close to a textbook first step. It came within weeks of Erginbilgic starting, at a point when the external crisis was fading. The urgency rested on comparison with competitors and on the claim that investments destroyed value, not on an outside shock. The target was complacency in a company that could see flying returning.

The capital markets day in November 2023 supplied the vision, with group and divisional targets and six named levers. The October 2023 job cuts and the merger of engineering, technology and safety removed layers and duplicated functions, which fits the obstacle-clearing step. The short-term wins arrived quickly: operating profit roughly doubled from £652m in 2022 to £1.59bn in 2023, then rose to £2.46bn in 2024, and the balance sheet moved to net cash. Raising the targets twice, in February 2025 and February 2026, kept up the pressure after early gains, which is Kotter’s seventh step.

The open question in Kotter’s terms is the eighth step. Change is anchored when new behaviours become normal practice and survive a change of leader. With the shares up roughly tenfold from January 2023 and profits far ahead of plan, the conditions that made urgency easy to create no longer exist. Whether pricing discipline and cost control hold in a strong market is not yet known.

BCG growth-share matrix

The Boston Consulting Group matrix sorts a portfolio by market growth and relative market share. Strong-share units in slow markets are cash cows, strong-share units in fast markets are stars, weak-share units in fast markets are question marks and weak-share units in slow markets are dogs. The 2023 plan reads like a portfolio exercise.

Wide-body civil engines and their service contracts were a strong-share business, with 32% to 36% of the installed fleet and more than half of recent deliveries, in a market recovering from a collapse. The plan treated them as the main cash source, to be milked harder through pricing and contract terms. Business aviation, with about 70% of large-cabin jets according to Leeham News, sat in the same group. Defence, with steady government demand and a large installed base, was given room to grow. Power Systems was asked to narrow its focus.

Rolls-Royce Electrical fits the question mark category: a possible growth market where the company had no clear lead and the payback was uncertain. The decision to exit it, and the wider £1.0bn to £1.5bn divestment target, follow the matrix’s logic of not funding units that cannot reach a strong position. Narrow-body engines are a large market where Rolls-Royce has no share. Re-entering alone would mean funding a long, costly fight, so the plan limited re-entry to a partnership. The SMR venture is a long-dated option. Bringing in partners, and later winning a UK government selection, limited how much cash it could draw.

The matrix has limits here. It treats market share as the driver of profit, but in 2022 Rolls-Royce already had a strong wide-body share and a 2.5% civil margin. Share was not the problem. Pricing was. The matrix explains where the 2023 plan put its money, but the profit gains came from changing the terms on which the cash cow was milked.

Since then

Rolls-Royce SMR was selected by the UK government on 10 June 2025 to build the country’s first small modular reactors, with a contract worth about £2.5bn planned and Great British Energy-Nuclear to form a development company with it. The 2025 results said three units were planned at Wylfa and that the Czech utility ČEZ had committed to up to six units. In Defence, the company won an eight-year submarine support contract with the UK Ministry of Defence worth around £9bn, reported in early 2025.

The financial momentum continued into 2026. In its half-year results on 30 July 2026, Rolls-Royce reported underlying operating profit of £2.5bn on revenue of £11.28bn, a margin of 22.5%, with all three main divisions at or above 20%. It raised its 2026 operating profit guidance to £4.7bn to £4.9bn, from £4.0bn to £4.2bn, and its free cash flow guidance to £3.8bn to £4.0bn. Erginbilgic said the company had eliminated aircraft on the ground waiting for engines in civil aerospace for the first time in a decade. He also warned that order cancellations linked to fuel costs were mostly in narrow-bodies, and that in an uncertain world they could spread.

The main risks are the ones critics named in 2024. Civil profits depend on a few engine programmes. The narrow-body market, by far the largest, remains closed to Rolls-Royce until it finds a partner and a new engine. And much of the improvement has come from repricing contracts with airlines and airframers, who will negotiate harder next time.

What to take from it

• A business paid by usage can lose its income overnight when usage stops, so liquidity planning has to assume the worst case, as Rolls-Royce’s £4.2bn cash outflow in 2020 showed.
• Surviving a crisis and fixing underlying performance are separate jobs, and Rolls-Royce used different leaders and different tools for each.
• A blunt internal message about value destruction can work when it is followed quickly by specific targets, visible action and early results.
• Pricing and contract terms on existing customers can move profit faster than new products or new markets, as the rise in civil margin from 2.5% in 2022 to 20.5% in 2025 shows.
• Strong results in a rising market make it hard to separate management action from luck, so targets and incentives should be judged against what the market would have delivered anyway.

Questions to think about

1. In October 2020 Rolls-Royce issued ten new shares for every three held at 32p. Work out what proportion of the enlarged company a shareholder who did not take up the rights would own, and discuss whether a rights issue was the right tool compared with more government-backed debt.
2. Using Exhibit 2, estimate how much of the increase in operating profit between 2022 and 2025 might be explained by higher revenue at the 2022 margin, and how much by margin improvement. What does the split suggest about the role of management action?
3. Was the “burning platform” message the right way to start, given that it was delivered to staff who had just been through 9,000 job cuts? What would you have done differently?
4. The company beat its 2027 targets two years early. Were the targets set too low, or did conditions change? How should a board judge this when setting executive pay?
5. Apply the BCG matrix to Rolls-Royce’s divisions in 2025. Has any unit moved quadrant since 2023, and what would that imply for capital allocation?
6. With profits and the share price now high, what would keep the urgency of 2023 alive inside the company?

Concepts at work

Burning platform, Kotter’s change model, Portfolio management. Explore them in Insights.

Further reading

Oxford University Press covers this story as a teaching case in Cases in Strategy on Oxford Business Trove. The sources below are the public record this page was written from.

Written from the public sources listed below. Figures are as those sources report them.