(Bloomberg) -- Rolls-Royce Holdings Plc raised eyebrows when it announced that veteran oilman Tufan Erginbilgic had been chosen to lead it through the existential crisis facing aviation as the fossil-fuel era draws to a close.
Rolls shares fell 4.6% on the news and remain almost a third lower for the year after the jet-engine maker subsequently published six-month results that laid bare the litany of more immediate obstacles facing the new chief executive officer.
But Erginbilgic, who takes over in January, said his two-decade stint at BP Plc, where Barclays described his turnaround of struggling downstream operations as “Tufantastic,” has equipped him to lead a company whose output spans airliner and warplane engines to power turbines and nuclear reactors.
“Rolls-Royce is a complex, global business operating in multiple markets through a number of different business models, similarly to BP Downstream,” he said in an emailed response to questions. “Both are involved in safety-critical industries and their success is ultimately rooted in innovative technologies.”
Rolls, long seen as the crown jewel of UK engineering, is still struggling from the long-haul travel sector’s failure to fully recover from Covid-19. Fewer long-haul flights rob Rolls of vital income from maintaining its large engines.
A transformation plan that dominated the tenure of outgoing CEO Warren East is also only part complete, while the new chief must decide whether to throw money at rejoining the lucrative but highly competitive narrow-body jetliner sector.
That’s before the company pins down its strategy on what some commentators regard as the biggest challenge facing aviation since the dawn of flight: the transition from jet fuel to still-unproven green technologies such as electric, hybrid and hydrogen propulsion.
Survival Threat
“The risk when you get a big technology change is some of the incumbents don’t make it,” says Nick Cunningham, an analyst at Agency Partners in London who has been covering the company since it was privatized in 1987. “The key thing for the new CEO will be to make sure that’s not Rolls.”
While strategic questions loom, a key factor in the appointment of Erginbilgic, a joint Turkish-British citizen who quit BP for private-equity firm Global Infrastructure Partners in 2020, is his track record in cutting costs and boosting earnings.
East was appointed CEO at Rolls in 2015 after making his name in microchips and quickly became embroiled in day-to-day struggles to make sense of its complex finances and multi-layered bureaucracy.
Tales of corporate waste included Rolls flying three employees to the south of France to erect a company sign because it didn’t trust local contractors to do so, and internal decisions requiring 26 signatories. East’s problems were compounded by glitches with engines on Boeing Co.’s flagship 787 before the pandemic grounded flights and forced the firm into a £5 billion refinancing.
Even with travel returning and the engine issues resolved, East’s final earnings update on Aug. 4 was little different from the lackluster reports that have punctuated his tenure, with the company recording worse-than-expected first-half figures while promising future gains.
Tougher Character
In February, announcing his exit, East said there is much still to be done.
That should play to the strengths of Erginbilgic, who at BP became known for rapid implementation of decision making and eschewing prolonged debate, as well as keeping to targets, something that’s been a failing for Rolls.
People with knowledge of the engine maker’s thinking say he was chosen as a tougher character prepared to take necessary steps in a more clinical way. People who know him well say that means gathering loyal staff closer, while sidelining and sometimes pushing out those who stand in the way.
Erginbilgic -- recruited after corporate headhunter MWM was asked to look beyond the aerospace sector again in replacing East -- told Bloomberg it’s too early to talk about specific priorities but that he’ll aim to bring a clearer sense of direction to the company.
“That is how I align an organization and also its wider stakeholders, creating clarity and focus, and ultimately that’s how I drive business results generating returns,” he said. “Delivering strong performance is something that I have a solid track record of achieving.”
Still, the new chief, more than a year older than East at 62, will face a steep technical learning curve according to Cunningham, who said Rolls-Royce has a track record of attracting CEOs who claim to be “commercial” and want to shake things up. “Then they find it’s like wading through treacle.”
Narrow-Body Decision
High in Erginbilgic’s in-tray will be possible partnerships in an industry that’s limited to three main players -- Rolls, General Electric Co. and Pratt & Whitney -- while being hugely capital intensive.
With GE already allied to smaller French engine maker Safran SA, the most obvious step would seem to be to link up with Pratt in the narrow-body market. A previous joint venture between the pair fell apart in 2011 after they clashed over whose technology should power a future single-aisle plane, leaving Rolls exposed as the Covid downturn hit demand for larger jets hardest.
Talk about the partnership being resurrected is gathering force, with East himself praising its previous achievements, but Erginbilgic will have some hard bargaining to do if he’s to revive the pact while pitching Rolls’s UltraFan model, on which it has lavished £500 million of investment, as the engine of choice for a new generation of single-aisle planes.
Erginbilgic, though, says he’s no aviation novice, pointing to his seven years as a director of UK aerospace components producer GKN, an experience which he said provided a “thorough understanding of the aerospace industry from the perspective of a tier-one supplier.”
Hydrogen Switch
Rolls-Royce also stands at a crossroads in its approach to post-kerosene flight.
The company had focused its zero-emission efforts on electric power, running the E-Fan X demonstrator project with Airbus SE before it was shelved during the pandemic, and claiming a world speed record with its Spirit of Innovation all-electric jet. At last month’s Farnborough air show, however, it revealed plans to test hydrogen engines on small aircraft and to be in a position to offer such propulsion for service entry in 2035.
Erginbilgic said his years at BP have prepared him for the challenges of the shift to carbon-free travel, while at GIP the majority of recent investments have been in energy and transportation.
For anyone wary about his green credentials, Erginbilgic insists that he sees the sweeping away of older technologies not just as a threat but as a potential profit generator for aerospace firms, as he did in big oil.
“At BP that was something I grasped through developments such as moving into electric vehicle charging and biofuels,” he says. “Both face the challenge -- and commercial opportunity -- of the energy transition.”
©2022 Bloomberg L.P.
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