Rolls-Royce, under the leadership of CEO Tufan Erginbilgic, has unveiled an ambitious plan to quadruple its profits over the next five years by enhancing the performance of its jet engines and implementing cost-saving measures.
This strategy, developed over nearly a year, aims to achieve annual operating profits of up to £2.8 billion ($3.5 billion) by 2027, a fourfold increase from 2022, and double the guidance for this year, which is set at up to £1.4 billion.
To attain this goal, the company will focus on several key areas, including increasing profit margins in its civil aerospace business, which is responsible for a significant portion of its revenue.
The aim is to boost margins from 2.5% last year to 15-17%. Erginbilgic plans to address inefficiencies within Rolls-Royce by concentrating on widebody planes, where the company exclusively supplies Airbus, as well as business aviation, defense, and power systems.
In a move to raise funds, Rolls-Royce intends to sell its electrical-powered aircraft business, targeting up to £1.5 billion in non-core asset sales.
Additionally, the company may re-enter the single aisle jet market through partnerships, leveraging its cutting-edge UltraFan technology.
The primary driver of profit growth will be improvements in the engine business, which powers nearly half of long-haul aircraft, including Airbus A330neo and A350 models and some Boeing 787 planes.
Rolls-Royce plans to achieve this by extending the “time on wing” of its engines between maintenance, reducing manufacturing and repair costs, implementing a new pricing strategy, and addressing low-margin contracts.
This new profit target will position Rolls-Royce closer to its competitors, such as General Electric, in the widebody aircraft market.
The company’s shares, which have already risen 161% year-to-date, increased by 6.5% in early trading following the announcement.
Erginbilgic expressed confidence in the company’s ability to achieve these targets, emphasizing that they represent “compelling and achievable financial targets for the mid-term” that would surpass previous financial performance.
Analysts noted that the targets suggest a shift in Rolls-Royce’s strategy, focusing more on profitability than market share, which has been a hallmark of its past approach.
When asked about sacrificing market share, Erginbilgic clarified that while the company had a 55% share of widebody deliveries last year, they aimed to continue capturing market share profitably, with sustainable growth over the next five to ten years.
Rolls-Royce plans to sell non-core assets and explore partnerships to create additional value, as it continues to recover from challenges related to its Trent 1000 engine and the pandemic’s impact on long-haul aviation, which severely affected its revenue tied to engine flying hours.
Under Erginbilgic’s leadership, the company has rapidly rebounded, reporting a five-fold increase in first-half operating profit in August, driven by higher engine maintenance prices and prudent cost management.