Rolls-Royce recently told several longtime suppliers that it was cutting expected orders at short notice. The news stunned the companies involved. Plants that had been set aside for Rolls-Royce would now lie idle.
While the orders had not been contractually agreed, such a drastic reduction in the so-called schedule — used by suppliers to plan capacity — was unusual and potentially "devastating for the supply chain", according to two industry executives familiar with the situation.
"It was catastrophic," said one. "The supply chain does not trust them any more."
The move comes after Rolls-Royce was suspended this year from the government's prompt payment code for failing to pay 95 per cent of its supplier invoices within 60 days.
Tensions in the supply chain are nothing new for Rolls-Royce which, like any large company, is able to use its scale to make tough demands of its suppliers. But they appear to be intensifying as Britain's venerable engineering champion faces one of its most serious crises in decades.
Over the past two years, the aero-engine maker has struggled to contain spiralling costs from durability problems on the Trent 1000 that powers Boeing's popular 787 Dreamliner. Rating agencies have downgraded the company to just above junk and the shares are trading at a near three-year low.
Last week its biggest shareholder, ValueAct, announced its representative would quit the board, raising speculation that after nearly four years the US activist was preparing to sell out.
Sitting in the company's new streamlined headquarters in London's King's Cross, chief executive Warren East was unapologetic about the turbulence in the supply chain. "We've changed leadership in our supply chain quite significantly. That is leading to some really dramatic shifts in how long it takes us to make things," he said. The pain that suppliers were feeling was "probably because things are being joined up".
East insisted that Rolls-Royce was on the path to recovery. "I don't mean to be complacent. But there's an underlying modernisation programme at Rolls-Royce and we are making progress on that."
But in its supply chain and among advisers there are mounting questions over whether East's efforts to transform the 113-year-old company are moving fast enough.
"There are challenges around quick decisiveness," said one person involved in the restructuring efforts.
Another UK insider said: "I have not been this worried about the future in more than 30 years."
A restructuring programme unveiled almost 18 months ago — which aimed to cut 4,600 jobs by the middle of 2020, saving an annual £400 million ($799.3m) — is running significantly behind schedule.
"There are still too many layers," the UK insider said. "When senior management makes a decision it is seen as a starting point for a debate about whether everyone else is going to do it."
East said the need to quickly resolve the Trent engine problems had slowed the job cuts plan. Dozens of aircraft have been grounded at any one time over the past two years due to a lack of spare engines or strained capacity in the company's maintenance shops, angering airlines who have had to cancel thousands of flights.
"If we take six months longer to achieve the 4,600 headcount reduction, but keep a few more customers less disrupted in the process, then that's what we'll do," East told the Financial Times.
But if those jobs are still needed to address the crisis, some wonder whether the right posts are being cut. "Some of these people are called managers but they don't manage. They are technical experts," said one person who works closely with Rolls-Royce. East denied the group was getting rid of vital staff.
Last month the group admitted that a planned fix for durability problems affecting the engine's turbine blades had failed after two years of trying to solve the issue. It also warned that the expected cost of the problems had shot up by £800m to £2.4 billion for the six years to 2023.
Seven revisions to the scale and cost of the problems have concerned analysts.
East said the announcements were a reflection of increased transparency since he took the job in 2015, after five profit warnings in a year. A lack of clear, consistent information was one of the problems he identified then but he acknowledges that after four years financial reporting systems have still not been modernised.
Those who work with him say he was uncharacteristically angry to discover just ahead of interims that commercial and administrative costs had risen by 10 per cent. The director for financial planning and analysis now reports to East rather than Stephen Daintith, finance director.
Several people interviewed by the FT say that senior management is out of touch with events on the ground, in particular at the group's main UK site in Derby. "The levers being turned are not working. Unions are not the problem. It is something in management, or culture," said one company veteran.
Rolls-Royce is also scrambling to fulfil its promise to return at least £600m in free cash flow this year and £1b in 2020. The targets will be met but mainly because the group is benefiting from one-off gains that offset the funds being sucked up by the Trent 1000 crisis. Suspension from the prompt payment code suggests suppliers are contributing too. One adviser to several airlines said his clients had been made to wait for promised compensation.
East defended the group's decision to include one-off gains to reach the £1b target. But investors are already beginning to fret about cash flow in the years beyond 2020, given a slowing market for wide-body aircraft. "You are affecting the feed into the hopper," said one leading investor. "Things will get a little tighter than we thought."
East hopes that the Trent 1000 crisis will be largely resolved by then. "We think we're actually almost done with fixing the . . . issue from a design point of view and so then we're into managing the customer disruption," he said.
The long-term benefits of the restructuring should start to show through as the Trent costs begin to subside. Finally, Rolls-Royce's cash generation will also improve thanks to a growing installed base of engines, in particular the popular XWB powering the Airbus A350.
But East is aware his own credibility is now on the line. "We are seeing fundamental changes," said one person who works closely with him. "The question is will the market give him enough time to do it?"
Harris Associates, a shareholder with a stake of 7 per cent, believes it should. "Once the fog of the Trent 1000 clears up we should start seeing better results," said David Herro, Harris's deputy chairman. "When you combine a vastly improved management team and a market obsessed with some of these short-term issues, that's a great investment opportunity."
East knows Rolls-Royce must work to recover its reputation, and not just with Boeing.
Airbus "doesn't have a lot of confidence in Rolls-Royce", said one veteran executive from the European aircraft group. The aircraft maker is flirting with General Electric of the US — Rolls's bigger, richer rival — as a possible engine supplier for the next variant of the A350 wide-body, where currently Rolls-Royce is the sole supplier. "There is a feeling inside Airbus that it needs to reduce its reliance on Rolls," the veteran said.
But East believes there are still opportunities to be seized, especially as the aerospace industry begins to address the challenges of delivering net zero carbon-emitting aircraft by 2050.
The next-generation UltraFan engine being developed by the company was designed to be a more efficient conventional fossil-fuelled engine. But its core could also be used as part of a hybrid electric system, he argued. Rolls-Royce has partnered with Airbus to develop a hybrid-powered regional aircraft.
"This is the opportunity. This is why we need to fix the Trent 1000, we need to fix the operation," East concluded. "We have just got to keep these things going, this investment in R&D, in that future."
Written by: Peggy Hollinger
© Financial Times