Civil aerospace - Investis Digitalfiles.investis.com/rollsroyce/2000annual/website_flash/docs/Section_… · Rolls-Royce has developed a world-leading marine business, serving customers

4 Rolls-Royce plc 2000

Chief Executive’s review

John E V Rose, Chief Executive

Rolls-Royce has anticipated customerneeds in civil aerospace, defence,marine and energy markets and hassuccessfully invested in new productsand services to meet these. We aredemonstrating innovation in manyaspects of our business and havecontinued to increase efficiency.

Rolls-Royce has created a substantialand balanced business through organicgrowth and targeted acquisitions. Weoffer advanced technology products,systems and support to three maincustomer groups – aerospace, marineand energy.

Our consistent strategy continues todeliver both growth in market shareand sound financial performance.The strategy has been based on:identifying customer requirements inour core markets; satisfying these witha comprehensive range of productsand services based on advancedtechnologies; adding value to thecustomer’s business and providingappropriate through-life support.

Rolls-Royce is a technology leader and power systems integrator in globalmarkets. Over recent years we havecreated a broader-based company byapplying technologies and capabilitiesdeveloped in the aerospace sector tothe marine and energy markets. Thiswill establish significant competitiveadvantage for the company and deliverfinancial benefit for shareholders.

Order book – firm and announced £bn

1996 7.7

1997 10.1

1998 12.6

1999 13.2

2000 14.5

Group turnover (restated) £m

1996 3,887

1997 4,323

1998 4,471

1999 4,634

2000 5,864


We continue to attract risk and revenue sharing partners to ourprogrammes. They provide financialand engineering resource and we value their contribution, whichendorses our strategy.

Rolls-Royce has significantlystrengthened its position in civilaerospace and is a world leader in marine propulsion systems. Weparticipate in many of the world’s key defence aerospace programmesand we anticipate growing success in the energy sector, as a range of new products is introduced.

The integration of our newly acquiredcommercial marine businesses isprogressing well and is achieving itstargets. A complementary range ofproducts and services strengthens our presence in both the commercialand naval marine markets.

The common thread linking theseseparate markets is the application of Rolls-Royce high-technologyengineering capability. This ranges from developing engines for the newgeneration of very large airliners, whichwill carry over 550 passengers on long-range flights, to using skills andexperience from the same technologybase to develop gas turbines togenerate electricity.

The company now has an improvedorganisation with shorter lines of communication and a flattermanagement structure. Thisorganisation enables our businessteams to respond more quickly tocustomer requirements and offeroutstanding levels of service.

Our focus on raising efficiency,including the introduction ofincreasingly sophisticated development and manufacturingprocesses, has resulted in sales peremployee increasing 50 per cent above the level of just five years ago,from a worldwide workforce currentlyat 43,700 people.

Underlying earnings per share haveachieved a compound annual growthrate of 22 per cent over the last fiveyears, while the company has investedmore than £3 billion over the sameperiod in new product developmentand technology acquisition to ensure future success.

Group turnover – per employee (restated) £000

1996 91

1997 102

1998 107

1999 113

2000 126

Turnover per share £ per share

1996 2.64

1997 2.92

1998 2.99

1999 3.08

2000 3.76

Underlying earnings per share pence

1996 12.70

1997 15.16

1998 16.91

1999 19.52

2000 21.63

our Trent 900 as the lead engine for the joint certification programme withAirbus. Since 1997, the Trent family hassecured a market-leading 57 per centshare of all widebody engine orders.

We are a leading supplier to the fastgrowing regional and corporate jetmarkets. The BR700 engine family,developed in Germany, had aparticularly successful year with over200 engines delivered. The BR700 familymeets the power requirements of largecorporate jets and regional aircraft of80-130 seats. The engine is fitted to the top of the range Gulfstream andBombardier corporate jets and powersthe Boeing 717 regional aircraft.

International Aero Engines, the multi-national consortium in whichRolls-Royce is a major shareholder, hadan outstanding year, winning 59 percent of the available market for itsV2500 engine. Firm orders for a total of 382 V2500 engines were placed forA319, A320, A321 and Airbus CorporateJetliner aircaft.

We anticipated the growth in potentialfor turbofans in the regional aircraftmarket when, in 1995, we purchasedthe Allison Engine Company and today the AE 3007 is the sole engine for Embraer’s fast-selling twin jet RJ 145 series of regional passengeraircraft. In addition, the AE 3007 powersthe successful Cessna Citation X.Altogether we delivered 400 of these powerplants during 2000. Thesuccessful Williams-Rolls joint venturedelivered a total of 203 FJ44 engines in 2000, 160 of them to Cessna for its popular CitationJet range.

Civil aerospaceSales: £3,150 millionUnderlying profit: £332 millionOur engines are in service with morethan 500 airlines and 2,400 corporateusers around the globe. In 2000 wesecured a 31 per cent share of engineorders placed and a 27 per cent shareof engines delivered. We now supply 38 of the world’s top 50 airlines.

Over the next 20 years we believeannual air passenger demand will growby five per cent per year and air freightby just over six per cent, comparedwith global economic growth expectedto average some three per cent peryear. The highest traffic growth will beassociated with Asia-Pacific markets,both within the region and to NorthAmerica and Europe. Of all widebodydeliveries over the next 20 years, 41 percent are expected to be to Asia-Pacificairlines. By contrast, North Americadominates demand for narrow-bodiedaircraft and is expected to order 4,000such aircraft over the same period.

Rolls-Royce is well positioned to benefit from this market expansionthrough its broad product range and international presence.

The Trent family of aero engines iscentral to our growth over the comingyears. This innovative, three-shaft, high-bypass ratio engine is lighter andprovides better payload/range andrevenue-earning potential than itscompetitors. The Trent is currently fitted to widebody Airbus Industrie and Boeing aircraft including the twinengined A330 and Boeing 777 and willfly in 2001 for the first time on the longrange A340.

In December 2000, Airbus announcedthe launch of its new A380, which willenter service in 2006 and be poweredby four Trent 900 engines. We havesecured orders from leading airlines,including Singapore Airlines, VirginAtlantic and Qantas which established

Chief Executive’s review continued



Civil aerospaceThe Trent 500 is the sole powerplant for thenew long-range Airbus A340-500/600, due toenter service in 2002. The aircraft will fly withTrent 500 power for the first time in 2001.(Computer visualisation shows a Trent 500high-pressure rotor.)


Civil aerospace continued

Customer relations, reliability, serviceand support are at the heart of oursuccess. Rolls-Royce has created anetwork of repair and overhaul jointventures with key airline customers to ensure that our products aremaintained to the highest standards.We provide global support to ouroperators. Last year we reachedagreement with Zurich-based SR Technics to create a newmaintenance and overhaul company to service Trent aero-engine customersin Europe and Africa. This 50:50 jointventure expands the Rolls-Royce global network for Trent support and complements our presence inSingapore, Hong Kong, the UnitedStates and the United Kingdom. In total we have repair and overhauloperations in 17 countries.

DefenceSales: £1,403 millionUnderlying profit: £154 millionThe defence market represents a broad area of opportunity, estimated to be worth some £130 billion over thenext 20 years. Our extensive portfolio of engines powers aircraft in all of themajor military aviation categories,ranging from helicopters to combataircraft, and transport to trainer aircraft.

In the year, we passed an importantmilestone by completing the assembly and test of the first Rolls-Royce production EJ200 engine for Eurofighter. This engine is a collaborative programme in which we have a 36 per cent share. The EJ200 has now made the transitionfrom development to production.Rolls-Royce has a contract toparticipate in the manufacture of 1,500 engines for 620 aircraft.

We announced our participation in asix-nation, European team to producethe TP400 engine for the new AirbusA400M military transport aircraft.Rolls-Royce will be responsible for

the low-pressure compressor andoverall integration. The programmecalls for up to 225 of the four-enginedaircraft. This consolidates our positionas a world leader in the transportsector, where we also power theLockheed Martin C-130 series and Bell Boeing V-22 aircraft.

International cooperation and shareddevelopment are features of thedefence industry. Rolls-Royce isparticipating in important programmeswith major international partners in anumber of key markets. The company’sdefence operation has become agenuine transatlantic business withthree of its four largest programmessponsored by the US Department ofDefense. Among these is the JointStrike Fighter, a US/UK programme for a new combat aircraft. Rolls-Royce isapplying its unique technology andexpertise, including short take-off andvertical landing capability, to assist boththe Boeing and Lockheed Martin teamsworking on this project.

Rolls-Royce Turbomeca RTM322engines have been selected for the NH90 helicopters ordered byGermany, Holland and France.This requirement will be worth anestimated £600 million. We forecastworldwide demand for nearly 4,500 gas turbine powered defencehelicopters over the next ten years.

Marine systemsSales: £751 millionUnderlying profit: £67 millionRolls-Royce has developed a world-leading marine business, servingcustomers in global commercial and naval markets. Today more than20,000 commercial and naval vesselsuse Rolls-Royce equipment and ourengines power 400 ships in 30 navies.The marine market has similarcharacteristics to civil aerospace, wherewe provide high capital-value products,services and systems, and developlong-term relationships with customers.



DefenceRTM322 engines power the potent AH Mk1Apache attack helicopter. The British Army Air Corps is to acquire 67 of these aircraft.(Computer visualisation shows an RTM322high-pressure turbine assembly.)


Marine systems continued

The acquisition of Vickers in 1999added a range of complementaryproducts and services and expandedour routes to market. These productsare market-leading brands in thecommercial marine business andinclude Ulstein, Kamewa and BrownBrothers. These additions to ourportfolio, coupled with our diesel andgas turbine propulsion technologies,enable us to offer a complete productand systems capability.

The integration of the commercialmarine businesses into Rolls-Royce isproceeding well and is on target. Weare now able to act as a full systemsupplier to both the commercial andnaval sectors and this will enable us togrow our share of the global marinemarket, estimated to be worth some£60 billion over the next 20 years.

This growth will be driven by threefactors: re-equipment by navies;a strong recovery in the commercialoffshore vessel sector; and our ability to address the whole of the marine market with ourcomprehensive product range and systems integration capability.

In the naval market, the WR-21intercooled and recuperated marinegas turbine, developed in partnershipwith Northrop Grumman Corporationof the US, has been selected for the firstthree ships of a new fleet of up to 12Type 45 air defence destroyers for theRoyal Navy. The WR-21 is the onlyadvanced cycle marine gas turbinebeing developed in the world today.The engine can achieve fuel economiesof 30 per cent compared with existingsystems and has the advantages ofsmaller size and reduced maintenance.

In the commercial offshore servicesector, Rolls-Royce equipment anddesigns were selected for 53 offshore

vessels during 2000 – a record orderintake. These vessels represent 70 per cent of all orders placed by the industry over this period. We arebeginning to exploit new marketopportunities in the cruise and cargomarkets where gas turbines areincreasingly becoming an attractiveoption. The Rolls-Royce marine Trenthas been selected to power the first of a new generation of cargo vesselscalled FastShip. These will also employour Kamewa water jets.

EnergySales: £476 millionUnderlying loss: £48 millionRolls-Royce adapts its established aero gas turbines and systems skills to the power generation and oil andgas sectors.

These markets are expected tocontinue to expand as a result ofprivatisation, deregulation and thetrend towards higher oil and gas prices, which encourage exploration.The potential markets are forecast to be worth $165 billion over the next ten years. About three quarters of thislies in power generation with theremainder in the oil and gas sectors.The company expects to secure agrowing share of this business over the next five years.

Our gas turbine and diesel systems are ideally suited to the generation of electrical power. The company hasover 100 million hours of operatingexperience in the energy market withits industrial gas turbines. The industrialRB211, delivering around 30MW ofoutput, and the industrial Trent in the 50MW range, meet a substantialmarket opportunity.



MarineToday Rolls-Royce marine equipment is in service on more than 20,000 vessels.(Computer visualisation shows a water jetimpeller. Our marine business is now makinguse of computational fluid dynamics toolsinitially developed for aerospace.)


Energy continued

The industrial Trent has beendeveloped on a transatlantic basis witharound 50 per cent of its componentssourced in North America. It isdesigned to meet the most stringentinternational emission requirements.The development of environmentalcombustion systems for the industrialTrent led the company to create a provision of £120 million to meet the expected additional costs. We areconfident that our emission controlsystem, which we believe is a worldleader, is able to deliver its designspecification within this provision. Thepotential market for the industrial Trentis very significant and we believe theengine will establish itself as one of themost powerful and efficient aero-derived generating sets in the world.Demand for the product is strong withsales expected to reach 30 enginesannually within five years.

Rolls-Royce products for the oil and gas market include gas turbines, dieselengines and compressors for oil andgas pumping, compression duties andpipeline applications. Orders in the firstquarter of 2001 picked up followingthe sustained high oil price in 2000 andthe resulting increase in exploration.A sustained recovery in oil prices willbenefit our sales in 2001 and beyond.

Customer servicesWhen a Rolls-Royce engine entersservice, it marks the start of a customerrelationship that may last 25 years ormore. This creates the opportunity forprovision of additional services tocustomers. Our ability to provide thesein a timely and innovative way allowsus to deliver value to both customersand shareholders.

Today we offer an extensive range ofservices, which accounts for 35 per centof sales. These include financial andleasing activities, web-based predictive

data management products, globalrepair and overhaul and the sale of parts.

Over the past five years, we havedoubled our share of repair andoverhaul on our own engines to more than 50 per cent. In the last two years alone we have won morethan 200 repair and overhaul contractsin the civil aerospace, defence andenergy sectors. An example of oursuccess in the aftermarket wasdemonstrated by the recent $1 billionagreement with American Airlines toprovide comprehensive maintenance support over the next ten years for the RB211 engines on its fleet ofmore than 100 Boeing 757 aircraft.

We were the first aero-engine companyto anticipate the potential for engineleasing and today Rolls-Royce &Partners Finance, our joint venture withGATX Capital, the US-based finance and leasing company, is the world’slargest specialist aero gas turbineleasing business. Rolls-Royce hasbecome the market leader of packagessuch as ‘Total Care’, which we apply to our broad portfolio of civil enginesand support with capabilities such asengine leasing. Rapid expansion of the regional jet market has enhancedthe opportunities for this form ofcustomer service.

Pembroke Group, our aircraft leasingjoint venture had a successful year and saw its portfolio of owned andmanaged aircraft grow to 145,including those on order or option,compared to 93 in the previous year.GATX Capital recently became an equal partner with Rolls-Royce in thisbusiness, endorsing our approach tothe market and strengthening ourstrategic relationship which dates back to their initial investment in Rolls-Royce & Partners Finance in 1998.



EnergyThe industrial RB211 gas generator is highly successful in the oil and gas marketproducing efficient power on land andoffshore. (Computer visualisation shows asectional view of the rotor from an RT61power turbine which combines with theRB211 to provide a compact power package set.)


Customer services continued

In the energy market our powerdevelopment operation, Rolls-RoycePower Ventures, ended the year with 12 power generation projects inoperation and four in the late stages of commissioning. Through theseprojects, we sell electricity to utilitiesand industries in nine countries on fourcontinents. The projects use a mix of our equipment including the industrialTrent, RB211 and Allen diesel engines.The increase in deregulation of thepower sector globally provides greaterworldwide potential.

We are developing e-business servicesfor customers, particularly in the area ofpredictive maintenance. By predictingthe behaviour of components in service,we can minimise interruption tooperations and maximise the availabilityof the asset to customers. Through DataSystems & Solutions, our joint venturewith Science Applications InternationalCorporation, we have launched anumber of products, including:enginedatacentre.comsupplying customers service data;aeromanager.com providing a complete range of facilities for fleet management andpowerplantmanager.com giving similar information for owners of power generation facilities.

We continue to develop aftermarketactivities and see these as fundamentalto our overall relationship withcustomers.

TechnologyResearch and development is essentialin order to acquire the necessaryknowledge on which to build futuresuccess. We identify key technologiesand processes which, while appliedinitially in just one area of our business, can then be utilised in otherapplications; we aim to ‘create once,use many times’. The core modules of our three-shaft gas turbines and many of our automated design

systems exemplify this principle and are in use across all our business sectors having been initially developedfor aerospace applications.

We are investing further in advancedelectrical systems and diagnostictechnologies. These will enable us tooffer enhanced reliability and greaterflexibility of operation in electricalpower – whether in the air, at sea or on land.

The marine business offers excellentopportunities to exploit the gas turbine technology originallydeveloped for aerospace applications.Computational fluid dynamics toolsand capabilities, developed foraerospace, are now being applied to marine propulsor design.

The advanced electrical engineeringtechnologies we have developedthrough our marine systems activitieswill be applied in the demonstration of the first ‘more electric’ large civil aero engine in 2003. This technologywill deliver increased reliability andefficiency to operators with associatedreductions in operating costs.

Artificial intelligence fitted to the healthmonitoring systems on the Trent 500 is providing real-time information forengine management and maintenanceplanning, resulting in more reliableoperation. This system, developed with Oxford University, is now beingevaluated for the Trent industrial andmarine powerplants.

We continue to attach a high priority to minimising the environmentalimpact of our products. Improvementprogrammes aimed at reducing noiseand emissions are being applied acrossthe businesses. A significant part of ourlong-term research and developmentprogramme is centred on sustainableenergy technologies, including high-efficiency fuel cell/gas turbine hybridsand the evaluation of alternative fuelsfor land-based gas turbines.



TechnologyThe market-leading Trent family of large aero engines is based on an approach of proven technology. Each new member of the family has benefited from thetechnology developed for predecessors.(Computer visualisation shows turbinecomponents from the Trent 600, designed for Boeing 747 developments.)


Technology continued

The effectiveness of our research anddevelopment is underpinned by theinvolvement of collaborators, partnersand suppliers. Increasingly, our keypartners are becoming involved in ourlong-term research programmes, as areuniversities around the world whichwork with us on new technologies.

PeopleRolls-Royce is fortunate to haveextremely talented and dedicatedemployees. In the UK, the averagelength of service is approaching 20 years. This is important in anindustry where development andproduction programmes may have lives of more than 50 years and inwhich the customer relationship withan individual product may be 25 years or more.

We continue to invest in attracting and retaining the people who willensure the success of the company.Last year we recruited 166 graduatetrainees and 144 modern apprenticesand there is a comprehensive trainingstructure that allows people tocontinue to develop skills andcapabilities throughout their careers.

Last year, the company invested £27 million in training. In parallel withmanagement programmes, we arebuilding a comprehensive frameworkfor professional development. Wecurrently have 440 employees studyingunder our Management DevelopmentCurriculum, established together withthe Open University. We continued tosupport our customers by providingthem with over 3,000 person days oftraining during last year. We completedconstruction of new Learning andDevelopment Centres in both the UK and the US.

Within the community the companyfocuses its efforts in the areas ofscience and education. We are involved in a range of activities across the education sector including

the Government’s Education Action Zones. We provide support to specialistlanguage and technology centres. Aspart of the National Skills Festival weparticipated in The Skills Show 2000 at the National Exhibition Centre and we played a major part in the ‘Careers in Aerospace’ initiative at theFarnborough International Airshow.

We create and sponsor UniversityTechnology Centres (UTCs) as centresof excellence in research. Working withthese universities is an efficient way to progress our own research anddevelopment requirements. They alsoprovide the opportunity to identify top quality recruits. There are 19 ofthese UTCs in the UK located close toour major sites. In addition, we fund afurther 60 research projects acrossNorth America and Europe.

The company now has 43,700 peoplein 48 countries with 36 per cent of ouremployees located outside the UK.

The growing international nature of the company has also had the impactof increasing the number ofnationalities employed by Rolls-Royce.This will become one of the strengthsof the organisation as we benefit fromdiverse experience and adopt practicesthat make us more effective.

SummaryWe are a global business supplyinginternational markets which aresubstantial and offer significant growth prospects. Our internationalreach allows us to offer customers a comprehensive service wherever they operate.

We continue to invest to get the bestresults from our people and operationsto deliver growth and value for ourcustomers, shareholders and employees.



PeopleThe company has a growing internationalpresence. We now operate in 48 countries,providing comprehensive services forcustomers. (Computer visualisation showsairflow over a Trent 800 wide-chord fan set.)

Documents

Civil aerospace - Investis Digitalfiles.investis.com/rollsroyce/2000annual/website_flash/docs/Section_… · Rolls-Royce has developed a world-leading marine business, serving customers