Warren East says it has been a “privilege” to lead Rolls-Royce for seven years, as he prepares to retire on New Year’s Eve. But it has also involved considerable pain.
East’s battles have ranged from a £671m settlement for a giant bribery and corruption scandal from before his time, to the discovery of costly cracks in its jet engines. Then Covid-19 struck, grounding the aeroplanes whose engines Rolls-Royce builds and services.
The crisis was existential for arguably the UK’s most illustrious industrial company. East set about finding more than £7bn from investors and lenders, and cut 7,000 jobs.
Now, he says, “the tools are there” for his successor, the former BP executive Tufan Erginbilgic, to improve its financial performance – and perhaps even emerge from the state of constant crisis. Erginbilgic, two years older than 61-year-old East, will take over on 1 January.
“I certainly hope he has an easier time in terms of issues,” says East, sitting in Rolls-Royce’s London office.
East, an Oxford-educated engineer, joined Rolls-Royce’s board in 2014, but was hurriedly installed as chief executive after the abrupt exit of predecessor John Rishton. It was something of a surprise second act: East had, in 2013, announced his “retirement” as chief executive of Arm, the Cambridge-based chip designer that he built into the UK’s most successful tech company (before it was later snapped up by Japan’s Softbank).
Rolls-Royce is a very different business, with 44,000 employees across 14 countries. Based in Derby, it sells jet engines at a loss and makes profits on maintenance later – so when during the pandemic the hours flown plunged to only about 10% of 2019 levels it was a disaster. After generating just under £1bn in cash in 2019 it burned through £4.2bn in 2020, even with help from the UK government’s furlough scheme to pay wages.
However, East says the company, which was nationalised in 1971 after falling into receivership because of the ballooning development costs of the RB211 engine, “never asked the government” for direct support this time around (although a £2bn loan facility was backed by a government agency). The luxury cars business of the same name was split from the core jet engines at the point of nationalisation.
“I think the world’s in a different place to the 1970s,” he says. “I’m not sure state rescue would have been practical from a political point of view.”
Engine flying hours are back above 70% of pre-pandemic levels, but even if its recovery continues, the pandemic scare has added weight to longer-term investor concerns.
Even so, there are reasons for optimism for East’s successor. In China, where widebody planes with two aisles and Rolls-Royce engines are often used for short-haul routes, the zero-Covid policy pursued by China’s Xi Jinping has meant that flying hours are still about 30%. But China’s decision to reopen its airspace and cease quarantine rules for inbound travellers, made after the interview, will turbocharge the aviation industry.
Does Rolls-Royce have the financial heft to go it alone? East is dismissive when asked about long-awaited consolidation in the sector, such as a takeover by the US’s Pratt & Whitney. “Yeah, I mean, there are always these trends,” he sighs.
He argues the company is “absolutely fine”. It has scale from its divisions building engines for boats and big land vehicles and its defence business making nuclear submarine reactors, and he also points to its 50% share of engines for large planes with two aisles.
However, if Rolls-Royce wants to win new work – and particularly if it wants to move into the faster-growing market for single-aisle planes – it will have to wait for aircraft makers Airbus and Boeing to commit to a new plane. That could take years. Boeing is still trying to recover from the 737 Max disasters, while Airbus has the luxury of waiting and making easy profits.
East says Rolls-Royce is “absolutely certain that there will be another widebody plane” with two aisles. Throughout the pandemic cuts he continued to invest in a new engine capable of propelling 200-tonne aircraft while using a fifth less fuel.
Richard Aboulafia, a consultant at Aerodynamic Advisory, said it was impressive that Rolls-Royce had “stayed intact” through the pandemic and also continued to invest in the new engine, known as UltraFan, “despite the lack of a clear application and despite serious pressure on the company’s engineering budget”.
East said Rolls-Royce may end up recouping the UltraFan investment before it ever builds an engine because of progress in things such as materials and cooling techniques that it can apply to older engines.
How to power new planes?
There is another big factor holding back the development of a new plane: the deep uncertainty over how they will be powered. Airlines have committed to net zero carbon emissions by 2050, but without a clear plan.
Rolls-Royce is experimenting with new technologies. It has flown an single-seater battery electric plane at 345mph (555km/h) and it last month carried out the world’s first test of an aircraft engine using hydrogen. However, such efforts are not advanced. Rolls-Royce only employs about a dozen people directly on hydrogen, East says.
The aviation industry is instead betting heavily on sustainable aviation fuel (SAF) – derived from substances such as used cooking oil – to get it to net zero. Planes will still emit carbon, but it will originate from the air rather than fossil fuels underground. It will be a crucial technology for the entire aviation industry, and East reckons there will be demand for SAF for at least 60 years. Relying on hydrogen is not an option.
“We can’t, as a sector, wait for hydrogen,” he says, given the doubts over how it will be used. “What if we got that wrong?”
East is a keen player of the church organ – he does weddings – but he hints that his latest retirement will still involve working on the energy transition beyond Rolls-Royce, albeit not as the leader of a big company. He will also remain on the board of ASML, a Dutch company that plays a crucial role in the global economy as the sole maker of the most advanced semiconductor production equipment.
Given his experience at the head of two FTSE 100 companies, it would not be a surprise if East were tapped up by the British government to help on industrial policy. East is careful not to criticise ministers for the recent hot-and-cold industrial strategy. He will only say that the government has had “a lot on its plate” in recent years.
But he argues there is a possible lesson for the UK’s industrial policy to be garnered from its work to produce small modular reactors (SMRs), especially given the energy crisis prompted by Russia’s invasion of Ukraine. Rolls-Royce is hoping for big demand for the cheaper, factory-built reactors for smaller power stations to complement intermittent renewables.
SMRs are a “niche, but it can be a fantastic niche”, East says. He sees the role of government as “the lubrication in the machine, the catalyst for the reaction”, with investments that can end up paying for themselves.
East is optimistic about the prospects for UK manufacturing, and Britain’s ability to produce new industrial champions.
“We do create some great engineers here,” he says. “We do have a fantastic supply chain of small UK-based companies that can do extraordinary things and definitely punch above their weight on a global basis. It’s a matter of coordination and getting that together, and having the will to actually go out and do it.
“It’s very easy to get sucked into the day-to-day battles which happen in any business,” he says. “Every now and again, remind yourself of how good it is.”
