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Fortune
Fortune
Prarthana Prakash

Rolls-Royce reports bumper profits after the CEO recently called it a 'burning platform' in need of saving

a picture of Tufan Erginbilgic (Credit: Kostas Tsironis—Bloomberg/Getty Images)

Just a few months ago, the new chief of Rolls-Royce described the company as a "burning platform" that was severely underperforming compared to its competitors. Seven months on, the tide has turned as the British aeroengineering company reported a massive fivefold increase in profits for the first half of 2023 compared to the same period last year.

Tufan Erginbilgic, a former BP executive, took the mantle at Rolls-Royce at the start of the year and kicked off a program to address the company's operations and cut costs.

"Our early interventions have had a significant and sustainable benefit on our financial results," Erginbilgic said in the company's earnings release Thursday.

The company reported an operating profit of £673 million ($860 million) for the first half of the year, up five times from the first half of 2022. Rolls-Royce also increased its guidance for full-year profits by £400 million ($511 million) on the lower and higher bracket of its initial estimate.

“We are tightly managing costs across the group as revenues have grown and improving the productivity of our operations," Erginbilgic said, adding that Rolls-Royce is being deliberate about the projects it picked, focusing on the most profitable ones.

What sparked the turnaround in fortunes?

The company benefited from higher demand for travel globally, which has increased new engine orders, as well as pricing improvements in its various divisions.

The civil aerospace business, which makes up roughly half of the British engineering company's revenue and services engines for the likes of Airbus A350 airliners, saw a margin growth of 12.4%—the highest for the company in the recent decade.

Profits in the company's defense side also saw robust growth, while large engine flying hours, a metric for how long engines can run, climbed back up to 83% of pre-pandemic levels.

COVID-19 Impact

Rolls-Royce was deeply impacted by the COVID-19 pandemic, with the travel industry coming to a standstill for several months.

During the first half of last year, the company recorded a £111 million ($142 million) loss as a result of supply-chain snarls and inflation associated with the pandemic.

At the time, Rolls-Royce said it was facing "post-COVID indigestion" as initial signs of travel recovery were starting to show but it was far from the pre-pandemic reality.

The company went through rounds of restructuring under former CEO Warren East, including cutting 9,000 jobs to help keep costs under control.

When Erginbilgic took over the company, he faced the uphill task of turning the financial situation of Rolls-Royce around. The new chief's initial reading of the situation was bleak.

“Every investment we make, we destroy value,” he told employees in January, according to Financial Times, which had access to the broadcast. “Given everything I know talking to investors, this is our last chance.”

But since Erginbilgic took over, the financial standing of the company seems to be improving. The company plans to host Capital Markets Day in November to share the outcomes of a strategic review that's currently underway.

"There is much more to do to deliver better performance and to transform Rolls-Royce into a high-performing, competitive, resilient, and growing business," Erginbilgic said.

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