In less than four years, Rolls-Royce Holdings has regained its footing from the brink of bankruptcy. (Bloomberg)
The aviation engine and luxury car divisions were split in 1971
[Financial Channel/Comprehensive Report] When it comes to Rolls-Royce, the first thing many people think of is Rolls-Royce cars, which symbolize top luxury. However, in 1971, Rolls-Royce fell into a serious financial crisis due to the development of the RB211 aviation engine and entered bankruptcy administration. Subsequently, the British government intervened and took over the aviation engine business, while the automotive business was separated.
Today, the luxury car brand is fully owned by Germany's BMW Group, and the aerospace engine business has developed into today's British industrial giant Rolls-Royce Holdings.
This century-old company not only manufactures aviation engines, but is also involved in the fields of national defense, power systems and nuclear energy. The most surprising thing, however, is that it experienced a serious financial crisis just a few short years ago. When the COVID-19 epidemic broke out in 2020, the global aviation industry came to a standstill. Rolls-Royce Holdings suffered a full-year free cash flow outflow of up to 4.185 billion pounds, and was forced to save itself through capital increases, debt, asset sales, and layoffs.
The crisis of Rolls-Royce Holdings that year mainly came from the shutdown of the global aviation industry due to the epidemic. Its long-term maintenance service contracts for civil aviation engines are highly dependent on engine flying hours (Engine Flying Hours, EFH) charges. When airlines ground a large number of flights, related service revenue also decreased. Coupled with problems with the original business model and cost structure, cash flow was under heavy pressure.
Even by the end of 2022, the company's free cash flow has returned to positive value, but it still carries a net debt of 3.251 billion pounds, and its financial health needs to be improved. But in less than four years, the situation has undergone an astonishing change. According to the financial report for the first half of 2026, as of the end of June, Rolls-Royce Holdings has shifted from net debt to having net cash of 2.136 billion pounds, and the difference in net financial positions at the two points in time is 5.387 billion pounds.
How did this British industrial giant, which had lost a lot of cash due to the epidemic, turn around its business difficulties in less than four years? The answer is not just the recovery of the aviation market, but also has to do with the new CEO who will take office in 2023 and the series of operational reforms that will be promoted subsequently.
Tufan Erginbilgic, current CEO of Rolls-Royce Holdings. (Bloomberg)
After the epidemic, the profit rate surged from 2.5% to 20.5%
The key figure behind Rolls-Royce Holdings' ability to turn around in just a few years is the new CEO Tufan Erginbilgiç, who took office in January 2023 and was a former senior executive of British Petroleum (BP). Foreign media described that analysts, investors and internal employees even gave him the nickname "Turbo Tufan" or "Turbofan" to describe his powerful style that is as violent and efficient as a jet engine and does not tolerate any compromise.
Shortly after taking office, Erginbilgiç warned employees that the company was standing on a "Burning Platform" and even bluntly stated that this might be the last opportunity for transformation. He believes that Rolls-Royce's problem is not just the impact of the epidemic, but the poor operating performance that has existed for more than ten years. Compared with its main competitors, the company has not fully exerted its due profitability.
He then launched a massive overhaul, including replacing the senior management team, streamlining 2,500 mid-level management positions, cutting costs, and renegotiating some unprofitable contracts. For Rolls-Royce Holdings, the focus is not just on selling more engines, but on making existing businesses generate more reasonable profits. This reform method has even become a research case at Harvard Business School.
Foreign media pointed out that Rolls-Royce Holdings has two competitors in manufacturing the largest passenger jet engine, including Pratt & Whitney (part of missile manufacturer RTX) and General Electric Company (GE). In 2022, the operating profit rate of General Electric's (GE) aviation business has reached 18.3%. In comparison, the civil aviation department of Rolls-Royce Holdings only had 2.5% that year, highlighting the gap in profitability between the two parties.
However, as the new chief executive pushes for reforms, these measures are gradually being reflected in the profitability of the civil aviation unit. The operating profit margin of Rolls-Royce Holdings' civil aviation division will rise to 11.6% in 2023, 16.6% in 2024, and 20.5% in 2025. In just three years, the operating profit rate increased significantly by 18 percentage points.
As for the group as a whole, the basic operating profit in the first half of 2026 reached 2.534 billion pounds, an annual increase of 46%, the basic operating profit rate rose to 22.5%, and free cash flow reached 1.964 billion pounds. More importantly, net debt of 3.3 billion pounds at the end of 2022 has been converted into net cash of approximately 2.1 billion pounds by the end of June 2026.
Capital markets also responded. At the beginning of 2023, the share price of Rolls-Royce Holdings was less than 1 pound. Based on approximately 0.932 pounds per share at the end of 2022, it had climbed to 12.80 pounds by October 29, 2026, and the share price was approximately 13.7 times the original price.
Rolls-Royce Holdings no longer makes money just by selling engines. (Excerpted from Rolls-Royce website)
The key to a successful turnaround is hidden in a contract
In the past, the business model of aircraft engine manufacturers was not only to sell engines, but also to provide maintenance services for many years. Airlines can pay fees based on engine flight hours and other conditions through a Long-Term Service Agreement (LTSA), and the manufacturer will bear the responsibility for related maintenance services.
However, this model is not without risks. If the original contract is poorly priced or subsequent maintenance costs exceed expectations, the service contract that is supposed to generate stable income may instead become a burden on profits. However, after taking office, Erginbilgiç actively promoted "Commercial Optimization" (Commercial Optimization), renegotiated some unfavorable contracts, and improved the pricing and profit structure of products and maintenance services.
According to the 2025 financial report, the civil aviation department of Rolls-Royce Holdings has achieved a contract gross profit improvement of approximately 553 million pounds through optimization of commercial terms and cost improvements. After deducting some additional cost effects, the net improvement is approximately 392 million pounds. At the same time, since the beginning of 2022, the company has saved approximately 600 million pounds through efficiency improvements and organizational simplification, and gross savings on third-party procurement have reached 1.2 billion pounds.
The recovery of the aviation market also provides assistance. In 2025, the flight hours of large aviation engines will reach 111% of the 2019 level, driving an increase in long-term service revenue. The business transaction cash flow of the civil aviation sector has also increased from 626 million pounds in 2023 to 2.030 billion pounds in 2024, and will further reach 2.512 billion pounds in 2025, approximately three times in two years.
These figures reflect that the operational reform of Rolls-Royce Holdings is not simply cutting budgets or waiting for the aviation market to recover, but trying to change the profit structure of existing contracts. When the number of flight hours increases, coupled with more favorable business terms and cost control, the new revenue can be further converted into profits and cash flow.
Why does Rolls-Royce Holdings have to come back? The next-generation aircraft market is undergoing a major reshuffle. (Bloomberg)
Return to the single-aisle passenger aircraft market
The British government announced on October 28 that it will jointly promote a 10-year, 2.5 billion pound aviation engine technology research and development plan with Rolls-Royce Holdings, covering civil aviation and military aviation. One of the focuses is to strive to enter the next-generation single-aisle passenger aircraft market, rather than the large long-range passenger aircraft engine market that the company is currently good at.
But in fact, Rolls-Royce Holdings has participated in this market in the past, but sold its shares in the International Aero Engines (IAE) alliance to Pratt & Whitney in 2012, and then mainly focused on large wide-body passenger aircraft engines. Today, the main engine suppliers for the Airbus A320 and Boeing 737 series are CFM International, a joint venture between GE Aerospace and French Safran, and Pratt & Whitney.
Why is this company preparing to return to a market it has been out of for 14 years and investing billions of pounds to challenge its already established competitors? The key lies in the development timeline of the next generation of passenger aircraft. Rolls-Royce Holdings pointed out that the new generation of single-aisle passenger aircraft is expected to enter commercial operation in the mid-to-late 2030s. Aircraft manufacturers may select engine partners in the next few years. If they do not participate in research and development now, they may miss the next decades-long aircraft product cycle.
However, outsiders may wonder why a company that has returned to strong profits still needs government support. "Reuters" pointed out that the research and development of large-scale aviation engines requires huge funds and high investment risks. Therefore, the government has long been involved in sharing aviation technology research and development risks. This 2.5 billion pound project will be jointly funded by the British government and Rolls-Royce Holdings, but the specific funding arrangements still need to complete relevant approvals.
For the UK, this is not just about supporting an enterprise, but also involves manufacturing capabilities and employment opportunities in the future aviation industry. Rolls-Royce Holdings estimates that if it successfully enters the next-generation single-aisle passenger aircraft engine market, it may contribute 120 billion pounds to the British economy in the long term. This research and development plan is expected to support 3,300 job opportunities by the end of 2029, and may create tens of thousands of additional jobs if orders for new models are obtained in the future.
Rolls-Royce Holdings has another ace up its sleeve! The "heart" of the British nuclear submarine is actually in its hands. (European News Agency)
Entering the Small Modular Reactor (SMR)
In addition to aviation engines, Rolls-Royce Holdings also has another business worthy of attention, which is nuclear energy. The British industrial giant is deploying small modular reactors (SMRs) through its holding company Rolls-Royce SMR, and related plans have gradually advanced from technology development to specific power plant development and supply chain construction stages.
Rolls-Royce SMR announced in September 2026 that it will provide supplier contract bidding opportunities of up to 1.4 billion pounds in the next year and actively establish a nuclear energy supply chain; in addition, the company is also advancing reactor projects in Wales and the Czech Republic. Among them, the Temelín project in the Czech Republic has launched an environmental impact assessment process in October.
Analysts believe that if the relevant plans are successfully promoted and commercialized, this business has the opportunity to become another growth engine for Rolls-Royce Holdings in the AI era. If these nuclear energy plans are gradually implemented, Rolls-Royce Holdings' role will no longer be just a traditional power equipment manufacturer, but may further become a nuclear energy equipment and power plant technology supplier, because its technology development involves not only reactor design, but also component manufacturing, supply chain management and related engineering services.
In fact, Rolls-Royce Holdings is not new to nuclear energy. Experts pointed out that this century-old industrial giant also has a business that has received relatively little attention from ordinary investors, which is the long-term provision of nuclear power reactors for the British Royal Navy's nuclear submarines.
The British government's Defense Nuclear Energy Annual Report released in September 2026 stated that the nuclear reactor equipment used by the Royal Navy's nuclear submarines is provided by Rolls-Royce Submarines' facilities in Raynesway, near Derby, England. Nuclear power allows submarines to perform underwater missions for a long time and is also an important technical basis for the UK's maritime nuclear deterrence capability.
Today, this business has been extended to Australia with the Australia-UK-US Security Partnership (AUKUS). The future SSN-AUKUS attack nuclear submarines of the United Kingdom and Australia will use a new generation of nuclear reactors manufactured by Rolls-Royce Submarines. The British government pointed out that Australia has committed to investing 2.4 billion pounds over 10 years to expand related facilities and share submarine design costs.
Nuclear submarine reactors involve highly specialized engineering techniques, safety regulations and long-term support requirements. This also gives Rolls-Royce Holdings an industrial position different from that of general equipment suppliers in the field of military nuclear power.
According to the financial report for the first half of 2026, the basic revenue of the defense department of Rolls-Royce Holdings reached 2.484 billion pounds, an organic annual increase of 17%; the basic operating profit reached 522 million pounds, an organic annual increase of 57%. However, the relevant performance covers the entire defense sector, and not all comes from the nuclear submarine business.
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