Transformation in Action - how investing in strategic choices is taking Rolls-Royce to a place it's not been before

Transcript

Rich Maslen:If you saw me earlier on, we had a really great session with, with CoverGenius. I'm really excited about the session I get to do on stage here now. We've got a great audience in here and we're now going to start talking about the beating hearts of our aircraft. Engines. Hmm. It's been a big topic. It's been a massive topic over the last few years and we know that.

Luke Mallows:Yeah.

Rich Maslen:And I'm going to be joined on stage by somebody who's at the center of, of ensuring that the aircraft stay flying. Um, so I'd please like to welcome Luke Mallows, SVP Leasing and Marketing at Rolls-Royce, to join me on stage. And I think I've probably got a few interesting questions for you, Luke. Sorry. Thanks, Luke. Please come and take a seat. Now, Luke has been at Rolls-Royce since 2009, so yeah, you've seen a lot and you've been around the world a lot where you've worked across energy, defense, civil business in Saudi Arabia, USA, Germany. You're now here in Lisbon, you know, getting around quite a lot. Most recently, you were dealing with customer teams in Americas and Europe, so you got quite hands-on in 2 very key markets for you. And you now are, since December, you've been in product and service marketing and full accountability for Rolls-Royce's relationship with aircraft and engine lessors. So you've been really hands-on in terms of the last few years. Yeah. In what has been, I don't think you mind me saying, a difficult time, not just for you, but for any business producing engines for aircraft. We're gonna talk about the lessons learned. We're gonna be honest. We're gonna find out what has happened, what went wrong, how Rolls-Royce has attempted to fix that, whether engine development is a marathon or is it a soap opera. I think with the Trent 1000, we could say it's probably been a bit of both. So let's see where we go with this. So, right, okay, to begin with, the Trent 1000 was an engine that launched 1,000 headlines, you know, appropriately named. It worked well.

Luke Mallows:Yeah.

Rich Maslen:It's had its time in the spotlight, perhaps more than yourself and your corporate team down there would, would have liked. If it was a person, would you describe its personality as a misunderstood genius or a drama queen or just an unlucky overachiever?

Luke Mallows:Ha! Yeah, we were— in fact, we were talking about this the other day, and when I was at school, we read Homer's Odyssey. And this wonderful carrier of, uh, character of, of Odysseus who's got this 10-year journey back to Ithaca, right? And it has, it has felt over the last 10 years in particular as though the Trent 1000 has been Odysseus. We are finding our way back to Ithaca, but we do so with, with perseverance. We do so with courage, and we do so with the, with the absolute belief that we have to bring the Trent 1000 back to a point of of competitiveness. And, and that's where we now sit. You know, we're at the gates of Ithaca and it's been, it's been a tough, tough journey. And we owe a huge debt of gratitude to, to many of those in the room, many customers who have been on that journey with us. But we do really feel as though we're now at the point where, where we are waiting for that exciting new chapter.

Rich Maslen:I don't think I've been at a CAPA event where we've had so much philosophical thoughts with, with Anko earlier on with, with comments. You know, joking aside, you know, what's been the biggest lessons that you've learned at Rolls-Royce and that you will take away from the saga with the Trent 1000?

Luke Mallows:Yeah, so it's, it's a great question and there's lots of, you know, we've, we've taken the industry on a learning journey with us. I think when we are looking to the next, the next program of future engines, you have to, have to worry about specification. When we look back to 2002, 2003, when we were being asked to compete to win a position on the 787, what was then the, the 787E, I think it was, we were solely focused on fuel burn, right? No one believed that in 2025 we'd be sat with Brent crude at $60 a barrel. We've lived through $143. We thought there was a trajectory to, to keep us there. We now have hindsight, but where we made the compromise was perhaps to focus too significantly on, on fuel burn. We were a different organization back then, and engineering, as everyone knows, is, is a set of compromises. So as Boeing expanded the capability of the 787, as it got heavier and more capable, we'd found a sweet spot on performance that we couldn't stretch to meet that additional thrust requirement. And that's, that's when the engine really ran, began to run against its limitations. And that's why we've, we've had some of the difficulties we have. But yeah, I mean, in hindsight, people are making money today, good money today on a, Trent 700-powered A330, which is, which is 30-year-old technology. And, and fuel burn has not been the promised land that I think many of us were expecting.

Rich Maslen:So durability is a, a key issue, but you know, what have you done not just to fix it, what have you done to future-proof it that it doesn't— things don't happen again?

Luke Mallows:Yeah, so again, the world has changed, we have changed. So we launched in October with Lufthansa the Trent 1000 XE, So in June we certified a package, what we've called the Phase 1 upgrade package. It centers around a new HP turbine blade, right? So it's, it's a new parent alloy. It's changed the way it's, it's cooled. We've got a change to the combustion rear inner case, which flows more cooling air to the blade. So the blade itself is able to, to withstand thermal fatigue in a way it hasn't before. So launching the Phase 1 has been a huge success. I think there's now just over 50 engines that have been upgraded in service, and that's the important point, right? It's not just about putting new engines into service, it's about looking after the customers that have been with us on this journey and, and, and making sure that they're looked after as well. So the upgrade program continues, and then halfway next year we bring a second phase. So the second phase is another 30% improvement in time on wing and in durability. That's further changes to the HP turbine blade just to tweak its weight. just to make sure that we don't experience creep. And again, those thermal fatigues. So the XE is, yeah, it is the redefining moment of what the Trent 1000 is. We owe our customers, as I say, a huge debt of gratitude, but we owe them an engine that will compete. The 787 is an aircraft program that is designed to have competition in its engine selection.

Rich Maslen:And we owe that to the industry, we owe that to ourselves, and most importantly, to our Now, you know, I'm sure some of the customers, I think it's great to hear you say that, but it's delivering on that. So what I'd like you to do is, can you put your hands out, please? Now, can you confidently say to me without crossing your fingers that this is a great engine that's going to work?

Luke Mallows:Yeah.

Rich Maslen:There we go.

Luke Mallows:Promise is there now.

Rich Maslen:Um, thing is that durability is only something that gets noticed when it doesn't work and when things go wrong. What's the hardest thing about making reliability sexy?

Luke Mallows:Oh God. Reliability sexy. Yeah, you, you might argue that reliability shouldn't be sexy. So, so the compromise often in engine system design comes in durability, 'cause there's, there's a dial you can turn, right? You could deliver the most fuel-efficient engine on Earth, but it might only last 50 cycles on wing, or its NOx performance might not be good. It might have a, a poor noise profile. So durability, and to a greater or lesser extent, is where you can also get some sympathy from operators, right? Reliability is tantamount to safety. So there, there can be no compromise. So we don't, we don't need reliability to, to be sexy. We just need it to be absolutely where it should be, because in our industry, safety, as we all know, is, is above everything else. So that's where we're— all of our engine family, including the Trent 1000, it may have suffered with durability issues, but reliability has always been good. And that is, you know, we are a safety-first organization and we would never compromise. So I would settle for it being unsexy so long as it was safe.

Rich Maslen:I think that's a great answer. You know, what I'm quite interested to see is, have your conversations changed now with airlines given everything that's happened? And are airlines now looking More about predictability than the actual performance of the engine.

Luke Mallows:Yeah, absolutely. So I think, yeah, listen, as a— if you get philosophical, as an industry, we have commoditized aviation to a degree where the, the, the end passenger is expecting— I'll be honest, it's, it's difficult to think of any transportation means which is reliable, but they're expecting punctuality, above all else. And so we've lost, we've lost some of the, the magic. We've lost some of that, that engineering understanding that comes with, with aviation. But what we've absolutely learned is that customers don't always need the best product. It doesn't necessarily need to have the best fuel burn. It doesn't need to last 6,000 cycles on wing, but where it's not going to—

Rich Maslen:Yeah.

Luke Mallows:You have to let them know because they have to be able to plan it into their schedules. They have to have that full understanding and knowledge because that's just the way aviation runs. We— nobody can be profitable in this business if they don't have the assets available to them.

Rich Maslen:It's a big investment to develop an engine program and bring it through testing and to fruition. You know, you've doubled down on the widebody market. Yeah, right now we, and we will continue to see rapid growth in, in narrowbody aircraft. You know, what's the reason for that? And, you know, do you think there's options going moving forward to perhaps see new engines in, in other areas?

Luke Mallows:Yeah, so we, we exited the IAE consortium, what, 2012, 2013? And the, and the reason we did that, as I say, at that time we were a very different organization. Right? We were, we were half the size of what we are now. We didn't have anywhere close to the market share, and we had to take, with the knowledge available at the time, strategic decisions to fund ourselves as a business. And we saw the opportunity available on the 350, the Trent XWB. We brought to market, you know, what is without doubt the best engine, but it came at a compromise. We exited the narrowbody. Now we've made very, very clear as a group, our CEO is very, very clear, we want back in. We've still been overhauling V2500, still been producing parts. So it's not as though we've fully exited the narrowbody market, but we need to bring a new engine into that market. We have the UltraFan development program. So we started the UltraFan, what, 2013, 2014? And it's just, it's testament to your point. Nowadays, learning the lessons of the Trent 1000s, We've been developing an engine for a decade. We've put billions into it. And as we sit here today, there's no known platform.

Rich Maslen:Mm-hmm.

Luke Mallows:Right? But that's, that's what you have to do to stay at the forefront of aeronautical and aerospace engineering. So we've, we've gone big. We've started with a demonstrator model that will go between 80,000 and 100,000 pounds of thrust. And again, the lessons learned is if you have to expand your thrust, it's much, much harder. So we've gone big to begin with, and then we know we can scale down with efficiency and with reliability and durability to reenter and flex to, to get back into the narrowbody market.

Rich Maslen:And I think we will see developments there happening at some point soon. So you're well placed to, to, to have a program that would, that would, would work on, on those aircraft when they, they can. There's also the thing of going even bigger as well. You know, we, we constantly hear Tim Clark at Emirates talking about the, You know, the A380 is not big enough and I now need to stretch the A350 further and stretch the, the 777. You know, is that manageable? You know, can, can we get to that stage or, or have we hit the max where we are with, with where we are in current power plants?

Luke Mallows:You have to fill it profitably. The, the honest, the honest answer, there's probably a dozen maximum airlines in the world that can operate a jumbo-size aircraft. You have to have the network. It's not necessarily, is there the efficiency in, in the airframe and the engine? It's, can you fill it profitably and do you have the hub network that allows you to do it? So at the same time that some airlines are going massive—

Rich Maslen:Yeah.

Luke Mallows:I flew for the first time a couple of weeks ago transatlantic on a, on an XLR, right? So it's, I think what airlines are learning is that you've gotta, It's horses for courses.

Rich Maslen:Yeah.

Luke Mallows:You've really absolutely got to maximize the efficiency and the profitability of, of that route. And so I think you'll see an increasing number of airlines flex between aircraft rather than, I mean, even the Emirates model, right? They, they are opening up to 350s, 787-8s, 777s, 380s. They're offering a far greater mix than, than they used to.

Rich Maslen:Yeah. You know, you, you've said about the UltraFan and, and the investment that's already gone into working on, on the program. You know, how does work with OEMs like Boeing and Airbus continue so you can ensure that, you know, you're investing at the, at the right time now for it and when you can ramp it up to actually turn it into something that, that is a logical option?

Luke Mallows:So they, they are prime, right? They will always have to decide what an airframe looks like, what it is designed to achieve, what the customers want from it. But we, we are at that point where And then our, our job is simply to have the technology available to— that they want to select, right? The technology that they say, that's, that's what I want providing the thrust for this airframe. But I'll be honest, the, the decision will sit with many in the room when they're thinking and contemplating and having those discussions as to what do you want from the next generation aircraft? How big a jump in efficiency do you need to find to make it worthwhile to launch a new program? Is it 10%? Is it 15%? Is it 20%? And then is fuel efficiency the right goal or is it NOx? Is it noise? Is it, as you've said earlier, is it just absolute, I want monotone, very, very boring reliability every day? So we can flex technology accordingly, but we need to understand, you know, what's the driving goal? What's the rationale for bringing a new product to market? And that's where the airlines have the biggest say.

Rich Maslen:And, you know, you, you're reliant on the airlines to, to, to, to, to buy your products. So, you know, what's the biggest misconceptions that airlines have about engine development? And I'm sure there's plenty.

Luke Mallows:Yeah, misconceptions. I don't know if there's— I wouldn't— I would never put the blame on the, the airline. I think sometimes as an OEM, we don't do enough to have people realize, you know, the costs, the brilliance of what we do. Like the perfect example I always get, you're on an aircraft, right? And you've got this enormous jet engine on your ear, right? It's there, it's gulping in tons and tons of air at like hurricane speeds, right? And then we ignite it at temperatures equivalent to the sun molten lava, and then we surge those gases through the turbine such that it comes out of the back end. You know, that turbine spinning at thousands of RPM spits out the back end at, at near sonic speeds, and then you land. And what does, you know, what does your wife or your kids worry about? Well, we're a bit tight on legroom, or, you know, the, the air conditioning wasn't working. And you think there's— And it does that day in, day out reliably. And so I think, I think all of us, again, it's this, it's, and we're all slightly guilty of commoditizing, as I say, aviation such that we've lost some of the magic.

Rich Maslen:Okay.

Luke Mallows:We've lost that real understanding of how brilliant what we do is.

Rich Maslen:I think everyone on their flights back home, those traveling back, are gonna be looking out on the engines now and thinking like there's a volcano taking off on, on the side of the plane. I want to talk quickly about culture and change. You know, you have changed, you say, a lot as a business, but engineering has changed a lot as well. It's very different to how it was in the old days. You've got a lot of heritage, a lot of background, a lot of really highly skilled individuals, but you've now got the sort of TikTok generation of engineers. So, you know, how do you marry this together in the organization to actually ensure you're innovative and moving forward?

Luke Mallows:Yeah, yeah, it's difficult. Because the expectations of the next generation are very, very different to my own and others that drive the company forward. I think making Rolls-Royce— and there's, listen, we, you know, there's a lot of debate at the moment around pricing and commercialization and around how we structure our business. The way we see it is we have to make Rolls-Royce the most attractive place for the best engineers in the world to be? Like the previous guy, I forget his name, but what a cool guy, what a cool product. That's who we are competing with. But how do you get the best minds in the world, the best engineers in the world to come to Rolls-Royce and not to spend or waste their talents at Meta, right? On, on sunglass design. But I hope he's left the room. But yeah, but that's, that's what, that's what, goes against us. So first and foremost, you have to be an attractive place to be, and brand loyalty is something that the next generation grows up with, and they have to feel the same about the business that they work in. So yeah, selfishly, we want to be a very sustainable business in every sense of the word, because that's how we attract and retain the best.

Rich Maslen:And I know you do a lot of work at Rolls-Royce in sort of STEM at, at schools and things like that. You, you You sponsor a badge for, for the scouting movement.

Luke Mallows:Yeah.

Rich Maslen:To get them involved in things.

Luke Mallows:Yes.

Rich Maslen:So, you know, is this the way that you are trying to, to build up for the future and attract new people in, into the, the industry?

Luke Mallows:Yeah. Yeah. I mean, the, the demographics of engineering and aviation are, are, you know, it brings you to tears if you spend too much time looking at it. But we still have a fundamental problem in how we attract a far broader demographic of individuals in, in just into the schools and universities. So STEM for us is hugely important. We're not as an industry unified enough in making aviation, to your point, sexy, attractive.

Rich Maslen:Mm-hmm.

Luke Mallows:And so we have to, we have to start with the, you know, we spend a lot of time in primary schools. We're not even talking secondary schools and universities. You have to capture the imagination of a 5-year-old, a 6-year-old, a 7-year-old. That's the age at which you need to, you need to start.

Rich Maslen:So we've got about a minute left. I'd, I'd like to sort of take you back a little way, take you back to when you were younger. And, you know, did you think you would think— yeah, maybe, maybe you had more hair then, I don't know. Um, take you back to then, and what, you know, would you have thought as an 18-year-old that you would be sat up here talking about engines? Did you think engines would be as they are, or would we— would you be in that situation of thinking that we would be in this alternate universe now where we have flying taxis? We're getting close to it, but something like that. So, you know, as an 18-year-old, what, you know, would you believe what you've done?

Luke Mallows:Yeah, I was actually 19 before I went on my first flight. So as an 18-year-old, I probably didn't believe that I'd be working in aviation. But I think, yeah, it's a great question. When you look back, have we made the advancements and, and leaps in— I mean, an aircraft looks like an aircraft did in the '80s, right?

Rich Maslen:Mm-hmm.

Luke Mallows:But the efficiency with which it operates, how we manage airport operations, the reliability, the, the length that aircraft can fly, you know, it's, it's phenomenal. The advancements are genuinely phenomenal. As I say, as a paying passenger, we're obvious, Yeah, we can sometimes forget that. So I think I did not— I'm into my, what, 17th year at Rolls-Royce. I didn't join thinking I'd stay here this long. And you looked at the people that had been there that long and you thought, come on, who stays in a company that long? But you get captivated by it. It's addictive. And yeah, you always want to be part of that step change in technology and that step change in how we are seen and how we perform as an industry.

Rich Maslen:And just finally, as that 19-year-old when you took that first flight, I'm interested, did you think the noise of the engine, did it thrill you or did it terrify you?

Luke Mallows:I mean, I didn't know there was a, you know, a molten lava explosion.

Rich Maslen:You do now. I think we've got a video that we can, can now show from Rolls-Royce that will highlight some of the things that they've done.

Luke Mallows:Cool.

Rich Maslen:Oh, really good. I know we've got tears in the eyes. We are one. I think that highlights things really well, and I think it shows the progress here. Luke, thank you for your insights. Thank you for your honesty. There was a few little loaded questions there, so thank you for taking the time to answer them. Please, everybody, Luke.

Luke Mallows:Thank you.

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