In 1998 the aero and space market in the United Kingdom was estimated to be 21.6 billion, contributing over ten percent of the UK manufacturing gross domestic product and two percent of the entire GDP. The bulk of the industry lies in military sales, which amounts to almost half of the product sales of the aviation market. Military sales have helped companies like British Aerospace (BAE) systems, and Rolls Royce become amongst the UK’s largest exporters.
The aerospace industry has remained strong in difficult periods through the nineties when there were large defence cutbacks and civil airline cancellations. However, it has been the technical excellence and market positioning that has allowed companies like Rolls Royce to widen the capacity of sales, through associations and relationships with traditional rivals and gained entry into new global markets. This has resulted in the UK industry gaining many domestic and foreign contracts for civil and military defence sales.
For the purpose of this project the definition of the aerospace industry is focused on and includes the sale of aircraft components, parts and engines, refurbishment work, and all after market services. The refurbishments and after market services are often included in company turnover because they are considered future cash flows. It excludes the systems that support avionics such as air and ground controls, their electronics and the electrical systems on board aircrafts.
Rolls Royce has positioned itself as the worlds second largest aircraft maker, closely behind General Electric (GE), but no less a technological leader in the aerospace, marine, and energy sectors of the industry. Throughout recent years the company has built a broader base growing through acquisitions and the expansion of its ample product range. Success has been attributed to the ability to accurately recognize the requirements of world markets and provide outstanding customer and product life support.
The Rolls Royce aerospace business makes gas turbine engines for both military and commercial aircraft worldwide. These customers include armed forces, commercial airlines and corporations who use jets, helicopters, and other aircraft. Rolls Royce is one of the largest makers of marine propulsion systems and both constructs and installs power generation systems, but what many of us know Rolls Royce for are its luxury automobiles.
The British company established in 1906 by Charles Rolls and engineer Henry Royce, had their first unveiling of a car named the Silver Ghost, which earned the makers the title of the best car in the world. Although their primary focus was automobiles, they began producing aircraft engines in 1914 used in the aircraft’s of the First World War. These engines were used in a number of historically important flights and in 1931 the Rolls Royce engines set records for speed on land, in air, and by sea. The finest line of automobile today came through the acquisition of the Bentley Company in 1933. It continued to produce engines that powered the fighters of the Second World War. Over the years it has been a pioneer in the aerospace market with its design of the jet engine, turboprop, turbofan, and vertical takeoff engine.
In 1976 the company penetrated the commercial market of the United States, gaining a presence when it acquired one of its competitors Bristol Siddley, and with it came the contract for the Anglo-French Concorde. Civil Aerospace In December 2000, civil aerospace sales amounted to ï¿½3,150 million, gaining an underlying profit of ï¿½332 million. Engines manufactured by Rolls Royce are used by more than 500 airlines and 2,400 corporate users worldwide. That translates to 31 percent of engine orders placed and a 27 percent share of engines that are delivered, supplying 38 of the world markets top 50. These deliveries have grown from 400 in 1996 to 1,100 in 2000, a record level that is forecasted for continual growth.
“The rapid expansion of our Aerospace business is also creating a growing fleet of engines. As this fleet matures, the company will benefit from the ling term stream of spare part sales and related services.” (Sir Ralph Robins, Chairman, annual report 2000.) Central to this growth are the new Trent family engines, lighter with better payload to range, which translates to higher profit potential, that its competitors. With operations in 17 countries Rolls Royce has established a competitive advantage through excellence in their customer relations, dependability, and overhaul and maintenance services. The ability to provide after market services for their products with a global network of joint ventures is proven to be at the heart of its success.
The defence sector of Rolls Royce business had a turnover ï¿½1,403 million in 2000, and has been estimated to be worth ï¿½130 billion over the next twenty years. Operations have become transatlantic working with a number of major international partners. The United States Department of defence backs three of the four largest projects. Engines are manufactured for many military aircraft including helicopters, fighter jets, and transport vehicles. During the year of 2000 the engine that will power the Eurofighter entered the production stage of which the contract calls for the manufacture of 1,500 engines. Germany, France, and the Netherlands have chosen Rolls Royce engines for up to 399 twin engine helicopters with an estimated value of $1 billion.
Marine With the acquisition if Vickers in November of 1999, Rolls Royce has made substantial progress in the marine business. More than 20,000 commercial and naval vessels use engines manufactured by Rolls Royce and they power 400 ships in 30 navies. Again Rolls Royce achieves success through a wide range of products supported by service systems and close customer relationships. In the naval sector a unique and advanced engine has been chosen for destroyer ships of the Royal Navy. On the commercial market record order levels were taken in 2000 for some 53 offshore vessels that will incorporate Rolls Royce equipment, accounting for 70 percent of all orders placed in the entire industry.
Energy There is a growing market for systems used for the generation of power. Deregulation and privatisation of the electricity supply industries and the growing availability of gas are creating greater demand. Rolls Royce recognises these markets and applies its technology in gas turbines and diesel engines to generating power that can be distributed. The company strengthened its position in the oil and gas business in 1999 buy buying the rotating equipment business of Cooper Cameron.
Following the accepted principal of financial theory, the interest of any company is to make profit. The financial decisions made are therefore based on the principals of capitalism. The objective is to maximise the wealth of the company, which translates into the maximisation of the value of its share, and therefore its shareholders wealth. Shareholders wealth is cash that can be used for consumption of goods and services. It is then maximised by the maximisation of dividend payments expected through time that are generated by the share.
There comes a decision that managers must make in this principal-agent relationship. Financial managers may not always make decisions that will necessarily maximise the wealth of shareholders. Alternatively, it may only aim for a set level of return, for instance an increase in dividends, per annum, of 10%. In a circumstance like this managers may do enough to keep shareholders satisfied, focussing remaining efforts on other, possibly personal objectives. Principals, or the owners of the company’s assets, respond to this in two ways. One in which they monitor managers to make sure they are attempting to maximise. The second establishes incentives in which the managers also share in the benefits of maximisation.
As the agents or managers are employed to manage the assets and capital of the company owned collectively by the shareholders. It is important to consider the sources of the capital that is employed by a company. It is comprised of share capital, capital reserves, revenue reserves, and long term debt. Each of these sources of capital falls under different ownership. The share capital is the amount paid by shareholders for new shares at their nominal or par value.
These are owned by shareholders and are part of shareholders funds and rewards take the form of dividend payments. Capital reserves are also part of shareholders funds and are the amount in excess that were paid for shares. They may also include a surplus on the revaluation of fixed assets. Revenue reserves also called Retained Earnings, are profits that could have been taken by shareholders in the form of dividends that have been left to finance future growth. These too are owned by and are part of shareholders funds.