The Turning Point: The Necessary Collapse of Rolls-Royce (Part 1)

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0:55Thanks for listening to A Long Time in Finance with Jonathan Ford and Neil Collins.

1:09Welcome to The Turning Point, a new series from a long time in finance. In February 1971, I was working in turbine engineering in B-Wing of Moor Lane. On the previous day, we'd heard rumours that something was happening because managers were being summoned to secret meetings. Soon after arrival on Thursday the 4th, we found the switchboard wouldn't allow any external calls. I can't remember what time we heard the news of the bankruptcy that morning. But I do know that not much work was done for the rest of the day, or the day after. Many of us were in denial, refusing to believe that our company could cease to exist.

1:46So that was a woman called Sue Allen, who was a young engineer based in the Rolls-Royce Aero Engine Division in Derby. And her story is typical of those employees who experienced the collapse of Rolls-Royce in 1971. Do you remember that, Neil? Do you remember the collapse of Rolls-Royce? Is that in your memory back? I do remember the collapse of Rolls-Royce. It was spectacular. When it actually happened, which is on the 4th of February 1971, and just to just say that morning, 8.45am, the Rolls-Royce board met and they resolved that subject to talks with Lockheed and Her Majesty's government, the RB211 programme would be discontinued, should be regarded as being suspended for the time being.

2:32And a letter was issued asking that a receiver be appointed for Rolls-Royce Ltd. The board also requested that dealings in the company's shares be suspended on the stock exchange. I mean, the reason for Rolls-Royce's collapse is a single-failed project, which is a contract to build this new large jet engine called the RB211, which they were building for a new American aircraft, the Lockheed Tristar, which was supposed to take to the skies the same year in 1971. But it's clear that the engine is not ready and the contract will not be fulfilled. So it's really hard to overestimate the shock that ripples through because Rolls-Royce isn't seen as one of these sort of old heavy engineering kind of lame duck industries of the 1960s, car making, steel, ship building that were seen to need kind of turning around.

3:22It's an industry which is the kind of future, it's seen as the kind of pride of British manufacturing. Is that fair? Well undoubtedly it had world-class engineering at a time when Britain had world-class engineers. Yeah. Anyway, so some of the reactions, let's just look at some of the reactions in Fortune magazine. For some reason, a lot of them come from American magazines, but maybe they were just intrigued. Fortune magazine reports one government official responding to the news by saying the whole country was stunned. It was like hearing Westminster Abbey had become a brothel. And there was a New York Times headline on the day which said death sentence for symbol of national pride.

3:59Well, the New York Times loves that sort of thing, then and now. Yeah, but in a way, it's reasonable. I mean, the newspapers in Britain were warning that 20 ,000 jobs could go, 4 ,000 employees of Rolls-Royce were immediately made redundant, with thousands more being laid off across the supply chain. Because obviously, it has a lot of engineering businesses around Derby who were feeding machinery and parts in. And a shop steward, this is the era of shop stewards, a much-loved British institution, was reportedly said with reference to the history of Rolls-Royce, which of course is all very much tied up in the Second World War.

4:35We're fighting the battle of Britain all over again, he said, about the kind of threat of redundancies at a Scottish plant operated by Rolls-Royce. So February the 4th, a day of complete disarray, newspapers full of gloomy headlines, the end of Rolls-Royce. But we call this series The Turning Point. And I think what we're going to discuss over these episodes is the extent to which this collapse, terrible as it seemed at the time, was in fact weirdly a turning point for the history of Rolls-Royce. In this episode, therefore, we'll chart its collapse, how it came to fail in the way it did in February 1971, and the second we'll chart the amazing recovery to what Rolls-Royce is today, which is a£100 billion company that's the world's largest and most important manufacturer of aero engines, and we'll try and figure out, is this really the moment when everything changed for Rolls-Royce?

5:30But first things first, how did Rolls-Royce get into this terrible situation? And how did the RB211 programme, the programme to build this very large jet, come to bring it down? So I suppose, Neil, we should start by talking a little bit about the history of Rolls-Royce and how it got into jet engines, because most people think about Rolls-Royce as a car company. makes these luxury limousines. But by 1971, when it goes bust, cars were only about 10 % of its sales. And most of it is focused on gas turbine technology, which is largely making engines for aeroplanes. So Rolls really gets into making aircraft engines in the First World War.

6:12It's a time when the government is building up an air force for the first time, and it needs, funnily enough engines to put in these planes because you don't want to go to war with a bunch of gliders and Rolls-Royce is a pretty obvious sort of business to make them because there's actually not that big a difference between a car engine and an airplane engine at that time they're basically just piston engines is that correct you're the resident engineering expert well a modern aircraft engine bears no resemblance at all of course but at the time it was just a a reciprocating engine in a car and in an aeroplane.

6:49In the Second World War, essentially everything changes with the invention of the jet engine. And we should talk a tiny bit about how Rolls-Royce got into making jet engines. And I suppose you need to start with the kind of race that's underway during the Second World War between, funnily enough, Britain and Germany over which of them is going to build a jet engine for the aircraft the first. There are two weirdly parallel projects in the 1930s, one in Britain involving a man called Frank Whittle and the other in Germany under a number of designers, the most famous of which is a guy called Hans von Ohain.

7:27And they're both independently developing jet engines. And by the middle of the war, the Germans appear to be in the lead. I think their first jet plane went into the skies in 1939 and Britain only managed to get its first one into the air two years later in 1941. and one of the problems I think is that the government which didn't really take jet aviation very seriously until the beginning of the war have appointed an engineering company a car company called Rover to essentially try and commercialize what Whittle has developed. The problem is that Whittle and Rover cars don't get on at all they have constant fights.

8:08Whittle thinks that Rover's parts are not built properly and there are huge sort of shouting matches. And the head of Rolls Royce at the time, a guy called Ernest Hives, has observed all this and he decides that basically it's a real problem for the war in that Britain is going to lose this vital race and will not have jet engines when the Germans do and that will potentially lead to the war being lost, I guess. So he basically steps in, and Rolls-Royce at this stage is not at all involved in jet engines. He goes to see Stafford Cripps, who is the Minister of Aircraft Production in late 1942, and asks him to let Rolls-Royce get drafted in to produce Whittle's jets.

8:52And the reason he has to do that is the government is essentially the buyer and in charge of all production. So he can't just waltz into Whittle's office and demand to join in. But Cripps is very unwilling. and in the end they had this argument and Hives has a complete meltdown in Cripps' office and basically says to him, people are dying needlessly. It's wrong, I tell you. It's stupid and it's wrong and I won't let it go on like this. There should be questions in Parliament about it, headlines in the papers. The world should know that this country is making a mistake and I shall see to it that the world does know and I shall see to it myself.

9:27We've got to have jets or more people will be killed and they're young And the result of this is Cripps basically gives way. And this is the moment that Rolls-Royce basically get into jet aviation. So what is it about jets that's so good? Whittle is developing the jet to try and solve two problems, basically. One is that there are certain aerodynamic consequences of propeller planes, which mean that at a certain speed, the drag from the propeller starts to stop you being able to go any faster. I think that's right, is it? Roughly right. There is a ceiling speed because of the tip speed of the propeller, which is why a modern propeller-driven plane has curved ends on its blades because that reduces the drag a little.

10:19But nevertheless, it's only a minor difference. To go any faster than about 400 miles an hour, you need to have a different engine. Yeah. So that's one aspect. The other aspect is altitude, in that propeller planes have a certain ceiling. They're capped by the fact that as the air gets thinner, the propeller works less well. Jets are seen as a way basically to get around these two problems, which basically will mean that you can go faster and you can go higher than other planes. And apparently in military aviation, these two things are a bit of an advantage if you've got them and the other guy hasn't.

10:54So that essentially was why Hives was getting so anxious about the way that the war was developing. But in Rolls-Royce sort of lore, there's a famous what was called a five shilling dinner, which involved him and a man, the chairman of Rover, a guy called Spencer Wilkes, which takes place, I think, in December 1942 at a place called the Swan and Royal Hotel in Clitheroe, Lancashire, where basically they do a swap. Hives offers Rover a tank factory, a tank engine factory in Nottingham. And Rover says, fine, well, actually, we'd quite like the tank engine factory. And you can have the whole jet project.

11:33So we no longer ever have to speak to Frank Whittle again. And basically, they end up getting a plant. The center of the jet production is a place called Barnalswick, which is in Yorkshire. And that's where all the development of Whittle's engines is taking place. and RB, as in the RB211, the designation for all the jets, stands for Rolls-Royce Barnalswick. Anyway, the rest is history. Rolls-Royce is in the jet business and they produced the first jet engine, the Welland, in 1944. That goes into an aircraft called the Gloucester Meteor and basically that becomes, in many ways, the model, the prototype for all the jet engines that are produced, not only in Europe and the United States, but also in Russia.

12:22And it doesn't matter, by the way, that the Germans did get there first, but only by about two months. And their engines were no good because they basically didn't use the right equipment. And also the German aviation industry was shut down for 10 years after the war. The jet engine basically changes everything for Rolls-Royce. And the big change, as you've alluded to, Neil, is that it really changes the business because jet engines are completely different from piston engines of the sort that they've been making, the famous Merlin engine for the Spitfire and stuff. I mean, it's true, isn't it?

12:54I mean, it really is a completely novel technology because you're dealing with hot gases and you're trying to confine them in a relatively light space. It's a turbine rather than a reciprocating engine. That's the key difference in technology. But turbines are notoriously difficult to get right, whereas a reciprocating engine is relatively straightforward. And to get a turbine to produce more output than you need input was a long time a serious challenge. And indeed, a lot of engine makers from the piston era are unable really to go into jet engines. There are lots of companies which essentially try.

13:40So General Motors has a company called Allison, which basically doesn't really ever manage to break into jets. The first American jet maker which is trying to design an all-American jet is Westinghouse, which is a big turbine company. And they basically can't do it. And as I've said, most of the U.S. designs that go into the really famous engine makers we've all heard of, like Pratt & Whitney and General Electric, are originally based around the Rolls-Royce designs that come out of the war. The 1940s and the 1950s are basically a time of incredible growth. Because if you think about it, military aviation becomes completely fixated on the jet because of its performance characteristics, the fact that they're so fast, and they can go so high.

14:24So essentially, within 10 years, effectively, the entire fleet of the US, the Royal Air Force, the French Air Force, or whatever, is being reconfigured to jets. So there are a huge number of new designs, there are virtually a new type of plane is coming out every two or three years. And for companies like Rolls-Royce, it's a great time because you've got huge demand for your product. But it's only really in the mid-50s that the civil jet engine appears at all. I think in the early days, they're just regarded as too unreliable and expensive to operate to really appeal to, you know, sort of airlines.

15:04planes i mean just to take one statistic in the korean war for example almost a quarter of the 1100 planes the u.s air force lost were due to engine failure and a government report after the war said they were concerned that pilots were no longer keen to join the air force if they had to learn to fly fast jets because they're just too dangerous i think it's also true that the pioneer of civil aviation jet aviation is a british plane called the comet in the 1950s and they didn't have a very happy time although not really due to the engines well it was the first major commercial aircraft and it was fine except that the windows of the airframe were square or rectangular and this allowed the propagation of cracks in the structure and so there were two dramatic crashes with a large loss of life over Italy.

16:01And essentially that put the lid on the whole project, which of course is why modern aircraft windows have curved corners. And it allowed Boeing to establish an assailable lead. But the comet does establish one thing, which is really important for civil aviation and jet aviation, is that it's incredibly popular because the comet, until it starts falling out of the sky, is always full. And other aircraft bosses look at this and they go, oh, people really like flying in jets, much more than they like flying in propeller planes. But you're right, by the mid-50s, it's basically Boeing and Douglas, two big American manufacturers who start to really dominate the market for larger jet airplanes.

16:47The thing about American aircraft or American aircraft manufacturers is even though they don't make the engines themselves, when they build a plane and they find a preferred engine supplier, it tends to be one of the two American engine manufacturers, either Pratt & Whitney or General Electric. Yeah, no major company makes both airframe and engines. It's just far too expensive. Okay. I mean, de Havilland did, but they were a bit early. So Rolls-Royce by the early 1960s is looking at basically what's happening. It can see that America is the market for civil aviation. It's just a much bigger market than anywhere else.

17:32And the statistics are quite incredible. In the late 1950s, around 85 % of the world's civilian aircraft were built in America, and around 65 % to 70 % of those were for US airlines. Do you find that extraordinary? Why is it that no one in Europe wants an aeroplane? It's because it's extremely expensive to develop. And the natural home for commercial air travel is America because of the distances and size. Yeah. And also, I suppose you're right, all the money is there. And the Airbus, which would become Europe's competitor, was still only a kind of dream at that point. But Rolls-Royce concludes from all this that essentially the only way they can really continue to push forward and be in the forefront of the jet business is they have to get into the US market and they have to produce an airplane engine for a large American manufacturer.

18:23And that in turn means that manufacturer has to believe that their engine will not deter basically American airline customers from wanting to buy the plane. So they need to find an American aircraft manufacturer to partner with. And this became known within Rolls-Royce in the 60s as the American strategy. And it became a complete obsession. How could they find a way to get Douglas or Boeing or Lockheed to stick a Rolls-Royce engine on one of their planes? The main reason they're so confident is that they think they have the right technology to succeed. because as we discussed, the thing about Rolls-Royce is it really is quite far ahead for a lot of other manufacturers of aeroplane engines.

19:07They had not only developed the first turbojet engine, they had also been instrumental in developing something called the turbofan engine, which was another of Whittle's brilliant ideas, which he left them. And that was going to become very important in the big jet age that was just about to start. Maybe you can explain to us what a turbofan engine is well in early jets the air went through the engine i was compressed and then ignited and then pushed out yep through the back of the engine yep with a turbo fan you have what's called a bypass so an increasing amount of the air which is sucked into the engine doesn't go through the compressor or the ignition at all and this means that it picks up momentum on the way because it's been it goes through the fan so the fan almost like an internal propeller engine so the air is pushed out of the back along with the exhaust gases so this makes the whole engine much more efficient and a great deal quieter which is extremely important obviously in a and also more powerful so it's the most incredible you know threesome you're getting more power you're using less fuel and you're making less noise and noise i have to say in the early 1960s was not a major criterion other than passengers didn't like being deafened by turbo jets but it would become a really important issue in the 70s and 80s when you know sound regulations came in around airports and the fact that the turbofan was so powerful and didn't make a huge racket was quite important so roles Rolls is actually in the lead, or historically was in the lead with the turbofan.

20:56It developed the first, the world's first commercial turbofan in the mid-50s, an engine called the Conway, but it was quite small. It only had 17 ,500 pounds of thrust. And as we'll see, you know, already the demands for engine power are getting bigger and bigger because people want to put more and more seats into commercial aircraft. But the problem Rolls-Royce has is that partly because the American manufacturers get huge military contracts from the U.S. Air Force to design engines for military transports and things like that. They're getting their development costs are being funded by the American taxpayer.

21:33This is actually a perennial problem, isn't it, with aviation. You had throughout the last 50 years huge rows between Airbus and Boeing and what have you, always arguing that. Absolutely. It's a very subsidy-heavy business. Well, it's a very expensive business. But as we shall see with Rolls-Royce, it can be extremely lucrative if you can get it right. And the key part of a bypass is the ignition chamber where the air is mixed with the fuel. And you need to get the temperature as high as you possibly can. because the higher the temperature, the more efficient the engine becomes. Yeah, but then you need to make sure the engine doesn't proceed to melt because if your turbine goes wrong, as far as I can make out, you've got no engine and that's the end of it.

22:27And also you have the other big constraint you have is you have to build this very durable structure that's capable or mechanism that's capable withstanding these forces, mainly heat, while at the same time not making it very heavy. Everything has to be light as well as very strong, and that's a big engineering challenge. Well, the innards of the combustion chamber are quite extraordinary. You have this thing that almost looks like a toy. The blades are only about six inches long, and the fuel is injected into the chamber through the blades. and what that does is it allows you to run the chamber above the melting point of the of the blades themselves yeah which you'd think is impossible but of course if you're injecting fuel through them all the time the uh they don't melt if they did you wouldn't have an engine okay but now we're looking back on all these questions from the with hindsight from all these problems being resolved around materials and design and so forth.

23:36But in the early 60s, they were all in the future. And essentially, they raised all sorts of engineering problems that would take trial and error, time and resources to fix. And I think the point about Rolls-Royce is it knew that its American strategy would only work if it had a large turbofan, which wasn't just as good as the competition but was even better so it would be able to persuade an American manufacturer that there was actually a real reason to go with them even though they weren't American and this essentially is what becomes the RB211. Yeah the inspiration was to explain that in a conventional jet at the time you had two tubes it was a two-tube business essentially.

24:21Two spools. Two spools. Spools. Get it tight. Two spools. And the smaller one inside was where the jet engine took place. And it was bypassed by the larger fan on the front. And one of the things about thermodynamics is that the smoother you can make the transformation of the whatever you're trying to do, in this case, burn the fuel, the smoother you can make it the more efficient the engine becomes and if you can do it through three stages rather than two then thermodynamically your theoretical thermodynamic limit is much higher and that was the genius of the rb211 yeah that it was going to be a three spool engine and no one else had done that and so this was the magic ingredient of the rb211 anyway let's get how it was sold.

25:17So it's all very well having a brilliant idea and a brilliant engine, but you need to find someone who's building a plane that you might sell it to. In the mid-1960s, it was a good time to try and sell an engine to new jets because essentially the Americans started building what we now refer to as wide-body jets, so planes that really are designed to take 300 to 500 people. So much heavier, need enormous amounts more power than the smaller planes that have been flying around in the skies hitherto. And there are basically three big wide body planes that start to be developed in the 1960s from different manufacturers.

25:56So the most famous is obviously the jumbo jet built by Boeing. It's first being developed in the mid 60s. It takes to the skies for its maiden flight in 1970. And Rolls-Royce pitches its idea of the RB211 to Boeing but Boeing always basically partners with Pratt and Whitney and it says no and so that one's gone. Then there are two kind of more challenger-y type operations. The first is McDonnell Douglas, big successful jet manufacturer. It's built the DC-8 and the DC-9. It announces it's building something called the DC-10. Now this is what's called a tri-jet and which means it has three jet engines on it rather than four like the Boeing 747 did.

26:41And I think this is in a way a it's a bit of an economy measure. It's designed to be able to fly long distances, but it's not got four engines. The fundamental point I think in the late 1960s is you can't fly across the Atlantic with two engines. It's not it's not allowed. Basically, because if one of them goes FUD, the regulators us think it's not safe for you to be more than I think originally an hour away from a landing point and there are certain points when you're flying across the Atlantic where you are not within an hour of landing anywhere. I think it's not if one goes wrong if one goes wrong you can get home more or less from anywhere from cruising height it was the possibility of a loss of power of two engines which is why all the early ones had four engines.

27:30Yeah, so the Tristar is a kind of way of cutting the numbers of engines but still being able to fly across the Atlantic. So McDonnell Douglas has announced its building, one called the DC-10. It will enter service sometime in, designed to enter service sometime in 1970-71. And Lockheed, which is kind of, it's a famous name but it dropped out of civil aviation in the 1950s because it had a failure with an airplane called the Electra and essentially dropped out of being in the civil aviation business for about a decade, it decides to get back into it and build the thing that becomes the Tristar.

28:04There's a last possibility on the horizon, but it should be said that it's only a possibility at this stage, which is the Europeans who after the war had decided, you know, had essentially national manufacturers had tried to build aircraft, jet aircraft, but had found it very difficult because of, as you say, it's so expensive and the national market wasn't big enough that they started looking at creating a kind of European consortium called Airbus that would essentially build the very, you know, absorb the very large costs that it would take to build a wide body competitor to the Boeing 747 or the McDonnell Douglas DC-10.

28:42And that was called the A300. But at that stage, it's really just on paper. It's a lot of Frenchmen wandering around empire building in Toulouse. So Rolls-Royce has sort of three, because Boeing's gone, it has three potential partners. Airbus consortium are fantastically keen to get Rolls-Royce to build an engine for them. And Rolls-Royce, because the A300 is a twin-jet aircraft, so not capable of crossing the Atlantic, but capable of going pretty much anywhere over Europe, they have two possible designs. One is the RB211, which is around£30 ,000 of thrust in its original design, which is designed to go into a tri-jet, so three jets, and a larger version called the RB207, which would have delivered around£50 ,000 of thrust, which would have gone into the Airbus, so a twin jet.

29:28But they basically don't really want to do the RB211, which is an Airbus. They don't want to do Airbus. They think Airbus is a rubbish idea. Well, they certainly couldn't have done both. Well, that's the excuse. But I think basically, they just ruled it out. They say, they're so convinced that America is the only game in town. Denning Pearson, who was the chairman of Rolls-Royce at the time, said, he's very explicit, he said, it appeared to us that if we were to stay in the civil business, which we had built up since the war, we needed to get into a United States built airframe as first engine choice.

30:02And he said, building a new engine wouldn't guarantee that we stayed in business. Not building one would guarantee that we went out of business. And the later official report into the failures said it referred to this thing of the American strategy. And it said a contract with a U.S. manufacturer had become for them, that's Rolls-Royce, not merely a consummation devoutly to be wished, but a task in which failure would be unthinkable. So the engine they push is a thing called the advanced technology engine. It's as we've discussed, it's it basically reflects their belief that you have to have a very special product to make up for not being American.

30:38and its pioneering design. As we've discussed, it has this three spool, the fantastic three spools. And essentially, it's got an advantage, all the advantages you've discussed, Neil. It's basically more efficient. It's very durable. It requires amazingly, or they think it will require amazingly little maintenance compared to other jet engines. But it's not been developed yet, which is always a problem. And the other concern they have is that it's going to be too heavy for reasons which I don't fully understand. But anyway, weight is a big concern. Yeah, and also three spools are likely to weigh more than two.

31:14Okay, so it's the extra spool maybe. And that sort of technical thing does come back to haunt them as they go forward. There's one other thing we should mention about what's happening with when they're developing this thing. In 1966, they bought out their only UK rival, a company called Bristol Sidley, and took on a lot of debt. The main reason for the acquisition is a classic one you always get very cross about, which is it's a defensive acquisition. because Bristol Sidley at the time are in negotiations with a French company called Snecma about building a European licensed version of a Pratt & Whitney turbofan.

31:48And basically Rolls really don't want Pratt & Whitney, Bristol and Snecma to break into the big jet market in Europe with the Airbus. And so basically they buy it, but they take on too much debt and they are short of money. And that, once again, will come back to haunt them. But none of this actually stops the whole thing going ahead, because in March 1968, they try, they don't succeed with the DC-10, the Douglas aircraft, but in 1968, they basically get the deal with Tristar and Lockheed. They essentially won this deal on price because they thought they got a sudden cost advantage because of the devaluation of the pound, which instantly made all their costs in dollar terms a lot lower.

32:35What, of course, they totally failed to understand is that if you devalue, then all your internal costs start going up because it costs you that much more to buy things and you get the inflationary impact. And so they'd having cut the price of the bone on the basis that the dollar bought more pounds. Yeah. They failed to see the downside, which again came back to bite them. But initially, the whole thing is greeted with incredible joy in England. It's the biggest ever export order. The Observer estimated that if you bundle in all future parts and servicing sales, it would bring in a billion pounds and boost the balance of payments.

33:15Hurrah. And both Denning Pearson and the aeroengine boss, a man called David Huddy, were promptly knighted. So it was a pretty big celebration. I'm sure your editor at the Daily Mail was writing very patriotic articles at the time that all this was happening. But in reality, though, as we have already observed, they are taking a huge risk. And it's probably worth just enumerating the elements of that risk. One, Lockheed is by far the weakest partner they could go with. It's more like a kind of startup coming back into commercial aviation after a decade. It's also got the thinnest order book. And it's also selling to the weakest two of the big four American airlines, which were Eastern and TWA.

34:00Neither of which I think you'll find now exist. And so both the buyer and seller in their different ways were in a desperate position. Yeah, well, I think everyone is. It's a kind of union of slightly desperate. So Rolls-Royce is taking an enormous punt on an untested aircraft engine. And Lockheed is taking a punt on making a big jet for the first time. And also the customers are a bit wobbly. And, you know, they're constantly complaining about we can't you can't put the price up because we can't afford to buy the planes. I mean, I can see why they did it, but it does seem that they're putting themselves in their head in a noose.

34:37Yes, I think they did. and they had a combination of faith in the engine and the need to understand that if they didn't get this contract, then they would never be playing in the First Division. Yeah, so they do get some assistance. The government doesn't completely leave them on their own. The government has a thing called launch aid, which is where essentially they give a grant, well, it's not a grant, it's like a loan, to cover the development costs, and it gets repaid. Once those development costs have been recovered by Rolls-Royce, they effectively pay a levy on each sale of every engine.

35:15Traditionally, it's only for 50 % of the development costs, but Rolls are sufficiently strapped for cash that they tell the government, we've got this brilliant engine, it's going to cost 65 million, but we can't cover half the cost of that. You need to cover 70%. And guess who's the man they negotiate with? He's our old friend, the nationalization enthusiast. anthony wedgwood ben as he was then known anthony wedgwood ben yeah yes but then he's sort of just in the kind of total pre-madness stage he's still a kind of vague technocrat and he's he's also he is the mp for bristol which is where rolls royce have a plant and also british aerospace so he's very very keen on aviation so he says this is absolutely brilliant we agree with you the engine's going to be great so we'll pay 70 so they do get a bit more money but not enough as we all discover yeah but everybody was doing launch aid airbus had enormous amounts of launch aid and the american manufacturers both airframe and engines get a vast amount of hidden subsidy from the military side of the business yes it's true so by the end of the 60s so in 68 it's signed unfortunately within a year or so things are seriously on the skids rolls-royce has to throw an enormous number of amount of resource at this.

36:35It assembles a team of about 700 engineers. But one of the problems is the top engineer they have and the man who's really invented the RB211 as a concept is a man called Adrian Lombard, who really, he was one of the team really right at the start when they built the first jets during the war. And he dies almost immediately of a brain hemorrhage. and that has a quite a major effect i think on on the project also the technology turns out to be much much more difficult to make work the engine isn't powerful enough it becomes too hot as you said they can't and they can't figure out how to stop the combustion chamber in the middle of the engine from melting and one of the key innovations they've come up with to keep the weight down which is to use a sort of composite material called high fill for the fan blades that can't resist bird strikes so when they fire a chicken at it through a cannon it doesn't work so it's not only the chicken that suffers so basically by september 1970 they realized basically it's a total disaster because if you think about it this is a sort of doom loop because if it takes too long to make aeroplane you can't raise the price you're faced with higher and higher development costs and And basically, you're getting penalties for not delivering what was ordered on time.

37:57So effectively, it's a terrible mess. And the other problem, of course, is that Rolls-Royce isn't only itself bringing itself down. It's also Lockheed that's in trouble because the TriStar were really hard to sell because it was the last in a line of three large aircraft. And coming third meant there were just fewer potential customers to pitch to. and the more likely it was that delays might occur some of those customers might just melt away and also Lockheed has itself been selling on price so the idea of raising the price because the engine is more expensive is something they literally can't bear the idea of so by the autumn of 1970 the game is sort of up and they try to rescue it by getting the government to give them some more money.

38:44The government sort of agrees, but it's very cross. And basically, they try to raise more money from the markets on the back of getting more launch aid. But essentially, it just doesn't really work. And by January 1971, essentially, they are in a situation where it's become a very, very hard choice between get Lockheed to cancel the contract and pay what damages they owe or renegotiate it or get the government to put in more money. And I think Rolls-Royce and Lockheed are really hopeful the government will give them more money. The government says actually Lockheed should make concessions first because in June 1970, a new government comes in under Ted Heath, which is supposed to let the markets work and not step in and help failing industries.

39:30And basically they say, well, look, we're not going to just pour money into this unless you know lockheed make lots of concessions and lockheed essentially say well we can't make concessions because we'll go bust so in february 1971 after a round after round of inconclusive discussions essentially rolls-royce pulled the plug is that a fair summary yes i suppose it is yeah rolls-royce i suppose the board pulled the plug technically well the government have just said they're not going to give them yeah i mean there wasn't any choice really uh As you have spelled out, it was untenable for months, if not years before that.

40:06Yes. Because they hopelessly underestimated all the costs of innovation in all sorts of areas of the engine. So I tell you, the government's demanded concessions from Lockheed were these. There were three. Tear up the contract. That was the first one. Secondly, accept a 12-month delay on a new contract. and third, a 33 % increase in the engine price. How would you feel if you were the buyer? You'd feel a little bit let down. I think you would. I think it would be actually, I mean, today, if something like that happened, there would be monster legal action against the government. It looks like a classic British industrial disaster.

40:52A clever idea, company mismanages it in development and overextends, goes spectacularly bust, and then either disappears entirely or emerges as a shadow of its former self. I mean, I think you could easily see that playing out with Rolls-Royce in 1971. I mean, the RB211 looks, to my mind, pretty dead in the water, doesn't it? Well, it was until the fateful day that they managed to make the test engine work. Which is the one other thing that happens on the morning of the 4th of February 1971 while the board is meeting to appoint the receivers. Around the same time, they receive a telex from a man called Ernest Eltis, who's the technical director of Rolls-Royce.

41:34He tells them that after an overnight performance test run, an RB211 engine had finally achieved thrust of£38 ,500, which essentially meets the power commitment they had made under the contract to Lockheed. And this was the first indication that despite all the problems that it had encountered, that this RB211 engine could be a technical success. Yeah, a very key turning point indeed. This is, I think, the turning point. This is basically why it isn't the end of the story. And I think we'll come back next time and we will basically discuss what happened next and how Rolls-Royce recovered and became the world leader in the same big jet industry that almost took it out of business.

42:20That was Long Time in Finance with Jonathan Ford and Neil Collins. Production and editing by Nick Hilton. If you enjoyed the show, please rate and review it on your podcast app as that will help new listeners find us.