Rolls Royce history

This site describes the history of the Space Transport System

http://history.nasa.gov/SP-4221/contents.htm

There is a chapter on civil aviation here

http://history.nasa.gov/SP-4221/ch7.htm

which has a some paragraphs about the RB211 development – now my question is, how long could RR expect to survive what appears to be creative accounting even if Hyfil had been a success or the engine didn’t have as many problems as it did (Hooker called back earlier??)..

Haughton executed the agreement, headed for the airport, and flew to London to talk about the L-1011 with people from Rolls-Royce. As he later put it, “For about fourteen hours I felt good.” Rolls had been buying in as well, and for the same reason: it needed the business. Its 1968 contract with Lockheed had committed Rolls to develop its turbofan, the RB-211, for a fixed price of $156 million and Lockheed to pay $840,000 for each engine. Rolls was also pushing onto new ground. This became apparent as the development of the RB-211 proceeded.

Rolls had been pioneering in the use of carbon fiber, a strong and very lightweight material. In selling the RB-211, a key point had been the firm’s intention to build its fan of Hyfil, a proprietary carbon-reinforced epoxy. Hyfil resembles plastics used in today’s tennis rackets, and its use in the three engines of an L-1011 stood to save 900 pounds of weight. Such fans must stand up to collisions with seagulls in flight. Hyfil’s merits would rest on its ability to pass the chicken test. This involved a cannon that would fire four-pound chicken carcasses at an engine operating at full speed on a test stand. The blades broke under the impact, which meant that these blades would have to use the conventional material, titanium. Titanium was heavier than Hyfil, and this change marked a sharp setback for the RB-211 program.

It was one of a number of problems that drove up the program’s cost. As this cost escalated, Rolls reported a loss of $115 million for the first half of 1970. Its chairman, Sir Denning Pearson, turned to the recently-elected Tory government of Prime Minister Edward Heath. The Tories responded by offering a subsidy of $100 million. Pearson, however, had failed to control his costs and hence he would have to go; the firm would have a new chairman, Lord Cole. His board members would include a representative of the government, Ian Morrow, who specialized in healing sick companies. Morrow soon arranged for an independent accounting firm, Cooper Brothers, to audit Rolls’ books.

There was ample opportunity for questions, for Pearson had been using accounting practices that made bankers wince. Since 1961, he had avoided debiting the expenses of jet-engine development in the years they were incurred. Rather, he held them over and debited them in subsequent years, as these engines reached their customers. This practice amounted to prorating the development cost against income from sales. In this fashion, Rolls had reported a string of profits prior to 1970. Now it was difficult to know the firm’s total liabilities.

The Cooper audit even had difficulty in estimating the cost of completing the development of the RB-211. The 1968 contract had specified $156 million. Early in 1971, it was at least $408 million. In turn, Lockheed had contracted to pay $840,000 for each engine, a price that supposedly would allow Rolls to make a profit. However, the bare-bones cost of production, even without profit, would now be $1.1 million. In addition to this, Rolls would deliver the engines late. As a consequence, it faced penalties for late delivery of an additional $120 million.

All this meant that Rolls was well past the point where an extra $100 million from the government, or even $200 million, could make a difference. Late in January 1971, Lord Cole learned that he lacked the funds to proceed with the RB-211. His board of directors promptly voted to place the entire company in receivership. In a word, Rolls was bankrupt.