Rolls-Royce’s reputation is most of its value

By Guest Contributor
November 8, 2010

By Robert Cole

As Benjamin Franklin observed, reputation is like glass or fine porcelain. Once cracked, delicate things are devilishly hard to mend. The engine failure on the Qantas superjumbo taking off from Singapore has created, as yet, no more than hairline fractures at Rolls-Royce. But the airline industry is fragile, and only works because its customers have faith in the abilities of aero-engineers, and those that fly and maintain aircraft. If those abilities are questioned, the value—and values—of those implicated are shaken.

Yes, Rolls is a business built upon its ability to forge awe-inspiring technology from plain metals. But it trades to a large extent on its reputation for the reliability of that technology and the sturdiness of the metals it uses.

Corporate reputations can be tarnished at the merest whiff of problems. Companies often become sullied by responding to crises too slowly; few are hurt by acting with speed and determination. Recall how BP could have managed better the awful events surrounding the Macondo blow-out. Recall the way thin clouds of volcanic ash halted air travel across the whole of northern Europe. Sure, it was irritating: but did the air industry over-react? Is that judgment changed with the benefit of post hoc suggestions that ash-cloud caution was in over-supply?

Fortunately, the 433 passengers and 26 crew aboard QF32 from Singapore to Sydney experienced no more than a scare. The fragile nature of air travel, however, means that few passengers will be happy to board these planes—and few airlines will be prepared to order Rolls’ engines—until the reasons behind the failure are clearly understood and comprehensive remedial action, if required, is taken. To date, Qantas appears to appreciate this more fully than Rolls.

Rolls-Royce shares are vulnerable, having doubled over the last 18 months, to trade at a premium to many peers. The company must act quickly to calm concerns about engine malfunctions on Qantas A380 superjumbos. John Rose, the departing CEO, still has a job to do. If he fails, his own stellar reputation will be cracked.

Comments

I wonder if this will hurt the deal China just made with Sarkozy?

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