Jay Striegle Product Reliability Engineer A competitive portfolio We are Europe’s largest defence aero-engine company, with a product range that spans the key market sectors and a position on the world’s most important development programmes. We have 18,000 engines in service with 160 customers worldwide. Paul Markwick Test Facility Manager – Nuclear New growth opportunities Renewed global demand for civil nuclear power represents a significant growth opportunity for Rolls-Royce. We have developed a strong nuclear capability, through our experience of designing, manufacturing and supporting nuclear plant for naval submarines. We have now established a new business unit to address the civil nuclear opportunity directly. Business review (continued) Our strategy 1

As a power systems company, Rolls-Royce focuses on supplying its customers with integrated systems to meet their power and propulsion needs. Our consistent strategy has five elements: Address four global markets We are a leading integrated power systems company operating in the civil and defence aerospace, marine and energy markets.

Invest in technology, infrastructure and capability Over the past five years, we have invested £3.7 billion in research and development. We invest approximately £30 million annually in training and over £300 million a year on capital projects.

Develop a competitive portfolio of products and services We have more than 50 current product programmes and we are involved in many of the future projects in the markets we serve. These key projects will define the power systems market for many years.

Grow market share and installed product base Across the Group, the installed base of engines in service is expected s t n to generate attractive returns over many decades. e m e t a t s l a i Add value for our customers through the provision c n a n i of product-related services F We seek to add value for our customers with aftermarket services that will enhance the performance and reliability of our products.

The core characteristics which define our Technological superiority business and underpin the delivery of this Our investments in technology and capability strategy are: provide Rolls-Royce and our customers with competitive advantage. Closeness to our customers e c We develop close relationships with our Operational excellence n a n r customers over many years. This allows us to We aim to operate at the highest standards, e v o offer solutions, often in partnership with our to ensure that we continue to meet our g e t

a customers, to meet their specific requirements. customers’ requirements in the quality, r o p performance, durability and delivery of r o Domain knowledge C our products, systems and services. Underpinning our sales of equipment and related services is a deep knowledge of the Organisational capability overall environment in which our equipment Because we are a global company we have is used. This allows us to provide the optimum the ability to recruit and retain capable people

8 level of service and focus our activities to meet in many locations. Our investment in training 0 0

2 our customers’ needs and grow our business. and the varied career opportunities are key t r o

p to our success in retaining high-quality people. e

r Integrated systems l a

u We supply our customers with products, Brand n n

A related services and whole systems. Our ability We have an exceptionally strong brand which | c l to integrate and optimise systems enables is recognised globally and embodies qualities p p u w us to create value for customers in all our that create a common focus for all our people, o e r i v G main markets. wherever they are located. e e r c s y s o e R n - i s l s l u o R B Business review (continued) Our business 1

Market outlook The Group operates in four long-term global markets – civil and defence aerospace, marine and energy. These markets create a total opportunity worth some two trillion US dollars over the next 20 years and: – have very high barriers to entry; – offer the opportunity for organic growth; – feature extraordinarily long programme lives, usually measured in decades; – can only be addressed through significant investments in technology, infrastructure and capability; and – create a significant opportunity for extended customer relationships, F i n a

with revenues from aftermarket services similar in size to original n c i a l

equipment revenues. s t a t e m

The size of these markets is generally related to world Gross Domestic e n t Product (GDP) growth, or in the case of the defence markets, global security s and the scale of defence budgets.

Civil aerospace As in the Group’s other business sectors, The Group publishes a 20 year global market programme lives are long and there is a outlook, which covers passenger and cargo significant opportunity to support equipment jets, corporate and regional aircraft. We predict with aftermarket services. Customers’ budget that over the next 20 years 131,000 engines, constraints and their need to increase the value worth over US$700 billion, will be required they derive from their assets have accelerated C

for more than 60,000 commercial aircraft and the move in this direction. o r p

business jets. The forecast predicts faster growth o r Marine a t rates for long-haul markets and those markets e g

The Group forecasts demand for marine power o

to, from and within Asia. These markets will v e r

and propulsion systems of US$200 billion over n

continue to benefit from more liberal air a n

the next 20 years. Demand will be greatest c service agreements, which boost demand. e in the commercial sector, where the merchant Factors affecting demand include GDP market represents 40 per cent of the total growth, aircraft productivity, operating costs, and the offshore market, a further 40 per cent. environmental issues and the number of Commercial shipping plays a crucial role in aircraft retirements. While the market can the world economy. The need to transport be temporarily disrupted by external events, raw materials, finished goods, people, and oil such as war, acts of terrorism, or economic and gas requires a large fleet which has to be downturns, it has, in the past, always returned renewed progressively. The expansion of trade to its long-term growth trend. In addition to and technological advances means more ship the demand for engines, the Group forecasts a B construction for growth and for replacement R o market opportunity worth US$550 billion for the u l s l s as older designs become obsolete. Finding and i - n R

provision of product-related aftermarket services. e o s y

extracting oil and gas offshore requires a large s c r e e G Defence aerospace number of floating drilling and production v i r e o w The Group forecasts that demand for new units which, in turn, are supported by a variety u p p l

military engines and through-life support will of service craft. c |

be worth US$450 billion over the next 20 years. A

Merchant and offshore markets are rarely n n

The largest single market is expected to be u a

at the same stage of the business cycle, l r

the US, followed by Europe and the Far East. e which helps to reduce overall volatility. p o

Within Asia, demand will be dominated by r t

In naval markets, the Group expects surface 2 0

Japan, South Korea and India. Trends are driven 0 vessels to represent 15 per cent of the total 8 by the scale of defence budgets and geopolitical demand, and submarines five per cent. developments around the world. Business review (continued) Our business (continued) 14

Naval markets are driven by different The Group’s 20 year forecast values the total considerations, with customers looking to get aero derivative gas turbine sales in the oil more for their budgets, leading to increasing and gas and power generation sectors at demand for integrated systems and through-life US$70 billion. Over this period, demand for servicing arrangements. As in the Group’s other associated aftermarket services is expected markets, marine aftermarket services are expected to be around US$50 billion. to generate significant demand, forecast at While the oil and gas market is large and US$120 billion over the next 20 years. growing, demand for aero derivative gas Energy turbines in the power generation segment The International Energy Agency has forecast is four times that of oil and gas. that over the next 20 years, the worldwide demand for oil will grow by 40 per cent, for gas by more than 50 per cent and for power generation by nearly 60 per cent. To satisfy this demand, there will be a growing requirement Note: A long-term conversion rate has been used for aero derivative gas turbines. where necessary in order to present all figures in US$.

Group financial highlights The Group delivered underlying organic sales growth across all businesses, s t

n growth in underlying profits and a further year of positive cash flow. e m e t a t s Order book – Underlying revenues l a i £55.5bn £m £9,147m c firm and announced n a £bn n i F

55.5 9,147 7,817 45.9 7,353 6,458 5,947

24.4 26.1 21.3

2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Underlying profit £919m Underlying earnings 36.70p e before financing per ordinary share c n a £m pence n r e v o g 919 36.70 e t 832 34.06 a r 748 29.81 o

p 679 r 24.48 o C

417 15.62

2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 8 0

0 Total shareholder 2 t r return over five years o p e r l a u n n )

Rolls-Royce x 400 A e

FTSE 100 d | n

i 350 ( c n l r u p

t 300 e r p r u e w 250 d o l e r i o h v G

e 200 e r e r a c h s s y l

s 150 a o t e R o n - T i

s 100 l s l u o 12/200312/2004 12/2005 12/2006 12/2007 12/2008 R B Financial statements Corporate governance Business review Rolls-Royce Group plc | Annual report 2008 5 1 , s . . , r r a s s n , f l e n f e c t s i n f o e c o o t l u s o i a i o i o f t n e y , w e r u e r s i n r e r u r d e t n s o i s a i l l n a g e s t i l e r t c t c a t n m S s n e a l b s a h a s a e l n e r u n t a t s o fl e u l . a t i t t c e i b e h o t g fi a m e r U i i m g a a l u s b t a p a 9 e p h t a o t e p o r f s f r e s a b e s e r t n t s e c n a v r u d r a w 9 i l c i n i i n s e u s a h s e e m g f n i e o e m t t y p e h K b u s 0 0 d i f o o f e d e r u e s e r r n e o d e r d n n e e v p s e r c T n i s 5 t s h t e u q e s t a c g s t c U m r a b a i i a e t a i r p e g n c i g n d e n a n u £ h t d e a n s n s i . s n n e v n i p a s ’ n e h a a i n i o m e b o g t o t c e s e b e e y t t o m e h n r t e r a e t t a e i p o v e - s r u d e r n a n e c ff t r u I o t e u l a a m o m r o rf o n p u u s e t a s e i c c g s a t fi o r r ) e r r u e n d d i h t n a n u c i c v g o t n o t c n s e r u s d / s a . s c n o n c p e s t s c o d i d e o c i t c ( e a d n n o e e t s g e l t a - r c fi c e fl w v e e p n a i r c s e n u f t t c u r e g a g o r G r p p a 2 s r e a m a h i m o a c o t d n i y l c c v e o h t i t e a c e n e r n r e r r u o r n e d t s r e n a e t d n u e a n c fl n o a e m g n fi g d i f t t e i h t n c i n g e r y n e p t n a g n a o n e m n s s i y l n e e r g i e r r y o t c a h a h t , t e h e d i s r a o t a e g r t d e h s s e r t t a a n e fl e r h s a h t t o n e e c i d n p u e d e g c o f e v e s o n p g e m g a c x r s t r t t i n i e n e r r i t a s h c e r o f g n d e e d e u U n fi c n s e v e e r a r n h t t s s e p e e i i i n i t t h g n r e n d a r s e t r n n w . t f i o t s e x e a e l o r G o m s r . h e b a e t a n l a a u c n n u g n t a o o o a c f o t i g d v o t c i e c n a h n a r d e f i o d i d n i m o v n m i l e e v h f n e m t e s t v i n o r u s n w a t n e a t fi h i o c t i w c r rt o h s n o e e h o k a t u r t s i o e h i e r n i n g i r c x r i u q e t o c a o r d l . d n e o t e g o T a d e w e r f b s u e s e s e m e a t e o h . r u i s ’ a e m r t a p p d t n e m o r e s s i l o r p n o r g h d i s e r e r u t c a j d e a e m d e s r r t h s i l o n a h s v t o b t r e s v t r o f a r i t t y t o n o m s a t f i y t y t e g e v d a g h h s t d n a e h t s s e c s d t n p r o r s n , n r s n a p u o e u f n s e t i l n o r n s i o c d n n s a v g i i d i d s e a n , a s i o - g s a u t c c g u n d e d u l c n i g n a p i r v i i s n a l i e d l o i b u o r a o m d r t r G c x e o c i y l l a n i r a i l t 7 r o r o n n o u a i f i m e m t n i s t o : s w o l l e a b s r e v 0 n a a i t t s e m r a e n o l t s r e e d r G i s m i h e o t i n b o i s u o B e y a v c n 0 h d t fi r i n e h h t i w e h e h e h e h a s h e r l a i c n a n fi - n a l l r a o f i c i r o n t a t t t b t e s o m m o m m t a 2 c e a h c e h rw ) d n o r t o n e e s e h e h u j d d n d n s t e h e h a ) b n i a t s u s ( o c o d f o U n I o M f o f o f o n o t x e o c ( a u p a e d T n fi a b f o a t h s T e d o f f o a e d n i p s c s p o m e n o n s a l l i l e o t s r o t a n i w i r a c d n a 2008 2008 n e s 2008 l a i i d n i t a h t d n a e c n a e o h c financing s t n w e e c n a i v c n a n fi s r o t e r a m r o rf e r f o s r a c m t s s e p before m r o f e v s e e g o t a n i d n i n i i l a t n r e p n a r c i d f o n a i s u b s e m 251 4 5,947 17 0420 062007 2006 2005 2004 y e K 0420 062007 2006 2005 2004 2 e c n a e 0 0520 2007 2006 2005 004 s e e s g e . e profit revenue s h t c s e s u 552 679 c c u 6,458 e h T d f o s n a d n a r a flow s n . 2 1 m r o rf e p e h t 491 748 o B 7,353 p u

m r o f

o i t o c £m Cash Underlying £m Underlying £m e s r e p d n a e g a p y e K e h T r G 8 62 7,817 32 919 570 9,147 Business review (continued) Our business (continued) 16

Return on capital employed Return on capital employed is calculated as % the after-tax underlying profit, divided by the average net assets during the year, adjusted for net cash, the net post-retirement deficit and 17.2 17.1 16.0 goodwill previously written off. It represents a 14.5 measure of the return the Group is making on its investments. 8.5

2004 2005 2006 2007 2008

Net research and development charge Investment in research and development £m underpins all the elements of the Group’s strategy. Programme expenditure is monitored in conjunction with a gated review process 403 370 381 on each programme and progress is reviewed at key milestones. 288 282

2004 2005 2006 2007 2008 s t n e The Group’s research and development activities m Gross research and e t a comprise both self-funded and customer- t development expenditure s l

a £m i funded programmes. Gross expenditure c n a measures the total research and development n i

F 885 824 activity and is an indicator of the effectiveness 747 663 of the actions taken to continuously improve 601 the Group’s intellectual property.

2004 2005 2006 2007 2008

Net research and development Research and development is measured as the self-funded expenditure before both amounts e expenditure as a proportion of c n a underlying revenue capitalised in the year and amortisation of n r

e %

v previously capitalised balances. The Group o

g 5.8 5.4 expects to spend approximately five per cent e 5.4 t 5.2 a r 4.7

o of revenues on research and development p r o although this proportion will fluctuate annually C depending on the stage of development of current programmes. This measure reflects the need to generate current returns as well 2004 2005 2006 2007 2008 as to invest for the future. 8 0 0 2 t r o p e r l a u n n A | c l p p u w o e r i v G e e r c s y s o e R n - i s l s l u o R B Financial statements Corporate governance Business review Rolls-Royce Group plc | Annual report 2008 7 1 . r t h t e d k o e e o f e e l , s e s s n d n d e k . d e i w s a s r d r o b s e y o i g n t i v o r s e n g b a l d n a e r u t i , s e r u t u g . e m a y f c a l o l p n o s s u e r r f t c n a r e t i m m r a e i i a n i i t e r , n i t s a m . c f ’ p fi l l i s u a n i c t n r v a m r fi h c d e r u s r e m o e s a s r d o s i t p e h i n t c e j s e y s e b d a s u s e e t x d n a a l t n e y g d r o t h i w r y d o n i a o i e h e t f p p m e r e e t d t a a p s t o d i a a d i l e t o y b e r r T e h r e c i b u s e r n u s u c o w m , y e p x e h t . t n o r p t a n e m o t o y l b g c r u o l l u p u o r G a t i b p t c k a s t h g u e d r o a . f a m o r e o s a e i n c i t s e r o h i s t a n i k t a e l o e a y m r t s n a e s y t s u c A r e l a m O d c l a s t o y t h h t r e p n e e m h h ry e t t n i o m a . i d e r u c e . t s t d n t t a t r e n o n e n i s i v t a , e k v t t n o f i t n r fi o r i p o r f n a b - g d u l n v e o a w t n n g c r t c i k o n r e r e o n o p s p s e d c - g y t o e rv u i t c e n n a rt t a a c t f i t s e u s s c n e v a n e b e r r a y l s e r u s e n I l i n o l t i l s i g n n u o b o i e y e m t e h i e e t n e m s i e . c fi n r m o f u n h e d t e i e n o l e n e t , d t s d b t d n i t s r , a u s r n e f o d g o r e s s d o i n s i e d e d u l a . n e i t a n t e e o l p s e r n n u a c i t s u g e v o n a d d p n o a s y i e v i d r c s o c e d t c i m m e e n r o y l n s a e e e v o y e o f c a s u e r u s n o n c x e r r i g r i e n n A m e l e t a l a c d d o a p m e e u n s e s r o a a d v o c , g p r o f m e g e a e h r n f e t p s s e r u e c i w e t n r e d u l r o t s t h e v r k o i o l l A o r i u q n i h . y e s t t s e rv u s r a f t e r e i t c c rv u s y s d e n i i a e m r o . a g . p i d t i e m e n t e r e a n c n r e c i v e r e e r e m e i c a n i t n o o r e d r n s i i v n t l a a n s n w r i h t s n e o ’ s t t t x e a e rv e s l s n e b w e o s m u c s s r e ff E i h t i l c n u o t I o o d e r d e o m s s s e t s . p r t a r a . d i s r i t o t n u s r u t c n f o n e r d i c p x e e u p u e n g n i s r u o i v e e r c n e m p s s e d u y r r r o e m e c v t c e n e y e r e d e n o m m u o o f n e m h y r d d n n p o a r t g n t s a l m t e i l t f u l r e e g b i e e e s i a r a a b o i l e r e l l e n r g a p i r G o g i s t s e f e o l e o c o h h c u n e h s a n i d i s i r h t t e h c d d d t c n d s n a e u l p p e y a rt u t i r u s a e m e t r f e s e v s i r u v e f u g e g n o l p m u q u h n n s n r a n o n o a r o a m u v e h o o a u u n n t s s T R e T T s f o a e r t b t i c a i v i d s a a a i e f a n I S n I i t c m s 2008 2008 t n e t n m p o l e m e t 191 8 21.3 g 2 0420 062007 2006 2005 2004 0 0 0520 2007 2006 2005 004 n e 0 e v e d a g 2 d n i n e 232 24.4 m t s e s n a expenditure e v n book i e e y ,000 l a e y o o l 303 26.1 g n i n l p u n i a r Capital £ Order £ m p m E 9  m E n A T bn m 0  £ 304 45.9 2 55.5 83 Business review (continued) Our business (continued) 18

Sales per employee A measure of personnel productivity, £000 this indicator measures published revenue generated per employee.

233

186 192 193 169

2004 2005 2006 2007 2008

Product cost index Unit costs are a key determinant of the Year-on-year increase/(decrease) % Group’s ability to deliver its commitments on a profitable basis. The Group monitors the year-on-year change in the actual average unit Increase 7 product cost of its gas turbine operations and 5 4 seeks over time to improve productivity in

0 all owned facilities and those of its suppliers.

Decrease (5) 2004 2005 2006 2007 2008 s t n e The Group’s installed engine base represents m Engine deliveries e t a an opportunity to generate future aftermarket t s l a i business. This is measured as the number c n a of Group products delivered during the n i

F 1,579 1,519 year within each business except for marine, 1,430 1,426 1,393 as its products do not lend themselves to this measure due to their diversity.

2004 2005 2006 2007 2008

Installed thrust – civil Installed thrust is the indicator of the lbs million amount of product in use by our customers e c n

a and therefore the scale of opportunity n r e

v this presents for our services business. o

g 348 334 e 320 t 305 a

r 288 o p r o C

2004 2005 2006 2007 2008 8 0 0 2 t r o p e r l a u n n A | c l p p u w o e r i v G e e r c s y s o e R n - i s l s l u o R B 19

Percentage of civil fleet Long-term contracts are an important way of under management generating value for customers. The percentage % of fleet under management gives a measure of the proportion of the installed base where 57 55 the future aftermarket arrangements are 48 45 45 agreed under long-term contracts. This is measured as the percentage of gas turbines and submarine propulsion units where the Group has contracted a long-term service arrangement. In civil aerospace, marine and 2004 2005 2006 2007 2008 energy, the percentage is weighted to reflect the value of the equipment under management. The figure shown for civil aerospace for 2004 differs from that disclosed in the Annual report for that year as a result F i n

of reflecting this weighting. a n c i a l s t a t Underlying services revenue shows the e Underlying services revenue m e

£m amount of business during the year that has n t been generated from the installed engine base. s This is measured as the revenue derived from 4,755 spare parts, overhaul services and long-term 4,265 3,901 service arrangements. 3,251 3,457

2004 2005 2006 2007 2008 C

Emissions Much of the research and development o r p o

expenditure is focused on reducing emissions r a t e

of the Group’s products. The Group measures g o v

both the emissions of its products and the e r n a

emissions of its manufacturing operations. n c These measures are described in detail in the e environment report,‘Powering a better world’, which is available on the Group’s website, www.rolls-royce.com. B R o u l s l s i - n R e o s y s c r e e G v i r e o w u p p l c | A n n u a l r e p o r t 2 0 0 8 Mari Kvalsund Construction assistant, Ship Technology Offshore A track record of developing businesses Marine is now the second largest Rolls-Royce business in revenue terms. Transformed by the acquisition of Vickers in 1999, it has become a world leader in specialist ship design and the provision and integration of high technology systems. 1

Principal risks and uncertainties The Group continues to be exposed to a number of risks and has an established, structured approach to identifying, assessing and managing those risks. The risk committee has accountability for the system of risk management and reports regularly to the Board on the key risks facing the business and the mitigating actions put in place to deal with them. The Group’s consistent strategy and long-term programmes require that key sources of risk are identified in advance and are maintained under continuous review. The risks described below are among those that the Group considers might have an impact on the Group’s performance. This is notwithstanding other risks and uncertainties that are currently unknown to the Group or which the Group does not presently consider to be material. The principal risks F i n a reflect the global growth of the business, and the competitive and challenging n c i a l

business environment in which it operates. Risks, including those to the s t a t e

Group’s reputation, are considered under four broad headings: m e n t – Business environment risks s – Strategic risks – Financial risks – Operational risks

Business environment risks The Group’s broadly balanced power systems activities, access to global markets with

Cyclical downturn – global recession C greater diversification by sector, customer and o r p

The current challenging economic environment o

geography and an improved balance between r a t is a source of some uncertainty for the Group. e

original equipment and services revenues are g o

The length and depth of the current recession v expected to help mitigate the effects of the e r n

and constraints caused by reduced liquidity a

slowing global economy. n c from global capital markets may hinder the e ability of customers and suppliers to make The Group has a robust balance sheet with planned investments in all sectors. The Group’s positive net cash. The changes made to the largest market, civil aerospace, is cyclical by UK defined benefit pension schemes should nature, although services activity and revenues, ensure a less volatile, more predictable funding now representing more than 60 per cent requirement in the future. of the civil aerospace business annual revenue, External events or factors affecting air travel have historically been less volatile in economic The civil aerospace business remains an slowdowns and are considered more predictable important contributor to the Group’s revenues and robust than the sales of engines for and profits. The willingness of passengers to B R o new aircraft. u l s

travel by air is influenced by a range of factors, l s i - n R e o

including economic conditions, health and s

The contribution from the Group’s global y s c r e security issues. Any prolonged reduction in e G activity in other non-civil aerospace markets v i r e o w is becoming more significant. It now air travel would impact airlines’ revenues and u p

cash flows, and potentially reduce their need p represents around 50 per cent of Group l c revenues, and these markets are also less for new engines, spare parts or aftermarket | A n cyclical in nature. support services. n u a l r e p o r t 2 0 0 8 Business review (continued) Our business (continued) 

Exposure to this risk is mitigated by the Group’s Strategic risks business strategy, which has driven it to become a global operation with a broader business base, Delivery of aftermarket with 50 per cent of revenues and 40 per cent The Group’s revenues are balanced between of earnings now generated outside the civil original equipment delivery and aftermarket aerospace business from its defence aerospace, services. The growth in product sales provides marine and energy businesses. a large installed base, of which a high proportion has successfully been contracted under long- The Group’s crisis management plan and term post-sale support arrangements, so that framework would be instrumental in responding aftermarket revenues now constitute a majority to, and recovering from, wider external events of forecast revenue. A significant failure to deliver such as the impact of terrorist activity or an the aftermarket commitments made to its influenza pandemic. customers and meet anticipated contractual Environmental impact of products profitability could have an adverse impact on and operations the Group’s financial results and reputation. The Group recognises that its products and The Group places great importance on working business operations have an impact on the closely in partnership with its customers to environment, particularly related to climate understand their operations and align the change. Rolls-Royce is determined to be Group’s service capability to meet their needs. part of the solution to these environmental Within the dedicated services organisation, challenges and continues to make significant management initiatives have developed robust investment in innovative solutions for processes, structures and networks to ensure the aviation, marine and energy markets. required support levels can be delivered The challenge is being addressed through the effectively and economically. Nevertheless, s t enhancement of current product ranges and n economic pressures on commercial aviation, e m affordable research and development into as well as changes in regulations, could lead e t a t complementary technologies such as nuclear s to reductions in utilisation rates and operational l a i c power, fuel cells and tidal energy. The Group budgets, representing a continuing threat to n a n i continues to work closely with its customers, the realisation of future revenues. F industry partners and other stakeholders to implement these development opportunities. Competitive pressures The markets in which Rolls-Royce operates A robust governance structure headed are highly competitive. The majority of its by the Environment Council directs and programmes are long term in nature and access monitors improvements in the environmental to key platforms is critical to the success of the performance of the Group’s products, and the business. This requires sustained investment Environmental Advisory Board reviews and in technology, capability and infrastructure, makes recommendations on the environmental all creating high barriers to entry. However, aspects of the Group’s products and business these factors alone do not protect the Group e c operations (see pages 42 to 53).

n from competition, including pricing and a n r technical advances made by competitors. e v o g

e The Group has developed a balanced business t a r o portfolio and maintained a steady focus on p r o

C improvement in operational performance, for example through the modernisation of its facilities. This, together with the establishment of long-term customer relationships and sustained investment in technology acquisition, allows the

8 Group to respond to competitive pressures. 0 0 2 t r o p e r l a u n n A | c l p p u w o e r i v G e e r c s y s o e R n - i s l s l u o R B Business review (continued) Our business (continued) 4

IT security Programme risk The continuing globalisation of the business The Group manages complex product and advances in technology have resulted programmes with demanding technical in more data being transmitted across requirements against stringent, and sometimes international communication links, fluctuating, customer schedules. This requires posing an increased security risk. There is the co-ordination of the engineering function, also the possibility of unintentional loss of manufacturing operations, the external supply controlled data by authorised users. In either chain and other partners. Failure to achieve case, adverse impacts upon operational programme goals would have significant effectiveness, the value of intellectual property, financial and reputational implications for legislative compliance or the reputation of the Group. the Group might arise. The active sharing of The Group seeks continuous improvement information through industry and government of all its processes and employs project forums and the continual upgrading of security management controls on a routine basis. equipment and software mitigate these risks. All major programmes are subject to Board Ethics approval and are reviewed regularly by the The Group recognises the benefit that is derived Board with a particular focus on the nature from conducting business in an ethical and and potential impact of emerging risks socially responsible manner. This approach and the effective mitigation of previously extends from the sourcing of raw materials and identified threats. components to the manufacture and delivery of products and services. It applies to the provision of a safe and healthy place of work and investment in technologies to reduce the s t n e environmental impact of the Group’s products m e t and operations. Shortcomings in any of these a t s l areas could damage the Group’s reputation a i c n and disrupt its business. a n i F The Group is committed to maintaining high ethical standards. A global code of business Ethics has been issued to employees and a face-to-face training and engagement programme is in place in order to strengthen employee awareness of the Group’s values. The Group’s ethical standards are also communicated to the Group’s first-tier supply base through a supplier code of conduct. Concerns regarding potentially unethical e c n

a behaviours can be reported in confidence n r e

v via dedicated global telephone and internet o g channels. All such reports are followed up e t a r

o and will be monitored by the recently formed p r o ethics committee. C 8 0 0 2 t r o p e r l a u n n A | c l p p u w o e r i v G e e r c s y s o e R n - i s l s l u o R B Pete Jackson Engine fitter A long-term business We power over 0 types of commercial aircraft, from business jets to the largest widebody airliners. Our Trent engine family is enjoying particular success. The Trent 900 has now been chosen by ten of the 1 operators that have ordered engines for the Airbus A80, the Trent 1000 for the Boeing 787 has been selected by around 50 per cent of operators and the Trent 700 has won 70 per cent of new orders for the Airbus A0. The Trent XWB remains the only engine on offer for the Airbus A50 XWB. Business review (continued) Review of operations 

Key businesses and activities We focus on investing in technology and capabilities that can be successfully applied to our advanced products and services. We then market and sell these through our four main customer facing businesses: civil aerospace, defence aerospace, marine and energy. Our manufacturing base is becoming increasingly global, as is our supply chain, as we seek to bring our products to market in the most efficient way. We hav e established a global service organisation with more than 50 locations around the world to bring us closer to our customers. This section of the report reviews the year for each of the customer facing businesses, including our services activity, and the key functions of engineering and operations. s t n e m e t a t s l a i Mark King Axel Arendt John Paterson Tom Curley c n

a President – Civil Aerospace President – Defence Aerospace President – Marine President – Energy n i F e c n a

n Colin Smith Mike Terrett Tony Wood r e v Director – Engineering Chief Operating Officer President – Services o g and Technology e t a r o p r o C 8 0 0 2 t r o p e r l a u n n A | c l p p u w o e r i v G e e r c s y s o e R n - i s l s l u o R B 7

Civil aerospace – Agreements signed with risk and revenue sharing partners for 40 per cent of Trent XWB programme – Trent 1000 ready for first flight of Boeing 787 – Successful entry into service of Trent 900 with Singapore Airlines and Qantas on the Airbus A380 – Successful entry into service of IAE V2500 SelectOne TM – Successful first run of BR725 for the new Gulfstream G650

Key financial data 008 2007 2006 2005 2004 Underlying revenue £m 4,50 4,038 3,907 3,406 3,072 +11% +3% +15% +11% +13% F i n

Underlying profit before financing £m 5 564 519 454 208 a n c i +0% +9% +14% +118% +24% a l s t a t Net assets £m 330 2,468 2,165 1,617 1,740 e m e n t s Other key performance indicators Order book £bn 43.5 35.9 20.0 19.0 16.2 +21% +80% +5% +17% +13% Engine deliveries 987 851 856 881 824 Underlying services revenues £m ,7 2,554 2,310 2,016 1,838 Underlying services revenues % 1 63 59 59 60 % of fleet under management 57 55 48 45 45 C o r

Underlying revenue Market opportunity over 0 years p o r a t e g o

£4.5bn US $1,50bn v e r n a n c

The civil aerospace business powers over In the corporate and regional market, e 30 types of commercial aircraft from business the 3,000th AE 3007 engine was delivered. jets to the largest widebody airliners. A fleet of Meanwhile, the newest member of the Group’s over 12,000 engines is in service with 600 airline corporate engine family, the BR725 for the customers and 4,000 corporate operators. new Gulfstream G650 corporate aircraft, achieved first engine run on time in April. The business continued to perform strongly in The G650 has enjoyed unprecedented market 2008 despite the impact of worsening economic interest, reinforcing the Group’s leading position conditions on customers and on the air travel in the corporate market. market in general. Underlying revenue grew by 11 per cent. This result was driven by increases in V2500 SelectOne, the latest successful V2500 B R o u l new engine deliveries, which approached 1,000 engine standard, produced by the International s l s i - n R e units, and by continued growth of services Aero Engines (IAE) consortium, in which o s y s c r e revenues which accounted for over 60 per cent Rolls-Royce is a major shareholder, entered e G v i r e o w of total sales. The first half of 2008 continued service with IndiGo Airlines of India. u p to see strong order intake and, while order p l The Trent family continues to enjoy c activity slowed in the second half of the year, | significant success. The Trent 900-powered A n the total order book for civil aerospace grew n Airbus A380 completed a year of service u a to £43.5 billion. Underlying profit was flat l r e

and demonstrated excellent reliability p year-on-year. o r

with Singapore Airlines (SIA) and Qantas. t 2 0 0 8 Business review (continued) Review of operations (continued) 28

Further orders for the engine were received We are actively exploring technologies and from SIA and Thai Airways International. programmes that address environmental and The Trent 900 has now been selected by sustainability issues relevant to our business. ten of the 13 operators that have ordered Through our Option 15-50 programme we the A380 and made an engine decision. continue to pursue a comprehensive range of leading technologies and engine architectures The Trent 700 continued to win over 70 per cent to meet these challenges . of orders placed for the Airbus A330. Significant additional orders were also placed for the Global air travel and air freight is already Trent 1000 for the Boeing 787, which has now being affected by the economic downturn. been selected by about 50 per cent of operators, The scale of the future impact is unclear, and for the Trent XWB, which is currently the with airframe delays and concerns about only engine offered for the Airbus A350 XWB. customer financing adding to the uncertainties surrounding engine volumes. Entry into service of the Boeing 787 has been delayed until 2010, but maturity The Group expects engine deliveries to fall testing of the Trent 1000 has continued in 2009 with an increasing risk of deferrals with successful demonstration of endurance and cancellations, weaker volumes in the programmes equivalent to two years of narrowbody and the corporate and regional service. The Trent XWB programme attracted sectors, and stable Trent deliveries for considerable interest from risk and revenue widebody aircraft. sharing partners with agreements signed by Growth in services revenues will be modest the end of 2008 for around 40 per cent of the in 2009, held back by lower utilisation levels, programme, with major partners including the impact of parked aircraft and some KHI and MHI of Japan, ITP of Spain, Volvo of softening of uncontracted‘Time and Material’ s t Sweden, Hispano-Suiza of France and Parker n e services revenues. As a consequence,

m Hannifin of the US. e t underlying profits will be lower in 2009. a t s l We continued to secure services contracts, a i c TM n achieving a record year for CorporateCare a n i TM F sales and selling TotalCare with approximately 90 per cent of new Trent engine orders. A larger Operations and Data Centre was opened in September to support the growing large-engine fleet under Rolls-Royce service contracts, now totalling 5,300 engines. e c n a n r e v o g e t a r o p r o C 8 0 0 2 t r o p e r l a u n n A | c l p p u w o e r i Technology creating global opportunities: Technology creating global opportunities: v G e e r IAE V2500 SelectOne Trent 900 c s y s

o Indian airline IndiGo was the launch customer for the Qantas became the second airline to put the Trent 90 0-powered e R n - i

s IAE V2500 SelectOne suite of services. Airbus A380 into service. The engine is the market leader on l s l u o the airframe. R B 9

Defence aerospace – £700 million contract secured for UK strategic tanker aircraft – US$915 million contract for AE 2100 engines signed with Alenia – Development of the F136 engine for the F-35 funded for 2009 – US$131 million F-35 Rolls-Royce LiftSystem® contract awarded – £258 million service and support contract for Gnome helicopter engines – £198 million contract to support UK Pegasus engine fleet

Key financial data 008 2007 2006 2005 2004 Underlying revenue £m 1,8 1,673 1,601 1,420 1,374 +1% +4% +13% +3% -2% Underlying profit before financing £m 3 199 193 180 179 F i n

+12% +3% +7% +1% +22% a n c i a l

Net assets £m (197) (172) 20 55 131 s t a t e m e n

Other key performance indicators t s Order book £bn 5.5 4.4 3.2 3.3 3.3 +25% +38% -3% 0% +22% Engine deliveries 517 495 514 565 548 Underlying services revenues £m 947 877 853 787 768 Underlying services revenues % 5 52 53 55 56 % of fleet under management 1 11 11 85

Underlying revenue Market opportunity over 0 years C o r p o r a

£1.7bn US$450bn t e g o v e r

Rolls-Royce is Europe’s largest defence aer o- In the combat aircraft market, the EJ200 n a n engine company, serving 160 customers in powerplant for the Typhoon aircraft c e 103 countries and with 18,000 engines in service. achieved several landmarks, with the 500th engine delivery and 100,000 flying hours We have a product range of 25 engines that in operational service. power aircraft across the key market sectors of combat, transport, helicopters, trainers, We also made progress on both engine patrol, maritime and reconnaissance. programmes for the Joint Strike Fighter. First flight of the F-35 STOVL (short take off During 2008, the business continued to and vertical landing) version, fitted with the strengthen its market position, winning key Rolls-Royce LiftSystem®, took place in May contracts across its product and service and the first LiftSystem production contract B range, particularly in the growing transpor t R o was secured in December at a value of u l s l s i - aircraft and military support sectors. n R e

US$131 million. o s y This included the development of our s c r e e G innovative range of aftermarket services, The F136 engine, jointly developed with GE v i r e o w u

known as MissionCare®, which enables for all F-35 variants, achieved US Government p p l Rolls-Royce to tailor support services solutions funding for 2009 and passed its test milestones c | to customers’ individual requirements. prior to delivery of the first production standard A n n

engine in early 2009. u a

The new operations facility in Bristol, UK, l r e p

opened in the first quarter of 2008. It delivers a We also consolidated our market lead in the o r t step change in engine assembly, development transport aircraft market, signing a US$915 million 2 0 0 and logistics and, in combination with more agreement with Alenia Aeronautica for the 8 flexible working practices, brings greater AE 2100 engine in the C-27J Military Transport efficiencies to the manufacturing process. aircraft. This engine also won further orders for its application in the C-130J. Business review (continued) Review of operations (continued) 30

Technology creating global opportunities: Technology creating global opportunities: AE 100 turboprop engine Gnome engines support The Alenia C-27J aircraft is powered by the Rolls-Royce Rolls-Royce is to support the Gnome engines that AE 2100 turboprop engine. Rolls-Royce has signed power the 96 Sea Kings in service with the Royal Air Force a US$915 million contract with the aircraft maker. and Royal Navy in a ten year contract worth £258 million.

Defence aerospace ’s other major collaborative Looking to the future, we are working on programme – the TP400 engine for the two important research and technology s t

n A400M military transport aircraft – made programmes for the US Air Forc e, Adaptive e m progress in the year. It has completed more Versatile Engine Technology (ADVENT) and e t a t s than 2,000 hours of ground testing and has the Highly Efficient Embedded Turbine l a i c successfully undertaken its first flights on the Engine (HEETE). n a n i flying testbed. F In the unmanned vehicle sector, we have As a shareholder and sub-contractor of the been selected to provide the Integrated AirTanker consortium, we secured a 27-year Power System for the UK’s Mantis demonstrator, engine and support contract worth over while we continue to work on the MoD Taranis £700 million from the UK Ministry of Defence unmanned combat vehicle demonstrator. (MoD) for the UK’s Future Strategic Tanker Aircraf t The Rolls-Royce AE 3007 engine, which under an innovative private finance scheme. powers the Global Hawk high altitude This Airbus A330M aircraft is powered by the unmanned aerial reconnaissance system, civil Trent 700, representing new aftermarket was selected for the new US Broad Area opportunities for this engin ein a defence Maritime Surveillance programme. e c environment. n a Significant opportunities exist in the global n r e v Orders for our innovative aftermarket solutions defence market, particularly in the combat, o g

e included a US$90 million engine availability transport, unmanned and helicopter sectors. t a r o contract for the T-45 Goshawk trainer with the The business also continues to develop p r o US Navy, and the UK MoD’s first full availability innovative aftermarket solutions, with services C contract to support its Gnom e-powered Sea now generating over 50 per cent of sales. King helicopter fleet at a value of £258 million. Further strong growth in engine deliveries In the helicopter sector, the RR300 was certified for the military transport sector is expected to ahead of schedule and the first Rolls-Royc e support another year of profit growth in 2009. 8 0

0 Honeywell LHTEC T800 engine was delivered 2 t r

o to AgustaWestland for the UK Future Lynx p e r

l Battlefield Reconnaissance programme. a u n n A | c l p p u w o e r i v G e e r c s y s o e R n - i s l s l u o R B 31

Marine –£901 million of sales in the offshore sector – £96 million contract to power new Royal Navy aircraft carriers – Order book grown to £5.2 billion – Major global services expansion now under way

Key financial data 008 2007 2006 2005 2004 Underlying revenue £m ,04 1,548 1,299 1,097 963 +42% +19% +18% +14% -4% Underlying profit before financing £m 183 113 101 89 78 +62% +12% +13% +14% 0% Net assets £m 488 563 619 674 651 F i n a n c i a l

Other key performance indicators s t a t e

Order book £bn 5. 4.7 2.4 1.7 1.4 m e n

+11% +96% +41% +21% +17% t s Underlying services revenues £m 71 545 487 435 397 Underlying services revenues % 3 35 37 40 41 % of fleet under management 35 33 330

Underlying revenue Market opportunity over 0 years £.bn US$30bn

Marine is now the second largest Rolls-Royce As our installed base of equipment grows, C o r p

business in revenue terms, with a world-class we are expanding our services capability and o r a t range of capabilities and expertise in naval investing in new service centres globally to e g o

surface ships, submarines, offshore oil and realise the significant opportunity that this v e r n

gas and merchant vessels. It has equipment represents. In addition, the expertise established a n c installed on over 30,000 vessels, including those in our aerospace businesses, including e of 70 navies, representing a major opportunity equipment health monitoring and long-term for services growth. service agreements, is being applied to further increase marine’s service revenues. The marine business has enjoyed a year of very strong growth. Our revenues since 2005 have The offshore sector has been central to our doubled and increased by 42 per cent on 2007, 2008 performance, based on the success of driven by continuing growth in our offshore our specialist UT -Design and integrated systems business which itself grew by 38 per cent capability which is the industry benchmark. in 2008. Marine profit has also increased by Driven by significant investment in deep water 62 per cent in 2008. exploration and production by the oil and gas B R o u l s l

industry , the sector has generated record sales s i - n R e o

of £ 901 million in 2008. s y s c r e e G v i r e o w u p p l c | A n n u a l r e p o r t 2 0 0 8 Business review (continued) Review of operations (continued) 3

We have been particularly successful in the Our naval business also won a milestone Asian offshore market, winning orders valued at order in 2008 : a £96 million contract to £666 million in 2008 including contracts worth provide power and propulsion equipment, £84 million to supply propulsion equipment for including four MT30 gas turbines, for the offshore vessels being built in China and Korea. UK’s new aircraft carriers. As part of the Two further landmark orders were received from Carrier Alliance, Rolls-Royce is supplying an China: a £58 million contract with China Oilfield integrated system which includes the propellers Services Ltd and a £13 million contract with and propeller shafts as well as rudders, BGP Marine China to design and equip an stabilisers and some electrical systems. advanced seismic research vessel. 2008 was the 50th anniversary of our During 2008, we acquired Scandinavian relationship with the UK Government on Electric Holding, which has further increased the design, production and support of nuclear our capability in the design and supply of plant for the Royal Navy’s submarine fleet. power electric systems. This enhances our The submarines business is primarily focused ability to provide systems for offshore vessels, on service and support, underpinned by an thereby increasing our overall market size. innovative £1 billion service contract with the MoD signed in 2007. Our proven offshore system capabilities are also being utilised in the development of specialist In 2009, marine will establish a global merchant ships, such as the contract to design headquarters in Singapore which will enhance and power two vessels for Sea-Cargo AS which our global position and bring us closer to key will be equipped with innovative gas-fuelled customers in Asia. Bergen engines. There were some modest cancellations in 2008 but a record order book, market leading s t n e positions in the offshore sector and demand for m e t high specification vessels provide good visibility a t s l of revenues in 2009 and support continuing a i c n strong growth in profitability over the year. a n i F e c n a n r e v o g e t a r o p r o C 8 0 0 2 t r o p e r l a u n n A | c l p p u w o e r i Technology creating global opportunities: Technology creating global opportunities: v G e e r Ship design Nuclear power for submarines c s y s

o A U T-Design vessel, Pacific Responder , operating off the eastern Rolls-Royce is responsible for the nuclear plant powering the e R n - i

s coast of Australia on behalf of the country’s Maritime Safety submarines of the Royal Navy under a £1 billion service contract. l s l u o Authority. UT-Design offshore support vessels are the market R B leader in the industry. 33

Energy – Industrial Trent achieved record sales of over US$ 380 millio n – Services business had record year with over 200 gas turbine packages now under TotalCare contract s – Civil nuclear business established to address the growing global market – Significant investment in production and test facilities

Key financial data 008 2007 2006 2005 2004 Underlying revenue £m 755 558 546 535 538 +35% +2% +2% -1% +2% Underlying profit before financing £m () 5 (18) 1 (7) -140% +128% -1900% +114% +61 % F i n a

Net assets £m 39 370 387 390 453 n c i a l s t a t e

Other key performance indicators m e n t

Order book £bn 1.3 0.9 0.5 0.4 0.4 s +44 % +80% +25% 0% 0% Engine deliveries 4 32 44 61 47 Underlying services revenues £m 370 289 251 219 248 Underlying services revenues % 49 52 46 41 46 % of fleet under management 9 7 655

Underlying revenue Market opportunity over 0 years C o r

£0.8bn US $10bn p o r a t e

The energy business is a world-leading Of particular significance was a year-end g o v e

supplier of power systems for onshore and order , for eight Rolls-Royce driven compression r n a offshore oil and gas applications, and has sets from a unit of the Russian natural gas n c a growing presence in the electric power company, Gazprom. The new packages will be e generation sector. It supplies products to installed on the Nord Stream pipeline project customers in over 120 countries. running under the Baltic Sea from Russia to Germany. They are scheduled for delivery in Order intake remained strong in 2008, 2010, with service expected to start in late 2 011. with services once again posting a record year and continuing to account for nearly 50 per cent Market acceptance of the industrial Trent of total energy sales. drove another record year in the global power generation sector, with orders received African and Asian oil and gas markets were in excess of US$ 270 million. These included particularly active in 2008, with eight RB211 B R o 13 Trents for power generation service u l s l packages ordered for installation off the shores s i - n

in Australia, Belgium, the Czech Republic, R e o s

of West Africa, and six new compression sets y s c

Germany, Hungary, New Caledonia and Slovaki a. r e e G for pipeline service in India. Other oil and gas v i r e o w RB211 packages were ordered for customers u p p

in China, Malaysia and Algeria. l c | A n n u a l r e p o r t 2 0 0 8 Business review (continued) Review of operations (continued) 34

Technology creating global opportunities: Technology creating global opportunities: Offshore oil and gas Power generation Rolls-Royce is a world leader in the supply of gas turbine Our industrial Trent gas turbine enjoyed a record year for power for offshore oil and gas applications. sales with orders taken from Europe, Asia and North America.

In North America, we continued to establish As part of our strategy to accommodate the Trent’s growing footprint in the high- growing production volume efficiently , s t

n demand north east US power generation we consolidated packaging operations into e m market. Successful start-up and commissioning our Mount Vernon, Ohio facility and ceased e t a t s was completed for a Trent genset package operations at our Liverpool, UK facility. Two new l a i c at Lowell, Massachusetts, while construction lean assembly flow lines, dedicated to Trent n a n i continues for two Trent units at Braintree, and RB211 packages, were opened in 2008, F Massachusetts for which start-up is scheduled and construction began on seven new gas in the second quarter of 2009. Reservations for turbine test beds which will become operational an additional 18 Trent units in North America in the second quarter of 2009. were also received. In 2009, further growth in original equipment The aftermarket business experienced revenues, particularly in the power generation another record year in 2008 with sales of sector, combined with increased services activity £370 millio n. Over 200 Rolls-Royce gas turbine and lower investment in fuel cells, is expected to packages were covered by TotalCare agreements deliver a modest level of profit for the business. by year-end; this number is expected to increase

e While our energy business currently centres c to over 250 by mid-2009. Our product upgrades n a on the gas turbine, the skills and technical n r business also delivered another strong year, e v knowledge within the Group allow us to identify o

g enhancing customer value by applying

e and explore new growth opportunities in the t a new gas turbine technology to increase r o energy market. p r the efficiency and power of i n-service units. o C Over 40 Avon 200 gas turbine upgrades The most significant of these in the near term have been delivered over the past two years is civil nuclear, where, through our experience to increase the power and efficiency of these of manufacturing and supporting nuclear highly reliable machines, while demand for reactors for the Royal Navy’s submarine fleet, control system and centrifugal compressor we have a strong and unique capability. In 2008, 8 0

0 upgrades also continues to grow as a result we established a new business to address the 2 t r

o of enhanced product performance benefits. market arising from renewed global demand p e r

l for nuclear power. a u n n A | c l p p u w o e r i v G e e r c s y s o e R n - i s l s l u o R B 35

Engineering and Technology – Global research network expanded – Further research work in US secured – Europrop International TP400 flew for the first time – WR-21, the world’s most efficient marine gas turbine, entered service – Trent 60 WLE dual fuel started service operation

Key performance indicators 008 2007 2006 2005 2004 Gross research and development expenditure £m 885 824 747 663 601 Net research and development expenditure £m 490 454 395 339 282 F i n a

Net research and development n c i a

charge £m 403 381 370 282 288 l s t a t e

Net research and development m e n

expenditure % of underlying revenue 5.4 5.8 5.4 5.2 4.7 t s

The Group’s engineering and technology activity In 2008, we have continued to invest in a includes our research and technology, product broad range of technology development development and product upgrade operations and demonstration programmes. Research and across our four customer-facing businesses. development expenditure was £885 million , of which £490 million was funded from Group We have 9,600 people in our worldwide resources. The net charge to the income engineering network, with major centres in statement was £403 million. A significant the UK, USA, Canada, Germany, Scandinavia, proportion of this technology provides the India and Singapore. In addition, the Group foundation for products with reduced C o r

leverages resources through its global network p

environmental impact while delivering o r of 29 University Technology Centres (UT C) in a t increased value to our customers. e seven countries, which develop and acquire g o v e technologies for tomorrow’s Rolls-Royce Building on our past research successes we r n a n

products. This network further expanded in filed 425 patent applications in 2008, a record c 2008 with the opening of a UTC in Pusan, Korea, year for the Group. e to develop high efficiency heat exchangers. B R o u l s l s i - n R e o s y s c r e e G v i r e o w u p p l c | A n n u a l r e p o r t 2 0 0 8 Technology creating global opportunities: Technology creating global opportunities: WR-1 Factory of the Future HMS Daring has entered service, powered by the Rolls-Royce has opened its‘Factory of the Future ’near Sheffield, world’s most efficient marine gas turbine, the WR-21. UK . It will demonstrate what can be achieved in the field of advanced manufacturing. Business review (continued) Review of operations (continued) 3

We have made good progress on two In civil aerospace, the Trent 900 demonstrated US Air Force premier technology program me s, excellent reliability during its first full year in ADVENT and HEETE, and won a further award service with Singapore Airline s and is also for the Integrated Vehicle Energy Technology in operation with Qantas . The Trent 1000 Program (INVENT). continues to build its maturity on the test bench, awaiting first flight of the Boeing 787. The first In Europe, we successfully ran the Power BR725 for the Gulfstream G650 ran on time and Optimised Aircraft (POA) engine demonstrator, the engine is making good progress towards integrating electrically driven engine components certification. The Trent XWB for the Airbus A350 which traditionally are powered mechanically. XWB has now largely completed its preliminary We also achieved encouraging noise level results design stage . from a rig test demonstrating the open rotor aero engine, which has the potential to deliver a step Our drive for improved in-service engine reduction in fuel consumption. reliability continues, with engine health monitoring data and analysis techniques We continued, with partners, to develop delivering globally competitive and improving two low-carbon energy technologies. levels of fleet reliability. The construction of the 500kW underwater tidal power turbine prototype has started and HMS Daring , the first of the WR-21 powered we also began system testing our solid oxide Royal Navy Type 45 destroyers, was handed fuel cells. However, we have taken the decision over to the Royal Navy in 2008. The engine, to focus future fuel cells activity on the with its intercooled and recuperated cycle, development of the technology rather than is the world’s most efficient marine gas turbine. production and manufacturing verification The Littoral Combat Ship USS Freedom in order to match product readiness with was commissioned for US Navy service, s t market demand. n e demonstrating successful integration of two m e t Our focus on modern manufacturing continues MT30s, the most powerful marine gas turbine a t s l with the opening of the Factory of the Future, in the world, derived from the Trent 800 aero a i c n the latest development of the Advanced engine. The MT3 0s together with four a n i F Manufacturing Research Centre in Sheffield, Rolls-Royce Kamewa 153 S11 wate rjets drive UK. We are also making good progress on this 3,000 tonne ship at speeds in excess of the Advanced Forming Research Centre 40 knots. in Glasgow , UK, and three other manufacturing The long life nuclear core was successfully research centres globally. installed in the first Astute class submarine In defence aerospace, the Rolls-Royce LiftFan for the Royal Navy. With this reactor core the flew on the Joint Strike Fighter in conventional submarine can operate for its whole lifespan mode, ahead of full system testing in 2009. without refuelling. The TP400, developed by the Europrop International consortium, for the A400M e c n a military transport aircraft, flew for the first n r e

v time on the flying tes tbed. o g e t a r o p r o C 8 0 0 2 t r o p e r l a u n n A | c l p p u w o e r i v G e e r c s y s o e R n - i s l s l u o R B 37

Operations – Increased demand from all businesses managed effectively by the supply chain – New product introductions included the BR725, MT30 and JSF LiftSystem – Successfully rephased production on Trent 900 and Trent 1000 programmes – Underlying revenues per employee up 18 per cent –New joint ventures signed with both GKN plc and Goodrich Corporation

Key performance indicators 008 2007 2006 2005 2004 Capital expenditure £m 83 304 303 232 191 Product cost index – year-on-year (increase)/decrease % (4) (7) (5) 05 F i n a Sales per employee £’000 33 193 192 186 169 n c i a l s t a t e Our supply chain provides parts for both the Business process improvements and the m e n t original equipment and aftermarket areas of ongoing roll out of new process systems like s our business. It responded extremely positively SAP and PLM continued to drive operational to a significant increase in demand from all efficiency, for example enabling the reduction sectors, supporting a growth in underlying of 2,300 jobs in support functions. As a result , revenue of 17 per cent in 2008. New product productivity measured as underlying revenues introductions and the impact of programme per employee, improved by 18 per cen t slippages were also managed effectively. on 2007. Our modern domestic factories continued to improve their productivity. Through our make/buy strategy, we continued However, commodity prices resulted in to focus on making only those parts which are a product cost index rise of four per cent. rich in intellectual property in order to maximise value. The strategy was underpinned by A range of new product introductions was C o r p ongoing supply chain rationalisation and the managed during the year, with the first run o r a t development of strategic supplier relationships, of the BR725 engine for the Gulfstream G650, e g o exemplified by the agreement of risk and first flight of the F-35 STOVL variant for the v e r n

revenue sharing partnerships for 40 per cent Joint Strike Fighter (JSF) and plans established a n c of the Trent XWB programme. to deliver orders for the MT30 naval gas turbine e and the JSF LiftSystem. We also successfully rephased our production programmes for the Trent 1000 and 900 engines in response to programme slippages on the Boeing 787 and Airbus A380. B R o u l s l s i - n R e o s y s c r e e G v i r e o w u p p l c | A n n u a l r e p o r t 2 0 0 8 Technology creating global opportunities: Technology creating global opportunities: Global manufacturing Trent 1000 A BR725 in production at the Rolls-Royce facility in Germany. The front fan of a Trent 1000 engine showing its swept The BR725 is the latest variant of this successful two-shaft engine wide-chord blade design. The Trent 1000 is the launch engine famil y. It has been developed to power the new Gulfstream for the new Boeing 787 Dreamliner aircraft. G650 corporate jet. Business review (continued) Review of operations (continued) 38

In the medium to long term, our record order We expanded our capability during the book will drive a significant increase in the year, establishing strategic joint ventures load on our supply chain, though the timing with GKN plc, to develop composite materials of this increased activity will be affected by for fan blades, and Goodrich Corporation, programme slippages and the economic to develop and manufacture engine controls. downturn. We are phasing the development Our success is based on operational excellence, of our new manufacturing facilities in Singapore strong partnerships and technological and Crosspointe, US , to take account of these superiority. We would like to thank all our impacts in order to meet demand in a employees, suppliers and partners for their timely fashion. commitment to these core principles and In November 2008, we announced proposed for their hard work during the year. global job reductions for 2009 of around 1,500-2,000, as a result of economic uncertainties and individual programme developments. We will continue to recruit graduates, apprentices and other employees in order to support areas of particular growth. Our Business Process Improvement programme continued to direct spend on information technology. We continued to introduce our design and data management tool , PLM , and our planning and scheduling tool , SAP, notably into Hong Kong Aero Engine Services s t Limited ( HAESL ), our Hong Kong repair and n e

m overhaul joint venture. Our services processes e t a t will be further enhanced in 2009 with the s l a i

c application of the Maximo planning tool . n a n i F e c n a n r e v o g e t a r o p r o C 8 0 0 2 t r o p e r l a u n n A | c l p p u w o e r i v G e e r c s y s o e R n - i s l s l u o R B 39

Services – Service revenues increased by 11 per cent to £4.8 billion – 57 per cent of the civil aerospace fleet now under TotalCare support – More than 8,000 engines and auxiliary power units covered by in-service monitoring – Expansion of joint ventures in Hong Kong and Singapore – Global repair services created, increasing focus on repair technology – Expanded capability of global Operation Centres, including satellite sites with two major customers

Key performance indicators 008 2007 2006 2005 2004 Underlying services revenue £m 4,755 4,265 3,901 3,457 3,251 F i n a

Underlying services as percentage n c i a

of Group revenue 5 55 53 54 55 l s t a t e m e n

The Group’s services business includes field This capacity will come on stream in 2009 and t s services, the sale of spare parts, equipment 2011 respectively and is being funded without overhaul services, parts repair, data management, recourse to the joint venture shareholders. equipment leasing and inventory management In its first full year of operation, the overhaul services. These services are typically sold as a facility we have established with Lufthansa, package under our TotalCare banner. N3, has made steady progress, successfully introducing Trent 700 capability and expanding Group service revenues increased by 11 per cent its customer base. Our field support capability in 2008, driven by good progress across all sectors. has also been enhanced with the opening Services represented 52 per cent of Group of our eighth On-Wing Care centre , in Brazil, revenues. The strongest growth was recorded and we are developing capability in the UAE in marine, demonstrating the value of expanding C in conjunction with Mubadala Development o r our service network in this sector. Our latest p o

Corporation. On-Wing Care services were r a t

service centre in Mumbai was opened in e

provided for over 3 ,000 engines across the year. g May and later in the year we entered into o v e r an agreement with Abu Dhabi Shipbuilders We have continued to expand our services n a n c

to provide waterjet services in the Middle East. provision with the successful deployment of e our Electronic Flight Bag (EFB), now in its third During 2008, we continued to invest in our year. The EFB provides, among other applications, civil aerospace service network, with extensions a key data acquisition capability to optimise to both Singapore Aero Engine Services Limited overall aircraft and fleet fuel usage. (SAESL) and Hong Kong Aero Engine Services Limited (HAESL) under construction. B R o u l s l s i - n R e o s y s c r e e G v i r e o w u p p l c | A n n u a l r e p o r t 2 0 0 8 Technology creating global opportunities: Technology creating global opportunities: Joint ventures Long term service agreements HAES L is a joint venture company and part of the global A Rolls-Royce service representative with a customer at an Rolls-Royce repair and overhaul network. RB211 power plant in Indonesia. The Group is increasingly signing long term service agreements with energy customers. Business review (continued) Review of operations (continued) 40

The TotalCare model encourages an integrated The upgrade and standardisation of our approach, which means we work closely IT systems to support the services business with our customers to optimise the operation continued and underpinned our expanded - of their assets while carefully managing costs. capability Operations Centre, opened in the We conduct in -service monitoring for over UK during 2008. We have also defined a suite 8,300 engines worldwide, providing engine of integrated Service Life Cycle Management health monitoring and data analysis services processes and supporting IT tools that we in conjunction with our expanded Operations are rolling out Group -wide in a multi-year Centres. This enables real -time data acquisition programme. The highlight for the year was and analysis to maximise operational a flawless implementation of SAP at HAESL performance for our customers in parallel where the site achieved near record output with optimising support costs. in the month the system went live. We are also increasing the focus on overhaul We remain confident that our service model costs, reorganising our component repair is aligned with our customers’ interests, activities during the year to establish Global encouraging us to focus on maximising the Repair Services. This organisation takes a strategic effectiveness of their assets. This alignment approach to repair development and is investing and focus drive the investment in capability in advanced repair processes. and improved delivery that is the hallmark of our services business. Contract highlights for the year included agreements with US Airways to support its RB211-535 fleet with a TotalCare package and a similar contract with IAE for its V2500 fleet. TotalCare support arrangements now cover s t 57 per cent of the civil aerospace fleet . In defence n e

m aerospace we competed for and successfully e t a t retained the F405 US Navy contract , which we s l a i

c have been executing for the past five years, the n a n

i new contract being for a further year with four F one year extension options. Also notable were a number of helicopter contracts including a £25 8 million award from the UK MoD to support Gnome engines. In the energy business, ten long-term service agreements were won with a total value of £160 million. We expect to agree a further ten energy contracts covering 50 new gas turbine units that will be installed during 2009, taking the number of packages under long-term service agreements to over 250 , or around e c n

a 20 per cent of the fleet. n r e v o g e t a r o p r o C 8 0 0 2 t r o p e r l a u n n A | c l p p u w o e r i v G e e r c s y s o e R n - i s l s l u o R B