Published: May 24, 2010
Spurred by the Obama administration and
public pressure around the world, this industry will have to
change -- and fast. New environmental regulations are emerging
from Washington and Europe that are compelling the industry to
change its ways and play a bigger role in the fight against
The stakes couldn't be bigger: the industry accounts for a
growing amount of pollution. If it fails to act, these companies
could very well emerge as the next environmental villains.
The industry? Aviation. Political sentiment is mounting, not
only for the industry to slash its greenhouse gas emissions, but
also its noise levels. But there's good news for investors. One
beneficiary of the push for "greener" aviation, Rolls-Royce
(LSE: RR.L), looks set to capitalize on this trend.
Britain-based Rolls-Royce, the world's second-largest maker of
aircraft engines behind General Electric (NYSE: GE),
split from the famous luxury car maker of the same name in 1973.
The company makes engines for military and civilian aircraft and
has done more than any other aerospace engine maker to step up
to the plate and meet the green challenge.
Rolls-Royce’s group sales break down accordingly: defense
aerospace -- 21%, civil aerospace -- 53%, marine-- 17%, and
energy-- 8%. The company is listed on the London Stock Exchange
and is a component of the FTSE 100
Index (be sure to check with your broker before buying
The trends in favor of green aviation are clear. Air traffic
increasingly congests and pollutes the skies, and the Federal
Aviation Administration (FAA) projects the number of U.S.
airline passengers will nearly double from about 740 million
this year to 1.4 billion in 2025. Air traffic controllers are
expected to handle 95 million flights of all types of aircraft
in 2025, compared with roughly 64 million today.
Renewed growth in the aviation sector
worldwide, especially in the still-expanding economies of India,
China and Russia, generates new airlines and large orders for
new aircraft. China alone has 40 new airports on the drawing
Experts project that by 2050, aircraft emissions will become one
of the largest contributors to global warming. Carbon dioxide
(CO2) emissions from human activity now account for more than
84% of all U.S. greenhouse emissions. Transportation (which
includes aviation) is the biggest CO2 culprit, at 33%.
Engine researchers in Europe and the United States are focusing
on next-generation technology to propel aircraft, but
Rolls-Royce is a step ahead of the game. The Rolls-Royce Trent
1000 turbofan engine, which powers the composite-built Boeing
(NYSE: BA) 787 airliner, already boasts advances in
In addition to being the launch engine for the 787, a huge and
strategically important end user, the Trent has been
phenomenally successful throughout the aviation industry. It
also powers the A380 and A350, widely flown airliners built by
Boeing’s archrival Airbus, and a host of other popular aircraft.
The Trent 1000 commands a 40% overall share in its markets.
Rolls-Royce has refined the turbofan process to reduce the
emissions as well as noise. The Trent 1000 is the most
fuel-efficient engine ever produced by Rolls-Royce or its
competitors. It has cruising fuel consumption up to 15% lower
than the company’s previous generation of turbofans. It’s also
Rolls-Royce’s competitors also produce greener aircraft engines,
but Rolls-Royce is the purest play on the green aircraft engine
trend. General Electric and Pratt & Whitney offer innovative
engine products, but GE is a vast conglomerate with fingers in
many pies and Pratt & Whitney is a subsidiary of another
conglomerate, United Technologies (NYSE: UTX).
Rolls-Royce has signed onto to a set of goals set by the
Advisory Council for Aeronautics Research in Europe (ACARE), an
organization with about 40 members, including government
agencies and private companies. ACARE calls for the following
achievements by 2020:
- -50% reduction in fuel burn and carbon dioxide (CO2)
emissions per passenger kilometer;
- -80% reduction in nitrous oxide (NOx); and
- -50% reduction in the perceived external noise level.
That puts Rolls-Royce in the forefront of eco-friendly engine
manufacturing. And yet, Rolls-Royce’s stock is off -10% from its
2009 year-end peak. Its P/E of about five represents the
market’s severe undervaluation of this stock and is an
overreaction to the aviation’s woes during the recession in
2009, which is now substantially easing.
Consider this: Despite the severe slump in aerospace last year,
Rolls-Royce posted a +4% annual increase in 2009 pretax profit
to 915 million English pounds, on sales +14% higher at 10.4
billion. Rolls-Royce’s stock looks set to rise on the strength
of the industry’s much rosier prospects, combined with the
inexorable push toward green aircraft engines.
-- John Persinos