Hold your nose: a £1.25bn subsidy for rich Rolls-Royce’s new engine had to happen

The chancellor's recent budget allocation is a reflection of the global aerospace business, requiring a £1.25bn subsidy for Rolls-Royce to develop a next-generation engine for single-aisle commercial planes. This generous handout was discreetly placed in the chancellor's speech, aimed at avoiding accusations of corporate welfare following his recent remarks on rising debt interest costs.

Despite Rolls-Royce's strong financial position, with a market value of £105bn and the ability to invest up to £9bn in share buybacks, the company's CEO, Tufan Erginbilgiç, had previously expressed appreciation for government support in engine development.

Rolls-Royce's success is attributable to its status as the UK's most radically improved major company in recent years, and the potential benefits of the £1.25bn subsidy are significant. The government's strategy document highlights that securing a UK engine position on next-generation narrow-body programmes could be the single most important opportunity in aerospace over the next 50 years.

Moreover, aircraft engines are high-value products, with about 80% expected to be exported, thereby bolstering the national balance of payments. The government's £2.5bn research and development program, including a demonstrator engine, aims to provide long-term returns, high-skilled jobs, and a positive impact on defense capability.

However, Rolls-Royce's entry into the narrow-body market has been absent for several decades, and success in the UltraFan project is uncertain, likely not until around 2030. As such, the UK government's contribution to the joint £2.5bn research and development program is a strategic investment in a high-risk, high-reward venture.

While the government must ensure that the agreement guarantees UK jobs and investment, it is understandable that the level of support is justified, given the potential long-term benefits for the UK aerospace sector.