#60 1962 · Rolls-Royce · Aerospace / jet enginesincentive-flip
Rolls-Royce stopped selling jet engines and started selling flying hours, so a broken engine became the manufacturer's bill, not the airline's
the problem
A manufacturer selling a machine has no ongoing stake in whether it keeps working after the sale
background
A jet engine sold outright puts all the downstream risk on the buyer: once the sale closes, every hour the engine is grounded for unscheduled repair is the airline's lost revenue and the airline's maintenance bill, while the manufacturer has already been paid in full and has only a warranty period's worth of financial stake in whether the engine keeps running well after that. That split incentive is baked into almost every capital-equipment sale — the standard fix operators reach for is buying a service contract layered on top of ownership, which still treats maintenance as a cost the buyer manages, not a promise the seller is on the hook for.
Rolls-Royce introduced its Viper engine on the new de Havilland/Hawker Siddeley 125 business jet in 1962, a smaller, newer aircraft segment where unpredictable maintenance costs were a real barrier to operators willing to commit to owning and flying it. Rather than sell the engine and let operators absorb whatever maintenance turned out to cost, Rolls-Royce restructured the entire commercial relationship around the metric operators actually cared about.
the move
Rolls-Royce offered operators of the Viper-powered HS125 a complete engine and accessory replacement and maintenance service billed at a fixed cost per flying hour, rather than selling the engine and its upkeep separately — trademarking the arrangement 'Power-by-the-Hour.' Because Rolls-Royce's revenue depended on the plane flying reliably rather than on the initial sale, the manufacturer now bore the financial consequence of engine failures directly, instead of passing that risk to the customer at the point of sale.
the payoff
Power-by-the-Hour became embedded in how Rolls-Royce sells and services engines industry-wide, and the model evolved into the CorporateCare programme launched in 2002 for business-jet engines, adding real-time engine health monitoring and a global maintenance network on top of the original per-hour billing; by the time Rolls-Royce marked the concept's 50th anniversary in 2012, more than half of the company's £11.3 billion in 2011 revenue came from services rather than one-time equipment sales.
what came after
The term 'Power-by-the-Hour,' though a Rolls-Royce trademark, became the generic name used across the aerospace and industrial-equipment world for performance-based or usage-based service contracts, and is now taught in operations and services-marketing curricula as the origin case for 'servitization' — manufacturers converting product sales into ongoing, outcome-tied service revenue, a model later echoed by everything from Software-as-a-Service pricing to equipment-as-a-service leasing in unrelated industries.
filed under
references
- [1]Rolls-Royce celebrates 50th anniversary of Power-by-the-HourRolls-Royce plc, 2012rolls-royce.com
- [2]Airplanes: Power by the HourGabelli Funds (GAMCO Investors), 2023gabelli.com