* New boss inherits tough target to double sales by 2020
* Dilemma over engines, lower govt. defence spending * Rishton right man, will retain shares - major shareholder
By Rhys Jones
LONDON, Oct 14 (Reuters) - Rolls-Royce's next chief faces a tough task to maintain the company's robust growth, cope with intense competition and stagnant defence spending, and make the right call on new engines.
Analysts and investors are sure John Rishton's three-year association with the British aero engine maker as non-executive director and stint as finance director at one of Rolls' main customers, British Airways, will help him deliver.
Rishton's first task when he takes over in March from popular chief executive John Rose, who retires after a successful 14 years at the helm, is to maintain Rolls' established position in the global aerospace market.
The company's order book grew from 7.6 billion pounds ($12 billion) in 1996, when Rose became CEO, to 58.3 billion at the end of last year, while annual revenue trebled to 10 billion. Rishton has inherited a target of doubling that figure by 2020.
"Rishton's big challenge will be to maintain and grow market share -- if you don't have engines in service you don't have the through-life support contracts which have driven its revenue," said Howard Wheeldon, senior strategist at BGC Partners.
Growth should come from the many long-term contracts secured by Rose. A key component of Rolls' order book are contracts for Trent 1000 engines to power Boeing's 787 -- slated for delivery in 2011 -- and the Trent XWB engine for EADS-owned Airbus's A350 due two years later.
"We know Rishton from his time at BA and he's been a non-exec at Rolls for three years, so he knows the business well. We have no concerns about his ability to continue Rose's fantastic work and will absolutely be holding on to our shares," said one of Rolls' largest shareholders.
Rishton is also viewed as a "safe choice" by Societe Generale analyst Zafar Khan.
"They've chosen a guy who was on the board to ensure continuity and he's worked at BA -- one of Rolls' biggest customers -- so has seen the business from the customer side."
That Rishton has a tough act to follow is underlined by the premium that Rolls' shares enjoy: the stock, which has outperformed the FTSE All Share Aerospace & Defence Index by 17 percent in 2010, trades at 15.47 times one year forward, compared with a sector average of 11.8.
And the next batch of work from Boeing and Airbus is unlikely to come until the end of the decade in the shape of new single-aisle planes. Filling this gap could be problematic.
STALLED ON ENGINES
Rishton also has to contend with the possibility that Airbus and Boeing could put new engines on their A320 and 737 airliners instead of designing new, more efficient planes. Rolls fears that would delay revenue from engines: it is keen to see new planes that will use its Advance family of engines.
Airbus is expected to announce plans for new, more efficient engines on its A320. General Electric and Pratt & Whitney say they could offer engines for the A320 with fuel savings of between 12 percent and 15 percent, from 2015.
If the planemakers opt to re-engine, the move could affect the shifting alliances of the world's top engine firms.
Aero engines in the medium-haul market are dominated by two transatlantic alliances: CFM, a Safran-General Electric partnership, which has a monopoly on the 737; and International Aero Engines (IAE), which competes with CFM on the Airbus A320.
IAE leaders Pratt and Rolls appear split on whether it makes sense to invest in a short-term tactical engine, and so far Pratt is marketing its new "geared turbofan" alone.
"Re-engining is key for Rolls but they have nothing to offer right now. They can't afford to stand aside," said BGC's Wheeldon.
GLOBAL FOOTPRINT
Challenges brought about by cuts in military spending are also likely to give Rishton a headache.
Britain is reviewing its defence spending to cut a record budget deficit, while military spend abroad is stagnant at best.
Analysts believe this will lead to cuts of up to 15 percent -- the budget is 36.9 billion pounds for the current year -- with large procurement programmes set to be scaled back.
Rolls, however, makes just a fifth of its revenue from the defence industry and is aided by its wide global footprint -- half of its orders come from emerging markets, while Britain accounts for just 15 percent of sales.
Any sales dip could be offset by growth at its energy and marine units. The latter makes power and propulsion systems and last year accounted for about a quarter of group sales.
Rishton will hope ongoing problems with Rolls' civil and military engines will be resolved by the time he takes over.
Boeing last month blamed Rolls for forcing it to push back delivery of its first 787 after the test engine, a Trent 1000, blew up at a test site in England.
Also last month, GE and Rolls said an engine they are developing for the F-35 fighter was damaged during testing.
However, with a background in aerospace and a solid track record as CEO of a global company, Rishton looks more than capable of rising to the challenges ahead.
"Rose was a strong leader and the architect of Rolls-Royce's transition into a world-class global company," said Investec analyst Andrew Gollan. "But we see Rishton as an eminently sensible replacement."
($1=.6307 Pound)
(Editing by David Hulmes)