Keith Roland Sturt was doing a flyover for an air show in Nottinghamshire, England in 1958. But as he began a simple turn, disaster struck.

Pieces of the right wing began peeling off. As the wing detached from the body, the plane rolled left, trailing clouds of fuel in its wake.

The jet pitched straight up. Then it pitched straight down. Then, both wings ablaze, it careened into the edge of the runway.

Sturt, three other men on board, and three first responders were killed. Investigators never determined the official cause of the crash. But some blamed vibrations from the jet’s new Rolls-Royce Conway engine for weakening the wing.

It wasn’t the first time folks took issue with a Rolls-Royce engine. And it wouldn’t be the last.

By the early 1960s, Rolls-Royce faced a growing problem as its engines often needed major overhauls after a few hundred hours of flight time.

Breakdowns often grounded planes and made flight schedules hard to maintain especially for smaller operators that couldn’t afford a bunch of spare parts. Operators were frustrated by unpredictable expenses and constant downtime.

Selling engines had always been a one-and-done business. Once the product left the factory floor, the manufacturer had little involvement with its upkeep.

If something broke, it was the customer’s problem and expense.

But in 1962, Rolls-Royce decided to try something new. The company introduced a new kind of service agreement called “Power by the Hour.”

Instead of selling a product and walking away, Rolls-Royce would handle all engine maintenance for a fixed rate per flying hour.

Budgeting for repairs no longer required a bunch of guesswork. Customers paid only when the aircraft was in use. The more reliable the engine, the more money Rolls-Royce earned.

And Rolls-Royce now had a reason to build better engines and reduce breakdowns. Its success depended on how well the product held up over time.

This was a risky move then, as jet engines were still unreliable during those times. However, Rolls-Royce’s bet turned out to be a smart one.

Operators liked the new deal. It was the first time engine maintenance became a steady, manageable expense instead of a constant headache. And it helped push for product improvements at Rolls-Royce, too.

Power-by-the-Hour eventually led to Rolls-Royce’s current model, CorporateCare. The offer now includes real-time engine monitoring, early warnings when things might go wrong, and a global support network.

This kind of contract is common in commercial aviation today. Despite the additional upkeep, service contracts like Power-by-the-Hour can be up to 7 times more profitable than selling the engine outright. They also reduce costs for customers and keep planes flying for longer.

And it’s not limited to aviation. Across many different industries, companies are going all in on service plans.

They don’t walk away after a sale. They stick around and help their customers succeed. And when they do that, their own businesses tend to hold up better, too.

The best time to invest in these service model businesses is during the transformation, not after it’s already over. The market tends to doubt if the transition will work, but as customers transition over, investors realize just how profitable the service model can be.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

Today’s analysis highlights the same insights we share with our FA Alpha Members. If you want to an get in-depth analysis of market trends and uncover undervalued stocks, become an FA Alpha Member today.