This article focuses on the decision-making process of Prime Minister Heath's administration toward the corporate failure of Rolls-Royce. I chose this process in light of the fact that modern airliner projects were too big to be managed by private corporations. I will examine not only the question, “Why did Rolls-Royce go bankrupt?”, but also “Why did the Heath administration leave Rolls-Royce to go bankrupt?”
In March 1968, Rolls-Royce made a contract for producing RB211 engines for Lockheed's TriStar airliners. At that time, Lockheed and Rolls-Royce expected the TriStar/RB211 to enjoy a monopoly in the medium-range wide-bodied airliner market. However, the expected production quantity for the RB211 had been shrinking. Rolls-Royce, therefore, could not absorb the escalation of the development costs of the RB211 project and, consequently, suffered a severe liquidity crisis. At the time of the first liquidity crisis in October 1970, the Heath administration pulled out of a commitment from the City as money lenders to Rolls-Royce. At the time of the second liquidity crisis in January 1971, the Heath administration decided to leave Rolls-Royce to go into bankruptcy. If the RB211 were to be cancelled, it would certainly cause the chain bankruptcy of Lockheed. As a result, Lockheed, the United States Nixon administration, the British Heath administration, and the United States bank group started negotiations over the continuation of the TriStar/RB211 project. By June 1971, the United States bank group agreed to provide a new $250 million loan to Lockheed subject to a debt guarantee by the United States government. With this new loan, Lockheed had the room to raise the price of the RB211 engines.
Faced with the crisis of this prestigious national corporation. the Heath administration did not bail out Rolls-Royce by limitless government financial commitment but rather ‘bailed in’ concerned business interests — namely, the City, Lockheed, and the United States bank group.