The Next $500 Billion Industry: How Rolls-Royce Sells Performance
Somewhere over the North Atlantic Ocean, a Rolls-Royce Trent engine is currently powering a commercial aircraft. It has seen many trips, yet neither the carrier nor Rolls-Royce stand to gain by replacing these engines frequently. The airline is billed only when the engine is operating reliably, and underperformance will land squarely in Rolls-Royce’s balance sheet. It is a rather unusual approach for a company that should want to sell as many engines as possible to maximize its profits. Instead, for six decades, the company has leaned into the idea of a circular economy to cater to its unique customer base.
In 2017, researchers led by Martin Geissdoerfer published an academic definition of a circular economy in the Journal of Cleaner Production. It was explained as a regenerative system that works to reduce waste/leakage by “narrowing material and energy loops”. The definition includes core areas of focus, such as repair, reuse, and recycling. Today, this line of thinking is no longer a nascent idea yet to be adopted. It has become, simultaneously, a new opportunity for firms to capture value through areas such as materials recovery and a regulated area for others.
Regulatory Tailwinds
Sustainability reporting regulations are a relatively recent development globally, with governments making them mandatory for American corporations in 2025. Similar regulations exist in the European Union, United Kingdom and Canada. Although the concept of a circular economy is not regulated in the same manner, certain dimensions of the theory have been examined under new legislation for corporations. In Quebec, Bill 29 was introduced in 2025 as the first right-to-repair law in Canada. It targets widespread planned obsolescence practices by large manufacturers where products are made to have a shorter lifespan, leading to a quicker replacement rate. Companies will also discourage repair from outside third parties. Examples like issues with older iPhone models and Amazon Kindle models that are glued shut are clear anti-consumer actions. Ultimately, these actions contribute to the 50 million tonnes of e-waste generated in landfills annually and increased sales volumes for manufacturers. Accordingly, the new regulation forces firms to guarantee available replacement parts or repair services to the public. Both repairing and reusing are key components of a circular economy, and such regulations are taking the right step forward in that direction. This approach is not limited to Quebec, and other provinces such as Manitoba have recently put forward similar proposals.
Design mandates, such as the EU’s Packaging and Packaging Waste Regulation, is the first of its kind in its regulatory space. The key focus is on recycling, and targets the upstream design process of products instead of inefficiently allocating resources to tackle the downstream accumulation of waste. The mandates include the goal of making all packaging recyclable by 2030 and applies restrictions on unnecessary packaging formats. In Ontario, the Blue Box regulation is a similar approach where the recycling program is completely funded by producers.
In short, product death in the form of obsolescence or disposal is addressed at the point of design through these regulations.
Value Capture
For a typical company, direct emissions from its own operations and the electricity it buys are a small fraction of the actual total. McKinsey separates emissions by category: Scope 1, 2, and 3. The numbers at the top of any sustainability report, such as the direct emissions and electricity use mentioned earlier, fall into Scopes 1 and 2, respectively. It is estimated that Scope 3, distributed throughout their value chain, represents over 90% of the actual total. To address this problem, it requires redesigning what the supply chain is made of and how materials move through it.
Circular redesign, however, is not a defensive strategy. McKinsey's own modeling suggests that European consumer goods companies moving early and aggressively toward circular models could unlock a range of €500 billion in value by 2030. In fashion and luxury, for example, the increase in sustainably produced products is set to increase tenfold, along with the market for used products in the business-to-consumer and consumer-to-consumer spaces. Another area is materials recovery. At scale, recycled steel, aluminum, and plastics cost less to buy back from a firm's own discarded products than to extract and process from outside sources, particularly as raw material and carbon-related input costs continue climbing.
In the same way third-party logistics were built to serve the meteoric growth of e-commerce in the early 2000s, circularity will also require the re-manufacturing and logistics services from third-parties. In addition, there is a real first-mover advantage available to manufacturers willing to redesign early, since regulations are still being written in this space, as mentioned earlier. Overall, the offensive positioning of global firms is the ideal strategy to capture a piece of this untapped market.
IKEA
At any IKEA store, people can drop off old bookshelves and dismantled wardrobes in exchange for store credit. Materials leave the company, get used, and eventually come back into the same value chain rather than into a landfill or a stranger's recycling bin. It is, in a sense, the easiest version of circularity to picture. Creating the company’s buy-back program and design for disassembly required an audit of its own sourcing and manufacturing from the ground up to make the economics of a second life work. A product engineered to be assembled by anyone with an Allen key is also, conveniently, a product that can be disassembled, refurbished, and resold without hassle. With 47 million products saved from the landfill in 2019, this program has made a tangible environmental impact. To make it work, IKEA made use of their high level of vertical integration to close the loop and standardize its products for reuse. Another company that does not control both retail and manufacturing operations will find this model more difficult to replicate. A retailer selling other brands' furniture has no such leverage over how those products were built in the first place.
Rolls-Royce
There is no buy-back counter for a jet engine. Rolls-Royce took a slightly different approach to a circular economy. Under the program known as Power by the Hour or TotalCare, an airline pays Rolls-Royce for the engine’s performance by the resources consumed. A manufacturer that sells an engine outright is financially indifferent to what happens to it the day after the sale closes. A manufacturer optimized purely for near-term revenue might even prefer the airline order another one sooner rather than later. Arjen Tukker classifies this use case as a product-service system, which incentivizes Rolls-Royce to keep a close eye on the durability and maintainability of its products. However, its model depends on the product being valuable and long-lived enough that retaining ownership with decades of maintenance revenue makes financial sense. The airline economy consists of a small number of consumers, and it is incredibly lucrative to maintain these relationships through a servicing approach. This tailored approach will become far messier if scaled to millions of individual consumers, which is not the case for Rolls-Royce in this example.
Conclusion
Somewhere in a hangar, the Trent engine is being taken apart, piece by piece after twenty thousand hours in the air. Each component is inspected closely, and checked to see if reuse or repair is possible. Rolls-Royce had stopped thinking along the lines of take-make-waste a long time ago, and figured out that the circular model is far more profitable. Both the airline and the provider benefit from this relationship, and is a healthy sign that a circular economy will be a viable option for many other corporations as we move towards a more regulated landscape concerning sustainability reporting.