A surge in Covid-19 cases has slowed the recovery of
prompting the company to increase its guidance for cash burn as it said it would lay off 500 more people than expected by the end of the year.
Shares in the embattled British engineering giant dropped more than 7% in London trading, as it led the
slide into the red.
The back story. The impact of the Covid-19 pandemic on the airline industry has hammered Rolls-Royce. A leading aircraft-engine manufacturer, the company relies on lucrative servicing contracts for cash flow and profits, which have dried up as fleets remain largely grounded.
Pandemic troubles only compounded Rolls-Royce’s financial problems, as costs were already piling up over repairs on the troubled Trent-1000 engines before the start of the pandemic.
In May, the company announced a restructuring that would bring 9,000 layoffs, as it burned through cash—£3 billion in the first six months of 2020 alone. In October, the engineer said it would seek £5 billion through debt and a heavily-discounted rights issue.
What’s new. In an unscheduled trading update on Friday, Rolls-Royce said that free cash outflows for 2020 were expected to be £4.2 billion, an increase from the £4 billion in outflows it forecast at the half-year.
“We have taken decisive actions to protect and reposition our business in difficult and uncertain trading conditions, including the impact from a second wave of Covid-19,” said Rolls-Royce Chief Executive Warren East. “The outlook remains challenging and the pace and timing of the recovery is uncertain.”
The company said that invoiced hours for its large-engine service agreements, crucial to civil aerospace revenues, were at approximately 42% of last year’s levels. Engine-flying hours, the engineer said, have gradually improved since April, “although more recently the pace of recovery has slowed due to the second wave of infections in some geographies.”
Looking ahead. It is dispiriting that Rolls-Royce increased its guidance for cash burn so soon after its massive recapitalization project, but hopefully the debt and rights issue—which came at a severe price to shareholders—will be enough to see it through. The fundamental guidance that the company will turn cash flow positive in the second half of 2021 remains unchanged, which is good news.
As Covid-19 vaccinations continue in the U.K. and begin in more countries, hopefully a slow return to travel will accelerate a recovery in the civil aerospace business.