Rolls-Royce warns of ‘historic shock’ to aviation

Rolls-Royce sign
Rolls-Royce sign

The boss of Rolls-Royce has warned of a coronavirus-induced “historic shock to civil aviation” as demand for its jet engines has plunged by half so far this year.

Deliveries of new wide-body engines were just 130 in the first six months, in line with the 250 the company expects for the full year, though this is half the amount Rolls was predicting before Covid-19.

Half of Rolls’s £15bn of annual revenues come from its civil aerospace business, and demand for flights has collapsed because of Covid-19.

The engineering giant said flyng hours for wide-body aircraft fell by 50pc in the first half and were down 75pc in the second quarter, when the pandemic was at its most intense.

Flying hours are a key measure for Rolls, because it has deals where it charges customers by the hour for its engines, providing service and maintenance for them.

Warren East, chief executive, said: “These are exceptional times. The Covid-19 pandemic has created a historic shock in civil aviation which will take several years to recover.

Markets Hub - Rolls Royce
Markets Hub – Rolls Royce

“We started this year with positive momentum and strong liquidity, and acted swiftly to conserve cash and cut costs to protect Rolls-Royce during the pandemic.”

Lower demand for its engines knocked £1.1bn off Rolls’s revenues in the first half of the year.

It also took another £1.1bn hit as it stopped using invoice factoring, a system which evens out the timing of charges for engines and flying hours.

Total cash going out of the business during the period was £3bn, and Rolls is expecting this to rise to a total of £4bn for the full year.

Mr East has launched a huge restructuring of the business to reflect the lower demand, with the axe falling on 9,000 of the company’s 52,000 global staff.

Around 3,000 people have asked for voluntary redundancy so far and most of them are expected to leave the company by the end of August.

The programme is expected to deliver savings of £1.3bn a year by 2022. These cuts come on top of an earlier efficiency programme, which is “on track” for £1bn of cost savings this year.

Rolls is also restructuring its huge hedge book, which it uses to mitigate currency fluctuations in what it called a “prudent” move. Closing out positions to cut the hedge book by $10bn to $27bn is expected to cost a total of £1.45bn between now and 2026, with £100m of it coming this year. 

Rolls’ defence business had been “resilient” during the first six months, Mr East said, while the power systems unit had suffered “low double-digit” declines.

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Since the pandemic struck Rolls has raised new £3.9bn in new credit and £300m from the Bank of England’s Covid Corporate Finance Facility.

So far Rolls has drawn down £2.5bn of its new debt facilities, and the company is mulling an equity raise and disposals to strengthen its balance sheet.

The company also announced it had agreed a new £2bn credit facility from a syndicate of banks and underwritten by UK Export Finance, which it has yet to draw on. This increases the £1.5bn overdraft facility it had announced in March.

Looking ahead, Mr East said Rolls expected demand for wide-body engines to recover to about 70pc of pre-Covid levels in 2021, though appetite for new engines would remain “subdued”.

Mr East has repeatedly urged investors to judge the company on its level of free cash flow. Rolls now expects this to be £750m in 2022, a level originally targeted for 2020.

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