Rolls-Royce to burn through another £2bn of cash

Business


Rolls-Royce to burn through another £2bn of cash as new Covid variants put the brakes on air travel

Engine maker Rolls-Royce warned it will burn through £2billion this year as the spread of new Covid variants batters air travel.

Increased restrictions to protect against more contagious strains of the virus are expected to ground flights worldwide in 2021.

This will deal a blow to Rolls as it gets paid when its engines fly – so fewer flights mean less cash is coming in.

Profits grounded: Rolls-Royce gets paid when its engines fly – so fewer flights mean less cash is coming in

The company, whose engines power many of Airbus and Boeing’s larger planes, now estimates the number of flying hours will be about 55 per cent of the levels seen in 2019. It was previously expecting around 70 per cent.

Shares in the FTSE 100 company dived by more than 10 per cent in early trading following the warning – but eventually closed down 1.7 per cent, or 1.68p, at 96.32p.

The £2billion cash hit is worse than analysts were expecting, with the highest City forecast coming in at around £1.5billion.

And although it said it expects to stem the tide of money flowing out of the business in the second half of the year, it also warned that the new variants made it harder to predict what will happen to its finances.

Rolls said that continued progress on vaccination programmes is ‘encouraging’.

But, it added: ‘In the near-term, however, more contagious variants of the virus are creating additional uncertainty. 

Enhanced restrictions are delaying the recovery of long-haul travel over the coming months compared to our prior expectations, placing further financial pressure on our customers and the wider aviation industry, all of which are impacting our own cash flows in 2021.’

The ferocity of the latest Covid wave has piled even more pressure on a company that was struggling financially even before the pandemic. 

Last spring it launched another restructuring programme – its third in six years – which included cutting £1billion in costs and axing 9,000 staff from its 52,000 workforce.

But months later it admitted it was struggling for survival and could be crippled by another downturn. Since then, the company has raised £5billion through selling new shares and arranging new credit lines.

Around 7,000 employees have already left and it is in the process of selling multiple businesses, including a deal in December for part of its nuclear division.

It now has around £9billion, which it said makes it ‘confident that despite the more challenging near-term market conditions we are well-positioned for the future’.

But even with this safety net, the Derby company usually makes around half its revenues from the civil aerospace division, and desperately needs flights to pick up again.

And analysts flagged up that its warning that its customers were struggling was a bad sign.

Sandy Morris, analyst at investment bank Jefferies, said: ‘This feels like an early effort to focus on what is probably a wide range of expectations about 2021 free cash flow. 

There are lots of variables but our focus is drawn to the comment that the delayed recovery in travel is ‘placing further pressure on our customers and the wider aviation industry’. That’s the bad news.’

Airbus and Boeing have dramatically curbed the number of planes they are producing as airlines have largely put orders on hold. The travel industry believes it will take until 2023 for the short-haul market to recover to 2019 levels.

But the long-haul market, which uses the big planes Rolls supplies, is expected to take longer.

Tight new restrictions in Europe to manage surging infections and delays in vaccination rollouts in other countries could extend this. Companies in or supplying the travel industry were among the worst-hit stocks during the 2020 crisis.

Advertisement



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *