• Sun. Aug 14th, 2022

‘The worst is now well behind us,’ says aero-engine group’s chief executive

Mar 11, 2021

Rolls-Royce plunged to a worse than expected loss last year as the pandemic led to the grounding of most of the world’s aircraft, but the UK aero-engine group pledged to stop haemorrhaging cash this year.
Warren East, chief executive, said that while the exact timing and pace of the recovery remained uncertain, “the worst is now well behind us”.
Rolls-Royce, he said, had its cash burn “under control”.
The company was forced to shore up its balance sheet last year with £7.3bn of new equity and debt, and launched a disposal programme to raise at least £2bn. A major restructuring programme is also under way and 7,000 jobs have been cut so far. 
But East said that with about £9bn of liquidity available, “even if there is no recovery in 2021 and not much better in 2022, we have ample liquidity to get through this crisis as long as it lasts”.
Rolls-Royce shares were up just over 1 per cent at 114.7p in morning trading on Thursday. They remain almost 40 per cent down over the past year.
Rolls-Royce generates profits in its civil aerospace division through long-term contracts under which it is paid for the number of hours its engines fly.
The unprecedented halt in flying because of the pandemic meant most of the group’s income dried up. Large engine flying hours last year were at 43 per cent of the levels seen in 2019, while deliveries of large engines more than halved to 250.
The company reported an underlying pre-tax loss of £4bn for 2020, higher than the consensus forecast of £3.1bn. That included a £1.7bn underlying charge related to the unwinding of hedging contracts. Losses before tax were £2.9bn, including write-offs and £489m in restructuring costs.
Cash outflow for the year was £4.2bn, including a charge of £1.1bn related to the cessation of invoice discounting. Underlying revenues over the period were £11.7bn, down from £15.45bn the previous year.
The company said it still expected to turn cash positive during the second half of 2021 and to generate at least £750m as early as 2022. Both forecasts, however, are dependent on the pace of the recovery in engine flying hours and are underpinned by the restructuring programme.
Rolls-Royce said it expected large engine flying hours in 2021 to increase to about 55 per cent of 2019 levels, up from the 43 per cent level seen in 2020, supported by an acceleration in global Covid-19 vaccination programmes.
For 2022, the company said its base case was for flying hours to reach about 80 per cent of 2019 levels, down from a previous forecast of 90 per cent. It said it expected large engine deliveries to remain “at the current lower levels for the next few years”.
The company’s civil aviation business accounts for half of its revenues. Underlying operating profits rose in other divisions, including defence and power systems.
Nick Cunningham, analyst at Agency Partners, said “the issue is not whether Rolls-Royce survives the crisis to fight another day, it is as to how long the losses go on for, how flat or steep the recovery becomes and how much debt [the company] accumulates by the end of the process”.