The resurgence of the Covid-19 pandemic has delayed the recovery of Rolls-Royce’s civil aero-engine business, pushing the company on Friday to increase its expectations for cash outflow this year.
The UK aero-engine maker said that while it was making good progress on the cost saving plan unveiled this year, in which 9,000 jobs will be cut globally by the end of 2022, it expected a free cash outflow in 2020 of £4.2bn. This compares with a target at the half year of £4bn.
Warren East, chief executive, said the outlook remained “challenging and the pace and timing of the recovery is uncertain” as he unveiled the group’s third quarter trading statement.
Rolls-Royce shares dropped more than 7 per cent after the news.
At the civil aerospace business, there has been a gradual recovery in the number of hours its engines flew on aircraft since the trough in the spring. However they remained at 42 per cent of 2019 levels, against the group’s base case of 45 per cent for this year.
Rolls-Royce generates the majority of its revenue in the civil aerospace business from long-term service agreements in which it is paid for the number of hours engines fly on wing.
Commercial air travel looked likely to recover slowly in the first half of 2021, the group said, as airlines cut back schedules during the winter. “We anticipate an improvement in the second half of 2021 as vaccination programmes support the further reopening of borders and economic recovery,” the company said in its statement.
Mr East said Rolls-Royce still expected to turn cash flow positive “at some point” during the second half of next year.
The group was still on track to deliver £1.3bn of pre-tax cash cost savings. Over half of the planned 9,000 job cuts will have been completed by the year end.
“Our mitigating actions to preserve cash in 2020 are on track to deliver more than £1bn of in-year savings in 2020,” the group said.
Sandy Morris, aerospace analyst at investment bank Jefferies, said the second wave of Covid-19 had made the fourth quarter more challenging than expected, and this was likely to continue into the first three months of 2021. “We are likely not alone in feeling a bit jet-lagged,” he said.
The group in the autumn raised £5bn through a combination of debt and equity. Net debt at the year end year was forecast at between £1.5bn and £2bn, excluding lease liabilities of approximately £2.1bn, with liquidity expected to be between £8.5bn and £9bn.
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