Rolls-Royce borrows billions as Covid-19 grounds aviation
Shares in the engine-maker fell on the news, with aircraft powered by its turbines logged a 75% drop in flying hours due to world lockdowns
London — Rolls-Royce warns that it will take years to bounce back from the coronavirus crisis that’s idled global jetliner fleets and robbed the engine-maker of vital maintenance revenue.
Shares of Rolls-Royce slid as much as 9.5% on Thursday after the London-based company said it would borrow £2bn to see it through the downturn.
Aircraft powered by the company’s turbines logged a 75% drop in flying hours in the second quarter as governments locked down travel, reducing demand for maintenance services that provide the bulk of profit. Rolls-Royce is particularly exposed because it only makes engines for wide-body jets that handle the bulk of long-haul routes that have been hit the hardest. That market is expected to remain subdued for years.
“The Covid-19 pandemic has created a historic shock in civil aviation from which it will take several years to recover,” CEO Warren East said in a statement.
On a conference call, East said the company’s commercial aerospace activity will be about one-third smaller. It’s unlikely Rolls-Royce will soon have the chance to get back into the market for narrow-body turbines, he said. “It’s a slightly moot point because there are no single-aisle opportunities likely to materialise in the current decade.”
Rolls-Royce has time to plot moves to strengthen its balance sheet while it rides out the crisis, East said. The company obtained a commitment for the new five-year loan, which will be underwritten by a syndicate of banks and backed by a guarantee from UK Export Finance.
The extra borrowing will lift liquidity to £8.1bn and comes on top of other moves to bolster the balance sheet as the coronavirus pandemic roils air travel. Rolls said on Sunday that it aims to close a pension plan four years early, while it’s said to be exploring other measure,s including a share sale and asset disposals.
“We started this year with positive momentum and strong liquidity and acted swiftly to conserve cash and cut costs,” East said.
Shares of Rolls-Royce, which said it has begun the process of cutting 9,000 jobs, traded 7.2% lower as of 9.07am in London, taking the decline so far this year to 61%.
The company may decide on an equity raise, but the liquidity now available means it can avoid doing so “against the uncertainty of a volatile trading backdrop and febrile sentiment”, according to Jefferies analyst Sandy Morris.
Rolls-Royce opened voluntary severance packages to staff last month after announcing plans to eliminate 3,000 UK jobs this year. It’s had expressions of interest from more than that number, with approximately two-thirds expected to go by the end of August.
The company expects the cash-flow situation to ease in the second half, with an outflow of £1bn compared to £3bn in the six months to end-June. There are early signs of a recovery in flying hours with a marginal improvement in May and June.
It said that fixes for Trent 1000 engine glitches which have plagued the company for years are on track.
Would you like to comment on this article or view other readers' comments?
Register (it’s quick and free) or sign in now.
Please read our Comment Policy before commenting.