Rolls-Royce has issued a chilling warning about its ability to carry on in business during the pandemic as it reported a £5.4 billion half-year loss and saw its finance director jump ship for less turbulent waters.
In its six month accounts, in which it said that cashburn was expected to top £4 billion by the year end and that it did not expect a full recovery until 2025, Britain’s premier engineering company confessed to the depths of its crisis.
It said there was “a severe but plausible downside scenario” that its operations and markets would be further ravaged by economic instabilities brought on by the pandemic.
“The inherent uncertainty over the severity, extent and duration of the disruption caused by the Covid-19 pandemic and therefore the timing of recovery of commercial aviation to pre-crisis levels and the availability of sufficient funding, represent material uncertainties that may cast significant doubt on the group’s ability to continue as a going concern.”
The heavy losses and the bleak outlook sent Rolls’ shares close to 15-year lows, down by 7.7 per cent, or 20p, to 232p this morning.
Rolls-Royce produces jet engines for long-haul aircraft for Airbus and Boeing. It also manufactures propulsion systems for Royal Navy warships and nuclear submarines and engines for trains including Britain’s new intercity fleet.
It has been hobbled by the collapse in air travel during the outbreak of the coronavirus pandemic and the subsequent economic lockdowns and restrictions on movements.
About £4 billion a year or a quarter of group revenues is tied through maintenance and service contracts to the flying hours of 5,000 engines on aircraft such as the Boeing 787 Dreamliner and Airbus A350, A380 and A330 for airlines such as British Airways and Virgin Atlantic. Long-haul travel has been disproportionately hit during the pandemic
Its future revenues in civil aerospace, which account for half the group revenues, are also affected by the fall-off in demand for new planes and the decision by Airbus and Boeing to halve production rates.
In the midst of the group’s unfolding crisis Warren East, 58, Rolls’ chief executive, has now lost his wingman Stephen Daintith, the finance director.
Rolls gave Mr Daintith a £3.3 million golden hello in shares when it poached him from the Daily Mail newspaper group three years ago. But with the value of those shares shredded and his subsequent share option awards deeply underwater Mr Daintith, 56, is off to take his chances with the dot-com grocer Ocado.
For the first six months of 2020, Rolls’ revenues fell by 26 per cent to £5.8 billion and it plunged to an operating loss of £1.7 billion. With £2.8 billion in cash leaving the company during the pandemic, net debt has now spiralled by a third to £4 billion.
Write-offs and impairment charges and a massive loss on its currency hedging book sent the group £5.4 billion into the red, or a loss of 280p per share. With the company forecasting the loss of £10 billion of dollar-denominated revenues in the next few years it will have to spend £2.6 billion unwinding its dollar-sterling currency fluctuation hedges.
Rolls, which has put its £1 billion-rated Spanish business ITP Aero up for sale, said it had identified businesses worth another £1 billion for disposals. The City is also expecting a multibillion-pound rights issue fundraising from its shareholders in the coming months — it needs as much as £8 billion, according to the company’s biggest critic, David Perry, analyst at JP Morgan Cazenove.
Mr East said he did not expect Rolls’ civil aerospace business to make a full recovery back to 2019 levels until 2025. It expects it to be down by half for the whole of 2020, still off by a third in 2021 and operating at only 90 per cent in 2022. Compared with the 450 engines it was supposed to make this year, mainly for the Airbus A350, it now expects to deliver only 250 a year for the foreseeable future.
The company is laying off 9,000 people or 15 per cent of its workforce — 3,000 of them in the UK. Of the total 8,000 are in civil aerospace, reducing the division by about a third. It is to reduce its 11 main locations to six, with Derby refocused as the main engine assembly plant.
The restructurings and redundancies are “absolutely vital” to save the business, Mr East said. Of the going concern warning, he added: “We are being literal and honest.”