Rolls-Royce has warned that its cash outflow this year will be worse than market expectations at £2bn as new variants of Covid-19 prolong the crisis in global aviation.
The aerospace group said engine flying hours this year are now expected to be only about 55 per cent of pre-coronavirus levels against base case expectations of 70 per cent.
Rolls-Royce generates profits in its civil aerospace division through long-term contracts under which it is paid for the number of hours its engine fly. Analysts had expected an outflow of £1bn to £1.5bn.
“More contagious variants of the virus are creating additional uncertainty,” the group said in a statement.
“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 group’s shares fell 10 per cent to 88.14p to a two-month low by mid-morning in London on Tuesday, taking its descent for this year to 21 per cent. The shares have fallen 60 per cent over the past 12 months.
The announcement comes a few weeks after Rolls-Royce disappointed the market by revising its expectations for cash outflows in 2020 from about £4bn to £4.2bn.
Analysts suggested the prolonged crisis was taking a heavy toll on Rolls-Royce’s airline customers, many of whom had been hoping for some recovery this year as vaccines were rolled out globally.
But with governments increasingly closing borders to contain the spread of new variants, dampening hopes for a summer recovery in air travel, there was scope for more bad news from Rolls-Royce in future, said Nick Cunningham, aerospace analyst at Agency Partners.
“The airlines are running out of cash and that puts part of RR’s receivables at risk, so working capital flows in 2021 are likely to be worse than expected,” he said.
“It looks increasingly likely that a lot of airlines will at best need emergency measures, including protection from creditors. RR is very liquid and will not go bust, but . . . there is still downside risk to the reduced 2021 scenario.”
The company said it expected to turn cash flow positive in the second half of 2021 and to be generating at least £750m of free cash flow as early as next year, depending on any recovery.
Rolls-Royce raised about £5bn in funds late last year through a rights issue and new credit lines. The company at the time set out three possible scenarios including a worst case one for recovery under which engine flying hours recovered to 35 per cent of 2019 levels in 2020 and 45 per cent this year. By the end of the third quarter these were running at 42 per cent.
Rolls-Royce said it had liquidity of approximately £9bn, enough to navigate even the prolonged crisis.
However, it has also pledged to make disposals of about £2bn and deliver substantial cost savings.
The company at the start of the crisis announced plans for 9,000 job cuts by the end of 2022, shrinking its civil aerospace division by a third.
“This restructuring will be a key enabler of our target to deliver at least £750m of free cash flow (excluding disposals) as early as 2022, contingent on the expected recovery in engine flying hours,” the group said.
https://news.google.com/__i/rss/rd/articles/CBMiP2h0dHBzOi8vd3d3LmZ0LmNvbS9jb250ZW50L2VlYWNmYTYwLWE2YTktNDAwNy1hMDk0LTk5YmJhNWE1YTgzNNIBP2h0dHBzOi8vYW1wLmZ0LmNvbS9jb250ZW50L2VlYWNmYTYwLWE2YTktNDAwNy1hMDk0LTk5YmJhNWE1YTgzNA?oc=5
2021-01-26 08:16:00Z
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