Wednesday, February 24, 2021

Contagious Covid variants creating additional uncertainty at Rolls-Royce

Roll-Royce is predicting a mixed picture in 2021. In a trading update the firm noted that while progress on vaccination programmes is encouraging for the medium-term recovery of air traffic and economic activity, in the near-term, more contagious variants of the virus are creating additional uncertainty.

Rolls-Royce said enhanced restrictions are delaying the recovery of long-haul travel over the coming months compared to its prior expectations, placing further financial pressure on customers and the wider aviation industry, all of which are impacting the firm’s own cash flows in 2021.

The company added: “In this environment, financial forecasts remain highly sensitive to changes in external conditions and, while we are continuing to drive cost reduction, our current forecasts indicate a free cash outflow in the region of £2 billion in 2021. This is based on 2021 widebody engine flying hours at around 55% of 2019 levels (compared to the base case of 70% presented on 01 October 2020).

“Though significant uncertainty remains over the precise shape and timing of the recovery in air traffic and the phasing of engine (OE) concession payments, free cash outflow this year is forecast to be heavily weighted towards the first six months. We continue to expect to turn cash flow positive at some point during the second half, reflecting our forecasted profile of flying hours as they recover from today’s low base.”

Rolls-Royce further noted that with liquidity of approximately £9 billion, it is “confident that despite the more challenging near-term market conditions,” it is “well-positioned for the future.”

The business remains focused on completing its restructuring programme and footprint consolidation as well as maintaining cost control and capital discipline. During 2020 around 7,000 roles were removed as part of a target to remove at least 9,000 roles by the end of 2022. Rolls-Royce said: “This restructuring will be a key enabler of our target to deliver at least £750 million of free cash flow (excluding disposals) as early as 2022, contingent on the expected recovery in engine flying hours.”

Reflecting on December, the firm indicated that trading was broadly in line with expectations across all business units. Full year 2020 Group free cash outflow was in line with previous guidance, and in-year cash cost savings of more than £1 billion were achieved from mitigating actions.

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