The Rolls-Royce share price has continued its recent slide with 2.2% dip today after the British engineering giant informed investors it expects to burn through another £2 billion keeping afloat in 2021. Heavily exposed to the aviation sector, to whom it sells jet engines, Rolls-Royce has been badly hit by the Covid-19 pandemic. But while investors and analysts were under no illusions the continued disruption to the industry would mean losses this year, the forward guidance for a £2 billion exceeded forecasts.
The announcement was made by the Derby-based engineer by way of an unscheduled statement to the London Stock Exchange and follows last year’s raising of £5 billion rescue funding from investors. Until today, Rolls-Royce had indicated a 2021 loss was expected, but had declined to put a number to it. Analysts had estimated cash outflow of between £1 billion and £1.5 billion.
However, with it now clear international travel restrictions will last deep into 2021, the recovery of the aviation industry much of Rolls’ turnover relies on is set to be slower than anticipated. The company now forecasts the flying hours of scheduled commercial aircraft in 2021 will reach only 55% of 2019’s pre-pandemic levels. The previous forecast had been for 70%.
That’s a huge blow for Rolls-Royce, with 25% of its annual income generated by long-tail service contracts with airlines. Rather than paying for engines upfront, they are provided upfront and paid for over the course of service contracts. No flying means much less need for servicing.
In addition to the £5 billion funding package raised last year, Rolls-Royce has been attempting to raise another £1 billion or more through the sales of its Spanish aerospace and Norwegian marine engine businesses. However, there has been little interest.
The Rolls-Royce sales price rallied between autumn and December on market optimism that a return to normality may be on the horizon thanks to vaccine roll-outs. That optimism has since drained away, despite the fact mass vaccination programmes are now underway. Since December the company has lost over a quarter of its value.
Rolls’ current valuation is around £8 billion, which is very cheap in the context of a business that ordinarily has annual turnover of around £15 billion. But reflects concerns about the long-term impact of how much cash is currently being bled staying alive. Around half of Rolls’ turnover comes from the sale of jet engines for planes it and Airbus manufacture.
The Airbus A350 long-haul aircraft is the biggest buyer of Rolls-Royce engines. Last week Airbus announced it expected a delay in the recovery of the model’s production numbers.
The Rolls-Royce statement read:
“Continued progress on vaccination programmes is encouraging for the medium-term recovery of air traffic and economic activity. In the near-term, however, more contagious variants of the virus are creating additional uncertainty.
“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.”
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