UK-based engine maker Rolls-Royce has released its financial results for 2020, posting a significant loss of more than $5 billion. Despite plummeting profits as large aircraft remain grounded, the manufacturer is keenly looking ahead to a better future, and believes it has done enough to ride out COVID for as long as it takes.
A significant loss
Well-known engine maker Rolls-Royce has fallen to a worse-than-expected loss of a staggering £4 billion ($5.6 billion) for 2020. The grounding of most of the world’s aircraft drained the company of revenue, with most of its money made servicing engines. As a company specialized in long-haul powerplants, it felt the downturn more acutely than others.
Rolls-Royce generates profit in its civil aviation arm through the contracts it holds with airlines. Under these, it is paid for the number of hours its engines are in the air. With the grounding of large aircraft around the world, engine flying hours achieved just 43% of their air-time that they did in 2019. Deliveries of new engines were less than half that of 2019, at 250 units.
To curb its losses, the company has turned to drastic measures over the past 12 months. It has let go of 7,000 staff, has launched a disposal program to raise around £2 billion ($2.8 billion) and has shored up its balance sheet with £7.3 billion ($10 billion) of new equity and debt.
In a statement, Warren East, Chief Executive, said,
“2020 was an unprecedented year and I would like to thank everyone at Rolls-Royce for their hard work, dedication and sacrifice to help secure the Group’s future. The impact of the COVID-19 pandemic on the Group was felt most acutely by our Civil Aerospace business.”
He called the restructuring the largest in the company’s recent history, noting that the job losses felt by the company were ‘regrettable.’ Nevertheless, he remained optimistic for the future, commenting that,
“We continue to invest in developing market-leading technology and low carbon opportunities in all our end markets, to create value for our stakeholders and ensure we are well-positioned to take advantage of the transition to a lower-carbon economy and growing demand for more sustainable power solutions.”
Looking ahead to a cash positive future
Despite a difficult year, Rolls-Royce considers that it has done enough to survive the impact of the pandemic. It believes that its cash burn is under control and that with around £9 billion ($12.6 billion) in available liquidity, it is well-positioned to ride out the crisis, regardless of how long it continues to challenge the company’s profits.
East told Simple Flying that,
“I believe 2020 marks the low point and the worst is now behind us.”
In terms of cash burn, the company is anticipating turning cash positive in the second half of the year, and hopes to generate at least £750 million ($1.1 billion) in 2022. Of course, this is dependent on the speed of the recovery, and the success of its ongoing restructuring program. East continued,
“Looking to the future, as we have all heard from many of the airlines, the pace and timing of the recovery remains uncertain, but progress on vaccines and testing is encouraging. We updated our expectations for 2021 in January to reflect the impact of new virus variants and national lockdowns, and our view of this year is unchanged. We expect engine flying hours to recover in 2021 to an average of 55% of 2019 levels. Looking out to 2022, we now estimate engine flying hours will reach around 80% of 2019 levels, compared with our forecast in October last year of 90%.
“We are still expecting a free cash outflow of around £2bn for 2021 as a whole, as we said in January. We believe we will turn cash flow positive at some point in the second half of the year, as vaccinations and testing allow more routes to reopen. Our ambition remains to achieve free cashflow of £750m as early as 2022. That excludes any proceeds from the disposal programme which we announced in August last year.
“There are good reasons for optimism about our position as commercial aviation recovers. Our relatively young Civil Aerospace widebody engine fleet – with an average age of less than 9 years – provides some level of protection from the risk of premature aircraft retirements and it also means that our engines are being used more than older, less efficient, ones.”
Rolls-Royce’s prediction of large engine flying hours to increase this year to around 55% of 2019s levels is largely in line with predictions from other organizations. In 2022, it hopes to be back to 80%, although it admits that engine deliveries will remain stunted for several years.
Nevertheless, the engine maker is keenly looking ahead to a better future, and remains positive for a swift and solid recovery in the second half of the year.