Rolls-Royce reports record £5.4bn loss as Covid-19 hits aviation

Several production sites to close after slump in demand for jet engines

The jet engine maker Rolls-Royce gave a stark warning about the impact of the Covid-19 pandemic on the business as it reported a record £5.4bn loss for the first half of the year.

The company does not expect orders to recover to pre-Covid levels until 2025. The pandemic led to a slump in demand for its engines as airlines reduced flights and aircraft manufacturers slowed production.

Rolls-Royce originally expected to make 450 engines during 2020 but now plans to deliver just 250.

It continues to burn through cash, and expects to have burned through £4bn by the end of the year, and said it may not be able to find enough funding to cover its needs.

Announcing its results for the first half of the year, it said: “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.”

Rolls-Royce is undertaking the largest restructuring in its history and, as a result, will close several production sites, including Barnoldswick, in Lancashire, and Annesley, in Nottinghamshire, as it consolidates its operations.

Rolls-Royce previously announced plans to cut 9,000 jobs globally, more than 15% of its workforce, because of the pandemic, with UK staff making up two-thirds of the total.

The company said 2,500 of its UK workers had applied for voluntary redundancy or agreed to take early retirement, substantially reducing the need for compulsory redundancies.

To date, 4,000 people in its civil aerospace business have left the company, reducing its global workforce to 48,000; a further 5,000 are due to leave before the end of the year.

Rolls-Royce predicts pre-tax savings of at least £1.3bn by the end of 2022 from its restructuring programme. As part of the attempts to shore up its balance sheet for the longer term, it is looking to sell at least £2bn worth of assets, including the Spanish engine maker ITP Aero.

The company said it had taken decisive action when the pandemic began to affect its business, such as its restructuring programme, but it only expected deliveries of large engines to increase from 2022.

Alongside its results Rolls-Royce announced that its finance chief, Stephen Daintith, was leaving after less than four years to join Ocado, the grocery delivery company.

The company said its defence business had remained resilient during 2020 and demand from its key government customers was unchanged.

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Covid-19 has had an “unprecedented impact on the civil aviation sector”, said the Rolls-Royce chief executive, Warren East.

The restructuring “will significantly reduce our cost base, which, combined with recovery in power systems and continued resilience in defence, will help us to deliver significantly improved returns as the world recovers from the pandemic,” he said.

The amount of cash Rolls-Royce is burning through is “simply unsustainable”, said Saj Ahmad, chief analyst at aviation consultancy StrategicAero Research. “Its strategy to sell off assets to generate cash is a limited option – what will they do when there’s nothing left to sell?”

Managing the fallout from the coronavirus crisis will be East’s greatest challenge at the jet engine maker, said Julie Palmer, a partner at insolvency firm Begbies Traynor.

“With its reputation currently diminishing, shareholders starting to bail out and the full force of Covid headwinds yet to come, East still has a lot of work to do to make sure Rolls-Royce can ride out the storm,” she said.

The company said it would scrap its dividend while the economic outlook remained uncertain.

Contributor

Joanna Partridge

The GuardianTramp

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