In almost every discussion during our online events or interviews with aviation executives the question of when the recovery will begin and its likely shape is raised. In the summer, most responses revolved around comments about not having crystal balls, but of late opinions have started to solidify as vaccination programmes come online, more data points are gathered and optimism levels rise - the latter despite the news around the world of further lockdowns as cases spike locally.
In a trading update, Rolls-Royce has warned that the recovery will be slow – the engine manufacturer does not expect commercial air travel to recover quickly due to the depressed winter schedules, but hopes that the real recovery will comments by summer 2021 as vaccination programme help to open borders and jump start economic recovery. Demand for the engine maker’s products and services has declined significantly as a larger proportion of the global fleet – particularly widebody aircraft – have been grounded as air travel demand dropped off. The group has made considerable effort in restructuring the business to make cash savings of £1.3bn by 2022, which the company says it is on track to deliver.
Rolls-Royce expects to turn cash flow positive “at some point during the second half of 2021, as we mitigate the uncertainty of the timing and shape of the recovery through cost-saving and capital allocation actions”. The company reconfirmed its target to deliver at leat £750 million free cash flow (excluding disposals) as early as 2022, and will raise at least £2 billion from disposal proceeds. The company has reached an agreement to sell its civil nuclear instrumentation and control business, while ITP Aero and gas and diesel engines business, Bergen Engines, remain on the block.
Rolls-Royce reports that its Civil Aerospace large engine flying hours are gradually recovering. In the 11-month period to end November, large engine LTSA invoiced flying hours (EFH) were approximately 42% of their prior year level. EFH have gradually improved since the trough in April although more recently the pace of recovery has slowed due to the second wave of infections in some geographies. In October and November combined, EFH increased to approximately 33% compared to 2019. In Q3, Rolls-Royce’s EFH were 29% of the prior year, an improvement versus the 24% seen in Q2.
The manufacturer confirmed that it has reduced the pace of production for its large engines and its full-year guidance for approximately 250 deliveries remains unchanged.
Rolls-Royce confirmed a £5bn package in November to increase resilience, strengthen the balance sheet and support its long-term strategy. The package comprised £2 billion of new equity, £2 billion in new bonds with maturity in 2026/2027 and a £1 billion two-year bank facility that remains undrawn. This extended and replaced shorter term facilities including an undrawn £1.9 billion revolving credit facility which was cancelled when the new financing was finalised.
The company expects 2020 free cash flow of approximately minus £4.2bn, resulting in year-end net debt of between £1.5bn and £2.0bn and liquidity between £8.5bn and £9.0bn.
"We have taken decisive actions to protect and reposition our business in difficult and uncertain trading conditions, including the impact from a second wave of COVID-19,” said CEO, Warren East. “We have made rapid progress on our restructuring programme and the consolidation and reorganisation of our Civil Aerospace footprint is well underway. Our £5 billion recapitalisation package in November was well supported and has increased our resilience and strengthened our balance sheet. The outlook remains challenging and the pace and timing of the recovery is uncertain. However, our actions have given us a strong foundation to deliver better returns as our end markets improve and we continue to drive our ambition of delivering more sustainable power to support the creation of a net zero carbon economy."
Rolls-Royce is currently in consultation regarding a proposal to transfer its facility and workforce in Hucknall, UK, which manufactures a range of aero-engine parts, into ITP Aero, which the company describes as a “difficult but necessary” decision that will help generate efficiency savings as well as strengthen ITP Aero's capabilities.