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Business & Finance

Travel troubles force Rolls-Royce to cut 2021 flight forecasts

  • Flying hours for engines in 2021 lower due to restrictions.
  • Cash outflow seen at 2 billion pounds, more than expected.
  • Roll-Royce still sees positive cash flow in second half.
Published January 26, 2021
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LONDON: Britain's Rolls-Royce lowered forecasts for how much its engines will fly this year as tighter coronavirus travel restrictions inflict fresh pain on airlines, saying this would mean a cash outflow of some 2 billion pounds ($2.7 billion).

Countries around the world have tightened border controls over concerns that new COVID-19 variants are more transmissible, and that vaccines may not work against one from South African.

That has caused a further air traffic drop just as airlines and engine makers were hoping for a recovery, forcing Rolls to issue a trading update just six weeks after its last warning.

The Rolls forecast of a cash outflow of 2 billion pounds is higher than analyst estimates which range from Morgan Stanley's 900 million pounds to 1.55 billion pounds forecast by Jefferies.

Flying hours, Rolls' main revenue stream from airlines as they pay depending on how much they use its engines, are expected to be about 55% of 2019 levels, compared to a base forecast of 70% it gave in October.

"Enhanced restrictions are delaying the recovery of long-haul travel over the coming months compared to our prior expectations," Rolls, whose engines power aircraft like Boeing 787s and Airbus A350s, said in a statement on Tuesday.

The downgrade came after Rolls said in December that 2020's cash outflow would be worse than expected at 4.2 billion pounds and its shares fell 5% to 93 pence at 1125 GMT.

Negative travel news has erased some of the gains made since November when a vaccine was discovered, with Rolls down 18% in the last month.

"Challenging conditions in the broader industry mean there may be incremental disappointments in a number of other areas," Morgan Stanley analysts said in a note.

Rolls said that liquidity of 9 billion pounds gave it confidence it was well-positioned for the future.

Last year, it raised 5 billion pounds from shareholders and in loans to buffer against the uncertain pace of recovery, after some analysts speculated it could be nationalised.

It also plans to sell assets worth 2 billion pounds and is cutting more than 1 billion pounds in costs by axing 9,000 jobs and closing factories.

Rolls stuck to its forecast to turn cash flow positive at some point during the second half of 2021, saying it expected the cash outflow mainly in the first half, and said it remained on track to meet its 2022 cash flow guidance contingent on the expected recovery in flying hours.

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