Rolls-Royce sees higher cash burn on Covid second wave

Aircraft engine maker Rolls-Royce on Friday warned the second wave of Covid-19 was hampering a recovery in air travel, leading it to lift cash outflow projections.

The company on Friday said cash outflow would be £4.2bn this year, compared with £4bn forecast in August as the recovery in airline travel stalls on the back of increasing coronavirus infections. Rolls-Royce shares slumped 7% on the news.

It maintained full-year guidance, adding it was targeting at least £750m in free cash flow, excluding disposals, as early as 2022 and at least £2bn from disposal proceeds. Rolls said it expected to turn cash flow positive in the second half of 2021 as air travel demand started to recover from the Covid-19 crisis driven by vaccination programmes

Engine flying hours, from which Rolls-Royce derives vital income, were 42% lower in the 11 months to November as the coronavirus pandemic hammered international travel. It also warned that the pace of recovery had slowed due to the second wave of infections.

“We anticipate an improvement in the second half of 2021 as vaccination programmes support the further reopening of borders and economic recovery,” the company said in a trading statement.

Rolls has taken drastic measures to counter the pandemic's impact and strengthen its balance sheet. Earlier this year it announced plans to sell £2bn in assets to cut debt along with a further £1.3 billion in cost cuts, including 9,000 jobs losses and factory closures in response to lower demand from airlines that use its engines.

The company said more than 5,500 roles would be removed by the end of 2020.

Russ Mould, investment director at AJ Bell, said cash, a problem for the engineering group before the pandemic struck at the start of the year, "is flowing out at an alarming rate with the second wave meaning the situation is markedly worse than it thought in August".

“The company is ahead of schedule with its restructuring efforts and is still flagging a return to positive cash flow in the second half of 2021, however there has to be a chance it will be forced to revisit this view too," he said.

“The recovery of the travel industry from Covid is arguably more uncertain than other sectors. There could be considerable divergence in the roll-out of any vaccine and the ongoing handling of infections. This could mean travel limits are in place even after individual countries have largely reopened their economies.

“The market’s willingness to wait for an eventual recovery may be tested if it keeps moving further away, with the ultimate risk the company might need another fix for its balance sheet.”