Rolls-Royce lowers 2021 outlook as new Covid curbs hit travel

Rolls-Royce lowered its forecasts for 2021 engine flying hours and expected a higher cash burn on the back of short-term market uncertainty caused by new variants of Covid-19 and enhanced travel restrictions.

The company on Tuesday revised down forecasts for widebody engine flying hours to 55% of 2019 levels from a 70% estimate last October, adding that it expected to lose £2bn in cash as a result. The company is paid based on how many hours its engines are flown by airlines.

New variants of Covid-19 in the UK, South Africa and Brazil have led to increased travel bans. Britain on Monday was preparing to implement a quarantine for all arriving passengers, with the government warning people not to make any overseas holiday plans.

Rolls-Royce expected to turn cash flow positive “at some point during the second half, reflecting our forecasted profile of flying hours as they recover from today's low base”.

"Though significant uncertainty remains over the precise shape and timing of the recovery in air traffic and the phasing of engine concession payments, free cash outflow this year is forecast to be heavily weighted towards the first six months," Rolls said.

The company, which bolstered its balance sheet through measures including a rights issue last year along with 9,000 job cuts, said it had £9bn of liquidity to ride out the pandemic storm. Of the job losses, 7,000 had already been completed, it added.

It is also trying to raise £2bn from disposals and has so far agreed to offload its nuclear instrumentation business for an undisclosed sum. Among the other assets up for sale are the TP Aero arm and its gas and diesel engines business, Bergen Engines.

AJ Bell investment director Russ Mould said the market would be "keeping a close eye on the state of the aviation industry and whether the second half of 2021 is realistic for a notable increase in the number of planes flying".

"That matters for Rolls-Royce as its real money is made from repair and maintenance work rather than the sale of engines, and that requires planes to be in the sky. There will be increasing pressure on management to get deals struck, given the current backdrop may well be more fragile than the assumptions in last year’s restructuring plan.”