Daily Management Review

Covid-19 Crisis Forced Rolls-Royce To Burn Through £3bn Cash


Covid-19 Crisis Forced Rolls-Royce To Burn Through £3bn Cash
The novel coronavirus pandemic has forced the aerospace unit of the Rolls-Royce to burn through £3bn in cash within a period of just six months,  the company said while also warning that it could be several years before the company would recover from the crisis.
3,000 of its employees in the United Kingdom of the company had applied for voluntary redundancy and about 2,000 of those employees are set to leave the company by the end of August, Rolls-Royce said. These job cuts are part of the wider plan of the company to reduce its workforce by 9,000 globally because of the pressure on the company form the pandemic. About two thirds of those planned job cuts will be from the UK. 
The total staff strength of the company globally was at 52,000 before the job cuts were announced.
“These are exceptional times. The Covid-19 pandemic has created a historic shock in civil aviation which will take several years to recover. We started this year with positive momentum and strong liquidity and acted swiftly to conserve cash and cut costs to protect Rolls-Royce during the pandemic. This means we have had to take the very difficult decision to lose people who have helped us become the company we are and who have been proud to work for Rolls-Royce,” said Warren East, the company’s chief executive.
During the first half of the year, the cash flow of the company had been significantly negatively impacted because of the raging pandemic situation worldwide. The restrictions ion on air travel imposed all across the world because of the pandemic has badly affected the business unit’s revenue generation because a major part of the unit’s revenues come from charging some companies based on the amount of time its engines are in the air.
There was a 75 per cent year on year fall in engine flying in the second quarter, Rolls-Royce said. It was also 50 per cent lower for the first six months of the current year compared to the same period a year ago. The decline in engine flying hours and fewer engine deliveries resulted in the unit’s revenues for the first half of the year falling by £1.1bn, the company said.
Additionally, after ending a practice known as invoice factoring, the company took a further £1.1bn.
It anticipates to burn through £4bn worth of cash by the end of 2020 in total, Rolls-Royce said.
With more long-haul flights expected to restart in the fourth quarter, the company expects to experience a “gradual improvement” in engine flying hours. It also expects to save on more cash in the second half of the year.  However, over the next seven years, there will be a significant hit to income from its US civil aviation, the company said.
 “Rolls-Royce is at the sharp end of current disruption. A business model that relies heavily on the number of hours its engines spend in the air is a tough deal in the face of international travel disruption. Engine flying hours are expected to be down 55% for the full year, and aren’t expected to normalise for a while after that. By 2021 engine flying hours are only expected to be at 70% of pre-pandemic levels,” said Sophie Lund-Yates, an equity analyst at Hargreaves Lansdown.