Rolls-Royce Holdings PLC (LON:RR.) said it expects another £2bn cash outflow in 2021 if the airline industry gets going in the second half of the year, after burning up more than £4bn and slashing 7,000 jobs last year.
On the upside, the FTSE 100-listed engine maker said year-end liquidity of roughly £9bn was at the upper end of its guidance.
However, the engines maker acknowledged that continued travel restrictions are pushing the recovery of long-haul travel over the coming months back compared to its prior expectations, which it blamed on new Covid-19 strains slowing down the recovery.
This is placing “further financial pressure on our customers and the wider aviation industry, all of which are impacting our own cash flows in 2021”, the company said.
Overseas trips are likely to be ruled out for much of 2021, with new controls expected to be approved by UK prime minister Boris Johnson today, according to media reports.
Rolls-Royce’s cash outflow forecast is based on airline customer’s widebody engine flying hours falling to 45% of 2019 levels. The company had previously given a base case of a 30% decline back in October.
“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-Royce said, expecting to turn cash flow positive “at some point” during the second half.
Boss Warren East plans to remove another 2,000 jobs by the end of 2022 as he looks to deliver at least £750mln of positive free cash flow by that time, though this is contingent on the expected recovery in engine flying hours.
Shares in the company fell 9% in early trade before paring losses as the morning wore on.
UBS said the expected £2bn cash outflow for 2021 was about £500mln worse than the market expected.
"While we believe air travel demand will pick up once the vaccines have been rolled out globally, we see domestic and intra-regional traffic benefitting the most in the near-term, while longhaul and widebody engines should recover in 2023, in our view, and should remain below 2019 levels until 2025," the UBS analysts added.
Analysts at AJ Bell said the latest restrictions on travel in various parts of the world “have tripped up Rolls-Royce just as it was settling into its recovery plan" though while the negative impact on cash flow is unwelcome, “no-one should have expected it to travel a smooth path in early 2021 given the ongoing uncertainty on when the aviation sector will return to better health".
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