ii view: Rolls-Royce cuts back as jet groundings bite

by Keith Bowman from interactive investor |

The aero engine maker is now seeking an appropriate cost base for a smaller commercial aerospace market.

AGM trading update

  • Targeting £1 billion of cost savings
  • Now expect to deliver around 250 wide-body engines in 2020, down from 450
  • Previously announced the cancellation of final dividend payment

Chief executive Warren East said:

"In this unprecedented period of uncertainty we have rapidly adapted our business to safeguard its future for all of our stakeholders. We have implemented heightened safety procedures to protect our people and we are providing practical assistance to combat the impact of Covid-19 on the countries in which we operate. 

“We have also strengthened the financial resilience of the group to ensure we are well positioned to weather the pandemic. 

“However, we must also take the difficult but necessary decisions to ensure the group emerges from this period with the appropriate cost base for what will be a smaller commercial aerospace market which may take several years to recover.”

ii round-up:

Aircraft engine maker Rolls-Royce (LSE:RR.) recently flagged job cuts as it continues to readjust the business in the midst of the corona crisis. 

Further details are expected before the end of May, following consultation with trade union and employee representatives. 

It now expects to deliver around 250 wide-body engines to customers in 2020, down from a previous estimate of 450. 

Rolls is paid by its airline customers depending on how many hours they fly. With airlines such as IAG (LSE:IAG) or easyJet (LSE:EZJ) either reducing flights to a trickle or completely grounding their fleet, wide-body flying hours fell by around 90% in April. Flying hours for the first four months of the year are down by around 40% compared with management’s initial estimate. 

Rolls-Royce shares have more than halved over 2020. Airbus (EURONEXT:AIR) and Boeing (NYSE:BA), whose planes Rolls engines regularly power, are both down by around 60% year-to-date.

Cost saving of up to £1 billion are now being targeted, up from a previous estimate of £750 million. 

Measures to combat Covid-19 and conserve cash have included cancelling the 2019 final dividend payment to save £137 million and furloughing over 4,000 of its UK employees. 

A first half trading update is expected to be made in early July, with the interim results scheduled for late August.  

ii view:

The civil aerospace engine business accounts for just over half of group sales. Rolls makes an initial loss on the delivery of each engine and aims to make a profit in the longer-term by including maintenance contracts. Covid-19 is now hitting these returns from engine flight times hard as fleets of aircraft remain grounded. 

For investors, progress in restructuring the company prior to Covid-19 has been seen. As a supplier to the volatile airline industry, Rolls is experienced in dealing with the ebbs and flows. A business model geared towards aftersales has long been established. 

But now, and despite measures to resize the group’s cost base under Covid-19, those aftersales remain pressured. That means any sustainable rebound will rely heavily on the timing of any return to normal service for the airline industry which, currently, is impossible to predict.

Positives: 

  • Diversity of product and geographical end-markets
  • Cost saving restructuring plan being executed

Negatives:

  • Exposure to the volatile airline industry
  • Final dividend payment cancelled

The average rating of stock market analysts:

Hold

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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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