The air travel curbs imposed globally because of the coronavirus pandemic has forced global airlines to ground their planes and this is likely to force British aero-engine maker Rolls-Royce to slash its 2020 cash flow target, said analysts.
Rolls forecast 2020 free cash flow of 1 billion pounds, excluding any material impact from COVID-19 during the last time that the company issued its forecast at the end of February. Analysts noted that since the company receives payments from the airlines on the basis of how many hours its engines fly and because there has been a slump in air travel, therefore it is likely that the company will be forced to change its cash flow forecast.
Thus year, the company’s cash flow could slip into negative territory, said Jefferies analyst Sandy Morris, even after the 400 million pound cost cuts imposed by the company. This estimate by the analyst was based on the reduction of flying hours that could drop by as much as two-thirds for four months of 2020.
However the company has the strength to withstand such a fall, he said. “Given that Rolls-Royce started the year with 1.36 billion pounds of cash it’s not as hamstrung as I think some people portray,” said Morris, who rates the company a “buy”.
The revenue that Rolls earns from spare parts and servicing in its aftermarket business could be impacted because it is likely that airlines would retire many older aircraft earlier than expected, said Vertical Research Partners analyst Robert Stallard, who rates Rolls “sell”.
“While this downcycle is set to hurt all aerospace suppliers, Rolls looks particularly vulnerable in our view. This is a company that was not in the best of financing shape before this downcycle hit,” he said.
With 7 billion pounds of liquidity at the end of 2019, including a 2.5 billion pound credit facility, the financial position of the company was robust, said a Rolls-Royce spokesman. “We are closely monitoring the situation and taking prudent measures to conserve cash, such as reducing or deferring discretionary spend. Our good starting position and the measures we have taken, and will continue to take, give us confidence in the ongoing financial resilience of our business,” he said.
A reduction in its workforce in the United States by 10 per cent was announced last week by General Electric Co’s aviation unit, a rival to Rolls in the market of manufacturing of engines for Boeing and Airbus aircraft.
There were no comments available from Rolls on the issue of furloughing staff under a British government job retention scheme.
The total flying hours on Rolls-Royce powered flights reduced 4,664 hours on March 29 from 20,421 hours on January 3, according to data available from travel data firm Cirium.
(Adapted from Reuters.com)