Rolls-Royce hit by £4bn loss: Boss says firm will thrive post lockdown

Rolls-Royce plunged to a £4billion loss last year after the collapse in air travel hammered its engines business.

The UK’s premier engineering firm warned the recovery this year would be even slower than expected after a second wave of the pandemic led to more flight cancellations.

But boss Warren East was in fighting mood and said the company was in a position to ‘thrive, not just survive’ and had built up enough cash to deal with any further setbacks.

Engine trouble: Rolls-Royce warned that the recovery this year would be even slower than expected after punishing second waves of the pandemic led to more flight cancellations

Rolls makes half its revenue from servicing plane engines. It is paid for the number of hours its engines fly, in what are dubbed ‘power by the hour’ contracts.

But turnover tumbled by 29 per cent to £11.8billion as air traffic was disrupted worldwide. The £4billion loss – which compares with a £583million profit in 2019 – was worse than analysts had expected.

In an effort to get through the crisis, Rolls kicked off a huge restructuring last May that included cutting 9,000 jobs from its 52,000-strong workforce and selling parts of the business worth £2billion. 

Rolls has also raised £7.3billion – which included arranging loans and selling new shares – and has access to £9billion.

But at its lowest point last year, the Derby-headquartered company admitted it could struggle to survive if the downturn continued. 

Rolls has been burning through cash, £4billion in total last year, and expects to go through another £2billion in 2021.

In an effort to get through the crisis, Rolls kicked off a huge restructuring last May that included cutting 9,000 jobs and selling parts of the business worth £2bn

But East yesterday said the £9billion cushion was ‘more than ample to last us if flying doesn’t pick up this year or next year, even if there’s no recovery from here over the next couple of years’.

In 2020, Rolls engines flew just 43 per cent of their normal hours. The company has revised down its forecasts for flight hours this year, which the company expects to run at about 55 per cent of 2019 levels. 

This is down from estimates of 70 per cent in October. And in the same set of forecasts yesterday, Rolls predicted flight hours would be at 80 per cent in 2022.

However, the company also warned there was a ‘severe but plausible’ scenario that they could be 40 per cent in 2021 and 70 per cent in 2022. 

Rolls said that while it was optimistic about the rollout of vaccine programmes, there were still ‘uncertainties’ around new, and possibly more deadly, variants of Covid.

Air travel is expected to take years to get back to 2019 levels – but Rolls is at another disadvantage because it makes engines for bigger planes that fly on long-haul routes. This part of the market is expected to take even longer to recover.

Hargreaves Lansdown analyst Laura Hoy described the results as ‘brutal’ and said investors could ‘forget about a dividend any time in the near future’.

Hoy said: ‘No amount of cost-saving and restructuring was enough to offset massive declines in civil aerospace, the group’s largest division.

‘Defence was the only bright light, but it makes up less than 30 per cent of overall revenue so its 8 per cent uptick in profits was buried under heavy losses in all of the group’s other segments.’

The company’s ‘power by the hour’ business model also came under fire from analysts yesterday.

Jack Winchester, analyst at investment research firm Third Bridge, said: ‘What we’ve seen over the past year is the inherent fragility of Rolls-Royce’s business model – when you sell engines to customers at a loss, you are very dependent on your aftermarket ‘power by the hour’ business.’

East told the Mail that the company had considered other sorts of deals it could strike with customers – such as having a ‘minimum usage’ charge on some contracts. But he said there were ‘no plans to radically change the business model’.

Away from civil aerospace, Rolls is also trying to establish itself as a leader in building small nuclear reactors and developing green flight technology.

Yesterday Rolls announced it had joined forces with Scandinavian carrier Wideroe to launch an all-electric plane by 2026.