Rolls-Royce plunges into the red with £4 billion loss for 2020

British engine maker hit by drastic reduction in airline flying times during pandemic

The Rolls-Royce factory at Allenton, Derby, in central England. The British aircraft engine maker has been hit by the fallout from the coronavirus pandemic. AFP

British jet-engine maker Rolls-Royce plunged into the red last year with a loss of £4 billion ($5.6bn) as the company suffered a “severe” blow from the Covid-19 pandemic when airlines stopped flying.

The underlying pre-tax loss, which compares with a profit of £583 million ($814m) in 2019, was driven by the company’s “power by the hour” model of charging some airlines for the amount of time its engines fly.

It meant Rolls-Royce’s income was instantly affected when airlines across the globe grounded their planes at the start of the pandemic, with flying hours on wide-body airliners – such as the A380 – at just 43 per cent of the usual time last year.

Warren East, chief executive at Rolls-Royce, called 2020 “an unprecedented year” and said the effects of the pandemic were felt “most acutely” by its civil aerospace business.

“In response, we took immediate actions to address our cost base, launching the largest restructuring in our recent history, consolidating our global manufacturing footprint and delivering significant cost-reduction measures,” he said.

“We have taken decisive actions to enhance our financial resilience and permanently improve our operational efficiency, resulting in a regrettable, but unfortunately very necessary, reduction in the size of our workforce.”

Britain's best-known engineering company, which also makes engines for ships and powers the UK's nuclear submarines, successfully completed taxiing trials of the company's all-electric plane earlier this month ahead of its first test flight in spring.

Powered along the runway by a 400-kilowatt electric engine and the latest battery technology, the tests form “part of an exciting new chapter in aviation”, according to the UK’s Minister for Business Paul Scully.

However, the company was hit particularly hard by the downturn in travel because it focuses on producing engines for the largest long-haul planes, such as the A380, a sector of travel expected to take longer to recover.

The company was forced to cut 7,000 permanent and contractor roles by the end of last year, with at least 2,000 more to go by the end of 2022.

Senior managers and executives were also hit with a 10 per cent pay cut, with the company warning in January that its 2021 cash outflow would be worse than expected.

After taking on approximately £5bn ($7bn) of debt last year – through a £2bn ($2.8bn) rights issues and £3bn ($4.2bn) in bonds and loans – Rolls-Royce is planning to repair its balance sheet by selling assets worth £2bn ($2.8bn), the major part of which will be Spain-based ITP Aero.

"Our planned sale of ITP Aero is progressing well with ongoing conversations with a number of potential buyers," Rolls-Royce said.

Adam Vettese, analyst at multi-asset investment platform eToro, said the pandemic continues to be "excruciatingly painful for Rolls-Royce, despite efforts to overhaul its finances".

“In the past year, the engine-maker has seen its revenue slump, pre-tax losses treble and it has piled on the debt. There are hopes that short-term flights will increase in number in the coming months, which would provide relief for Rolls-Royce, but long-haul flight demand will take considerably longer to recover – as will its own recovery," Mr Vettese said.

Mr East said the company had “made a good start on our programme of disposals and will continue with this in 2021”.

In a separate interview with the BBC, Mr East said 2020 “was a year like none other, but we do think the worst is behind us”.

He said the global vaccination drive should result in a pick-up in air travel in the second half of the year, although much will depend on an international agreement on how passenger health is checked.

The company’s loss was much higher than the £3.1bn ($4.35bn) expected by analysts, while revenue tumbled by 30 per cent to £11.8bn ($16.5bn).

Its cash outflow of £4.2bn ($5.9bn) was in line with consensus, and the company said it would improve this year to an outflow of £2bn ($2.8bn), with the figure turning positive during the second half.

That improvement is dependent on flying hours of its wide-body engines reaching 55 per cent of 2019 levels this year, a downgrade from its October forecast of 70 per cent.

Looking ahead to 2022, Rolls-Royce expects flying hours to be at 80 per cent of normal levels, down from an earlier forecast of 90 per cent.

"The near-term outlook remains uncertain and highly sensitive to the developments of the Covid-19 virus and the related measures taken by governments around the world," Rolls-Royce said.