Rolls-Royce has started to feel the pinch from the current crisis. The engine maker has seen 50% of its revenue vanish overnight, as airlines and aerospace builders stop placing aircraft orders and stop paying rent on engines.
What are the details?
Whilst much of the aviation crisis has been focused on passengers scrambling to get home and airlines taking drastic action to survive the storm, there have been several other hidden victims who have received less attention.
Rolls-Royce, famously known for its aircraft engines (and other products), has suffered massively under the crisis.
Half of the company’s revenue was drawn from engine leases to airlines, in which they were paid per flying hour rather than a fixed cost. Airlines would only pay for the engine when it flew, not when it was sitting on the ground.
Unfortunately, due to the mass grounding of airlines, very few Rolls-Royce powered aircraft are in the skies. According to the Telegraph who highlighted this story, 1,580 aircraft operated Rolls-Royce engines at the start of the year, compared to only 468 at the end of March. This means that the firm’s lucrative revenue stream has become a shadow of its former self. It’s likely due to keep falling too.
What actions is Rolls-Royce taking?
The firm has drawn down on its liquid assets, taking a loan out for around £2.5 billion ($3 billion USD) to use as cashflow during this crisis. The company has also removed any executive bonuses and stopped dividend payments to shareholders. It is also consulting with the UK government for special allowances (not ruling out additional credit either) as it is involved with military projects for the UK Navy and Royal Air Force.
The company had already sent 7,500 staff home as it shut down production lines, but it looks likely that Rolls-Royce has little wiggle room. It already downgraded its profits to a loss for the first half of 2020, due to problems with its Trent 1000 engines, and thus this new crisis could not have come at a worse time.
Robert Stallard, an analyst at Vertical Research, said to The Telegraph,
“Rolls has already cut the flab, so now it will have to start cutting the bone. In previous crises, it’s taken many months for demand to come back and this could be very much longer. It’s hard to see Rolls not needing to raise cash.”
Market predictions don’t look good for the future either. With a strong possibility that airlines could end up bankrupt as a result of the crisis, and even fewer ordering new planes, there is not much of a market left for Rolls to exploit.
But this issue might hurt the business more as Rolls-Royce doesn’t build a wide enough range of engines. By only building bigger engines for widebody aircraft, and not for smaller more popular planes like the Boeing 737, it is not well equipped to supply a range of aircraft when the market returns.
What do you think of this news? What should Rolls-Royce do? Let us know in the comments.