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Rolls-Royce – Managing Change- Building A Better Company for the FutureBy Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.





Never before and particularly in a period of just six months has Rolls-Royce been forced to witness such a dramatic period of necessary change that was not of its own making. Time has been of the essence and the result of change has required the most radical transformation of the civil aerospace business ever seen.

First Half 2020 results this morning are I suspect final confirmation if it was needed not only of the unprecedented and hugely damaging impact that COVID-19 has had on Rolls-Royce but also the impact that the pandemic has had on the wider aerospace industry as a whole.

In response and in order to protect its future, mitigate damage, adapt to reduced demand expectations Rolls-Royce was very quick to action a response to the situation that it faced.

While the extent of reported H1 losses announced today will undoubtedly make headline news suffice to say that actions already taken by Rolls-Royce that include the planned loss of 9,000 jobs worldwide have already resulted in a £8.1 billion boost to liquidity, some £1 billion of planned cash savings in 2020, stopping payment of the final FY2019 dividend payment and making no interim dividend payment, implanting a 10% salary deferral and importantly, a 20% cut in executive and senior management pay.

Unprecedented times across the whole aviation industry but Rolls-Royce is a company that never has and never will stand still. Caused by substantially lower aircraft utilisation and early retirement of many older aircraft, the reported underlying operating loss of £1.7 billion includes a £1.2 billion direct COVID-19 impact on civil aerospace activities.

But while material uncertainty remains over timing and shape of any recovery, I for one take the view that having successfully weathered the storm through what is likely to have been the toughest period that the company will have faced, the worst is now behind Rolls-Royce.

Such views are in part born out from cash flow expectations particularly given that while cash outflow was £2.8 billion in the first half period this year, the expectation is for H2 outflow is much smaller at £1 billion. Indeed, the company anticipate a return to positive cash flow in the second half of next year and this extending to positive cash flow of £750 million in 2022.

Rolls-Royce also believe that the worst is behind them in respect of the severity of COVID-19 related impact on widebody engine flying hours. This is hugely important and having dropped by 80% at the lowest point in April and down 75% in the second quarter period, while the company expect widebody engine flying hours to be down 55% for the year as a whole they also expect a gradual improvement to be witnessed in 2021 and 2022.

Having announced a major reorganisation in May in order to adapt to new and reduced levels of demand and that, as a direct result, wills see at least 9,000 roles from a 52,000 global workforce being lost, let no one accuse Rolls-Royce of being slow to react.

In addition to the savings generated from headcount reduction the company has also planned to cut expenditure right across plant and property, capital and other indirect cost areas. The company anticipated that these actions combined would generate annualised savings of more than £1.3bn. As the largest reorganisation of civil aerospace activities in its history and that when completed represent a one-third cut (8,000) cut in the total number of employees in this division, the fast and decisive moves that Rolls-Royce has taken to transform civil aerospace and protect its longer-term future are by any standards imaginable, very impressive.

Add to this the savings benefits created by reduction in plant, property, capex and indirect costs and the proposal to consolidate 11 facilities into six including all widebody assembly and test in Derby together with having aligned the hedge book to better match the medium term outlook and taken £1.1bn of impairments and write-offs in order to reflect impact of reduced demand on profitability of engine programmes/airline contracts, and one begins to understand the intensity of actions that have already been taken or set in train.

Rolls-Royce is fully aware of the need to rebuild its balance sheet for the longer-term and has already proposed actions such as disposing of ITP Aero and with potential sales of other assets not having been ruled out. That additional options in order to strengthen the balance sheet may be required has not been ruled out by the company.     

Rolls-Royce strategy has long been based on being a broad-based power company and so it remains today. Defence activities remain resilient and accounted for 30% of group first half revenue. While performance in power systems declined in H1 period these activities remain a very important part of the future Rolls-Royce.

Of course, the forward strategy cannot be solely based on recovery -it must also comprise ongoing technology development. Last week the company announced the strengthening of its strategic partner with Reaction Engines. As I wrote in a commentary piece last week in respect of the B-52 re-engining competition, the Rolls-Royce North America Defense has significant opportunities in the US.

Looking ahead, with support from the UK Government and others for low carbon transition – the company is very well positioned with its net zero emission plans and that include electrification, hybrid work in Power Systems, Small Modular Reactors, Sustainable Aviation Fuels and rightly believes there are huge opportunities ahead, Suffice to say that in respect of change and broader forms of power transition, no other company has a better capability to provide low carbon power solutions than Rolls-Royce.  

Results Statement

Presenting the 2020 Interim Results CEO Warren East said:

“We ended 2019 with good operational and financial momentum. However, the COVID-19 pandemic has significantly affected our 2020 performance, with an unprecedented impact on the civil aviation sector with flights grounded across the world. We have responded rapidly to increase our liquidity, with £6.1bn at the end of H1 and a further £2.0bn term loan agreed in H2, to help weather the continued uncertainty around the timing and shape of the recovery in the civil aviation sector. We have made significant progress with our restructuring, which includes the largest reorganisation of our Civil Aerospace business in our history. This restructuring has caused us to take difficult decisions resulting in an unfortunate but necessary reduction in roles. These actions will significantly reduce our cost base, which combined with recovery in Power Systems and continued resilience in Defence, will help us to deliver significantly improved returns as the world recovers from the pandemic.

While our actions have helped to secure the Group’s immediate future, we recognise the material uncertainties resulting from COVID-19 and the need to rebuild our balance sheet for the longer term. We have identified a number of potential disposals that are expected to generate proceeds of more than £2bn, including ITP Aero and a number of other assets. Furthermore, in light of ongoing uncertainty in the civil aviation sector, we are continuing to assess additional options to strengthen our balance sheet to enable us to emerge from the pandemic well placed to capitalise on the long-term opportunities in all our markets.”

Financial Summary

·             Underlying revenue of £5.6bn, down 24%, and reported revenue of £5.8bn, down 26%.

·             Underlying operating loss of £ (1.7) bn including one-off charges of £ (1.2) bn in Civil Aerospace, largely related to COVID-19.

·             Reported operating loss of £ (1.8) bn included £ (1.1) bn impact from impairments and write offs and £ (366) m restructuring charges partly offset by a £498m exceptional credit on the Trent 1000 programme, driven by COVID-19.

·             US$10.3bn reduction in FX hedge book to US$26.2bn to reflect lower forecast US$ receipts; resulting in a £1.46bn underlying financing charge.

·             Reported loss before tax of £ (5.4) bn included £ (2.6) bn non-cash loss from the revaluation of our FX hedge book; Underlying loss before tax of £ (3.2) bn.

·             Reported post-tax loss of £ (5.4) bn; Underlying post-tax loss of £ (3.3) bn.

·             Free cash outflow of £ (2.8) bn; 47% lower large engine flying hours and significant working capital outflows including £1.1bn negative impact from our choice to cease invoice discounting.

·             Liquidity of £6.1bn comprising £4.2bn of cash at 30 June, and £1.9bn undrawn revolving credit facility (RCF). Additional £2.0bn undrawn term loan announced in July and finalised in August.

·             Net debt of £ (1.7) bn excl. lease liabilities (FY 2019 net cash of £1.4bn).

·             Free cash outflow of approximately £ (1) bn expected in H2 reflecting an acceleration of cost mitigations, resulting in approximately £ (4) bn FY 2020 outflow.

Decisive Actions Taken

Significant H1 impact from COVID-19; timing and shape of industry recovery remains uncertain

Successful execution of cost mitigations; £350m delivered in H1 towards £1bn 2020 target

Fundamental restructuring of Civil Aerospace; > 4,000 group headcount reduction by 27 August

Defence remained resilient; Power Systems experienced disruption in some end markets

Rapid actions taken to strengthen liquidity; £6.1bn at end H1 and £2.0bn loan agreed in H2

Targeting potential disposals to raise at least £2bn, including ITP Aero and other assets

Reflecting uncertainties, reviewing a range of options to further strengthen our balance sheet


We have taken quick and decisive actions to address the unprecedented impact of COVID-19 on our business. We increased liquidity with £4.2bn new debt facilities and have taken rapid actions to save £1bn of in-year cash costs in 2020. Civil Aerospace is undergoing the largest restructuring in our corporate history. We are taking steps to rebuild our balance sheet so we can emerge well positioned to take the Group forward and capitalise on the long-term growth opportunities in our markets. 

Financial Guidance:

Our financial guidance reflects our current view of the most likely scenario in an uncertain current market environment. It is dependent on delivery of our restructuring programme benefits as well as the resumption in civil aviation activity detailed above.

·             Underlying revenue in 2020 approximately 25-30% lower than the prior year.

·             2020 free cash outflow of approximately £ (4) bn, reflecting the impact of COVID-19 on engine flying hours and other aftermarket activity in Civil Aerospace, the decision to cease invoice discounting (£1.1bn at FY19), and a large working capital outflow due to lower activity levels.

·             Year-end 2020 liquidity of around £6bn, reflecting an H2 free cash outflow of around £ (1) bn, restructuring costs of approximately £ (400) m and repayment of a US$500m bond.

·             FY 2020 net debt, excluding leases, approximately £ (3.5) bn (FY 2019: £1.4bn net cash).

Beyond 2020:

·             Targeting a return to positive free cash generation during H2 2021; FY 2021 free cash outflow at significantly reduced levels compared to FY 2020.

·             Targeting a return to annual free cash flow of £750m as early as 2022.

The cash flow targets for 2021 and 2022 exclude the impact of potential disposals but are stated after the hedge book cash settlement costs, previously announced in July 2020, of approximately £300m in each of 2021 and 2022 (with the balance of £750m of cash settlement costs paid by 2026).

We are assessing a number of forecasting scenarios given the uncertain market environment. To the extent that market recovery is delayed, our 2021 and 2022 targets would also be delayed. Each percentage point variance to our large engine flying hour estimates has around a £30m impact on flying hour related cash receipts.


Uncertainty remains high as a result of COVID-19, particularly around the easing of travel restrictions and the pace of economic recovery. Our recovery assumptions are based on a gradual recovery in civil aviation activity commencing towards the end of H2 2020. Most Power Systems end markets are currently expected to recover by the end of 2021 and revenues are expected to be back to 2019 levels in 2022. Defence performance is expected to remain resilient throughout the period.

Since the low point in April when large engine flying hours were down 80%, we have seen a modest recovery to between 70% and 75% down in May, June and July.  An overview of our base case expectations for the key Civil Aerospace metrics is detailed below, while recognising there is material uncertainty around the future timing and shape of the recovery. In reaching these expectations we have considered current airframer build rates, industry and macroeconomic forecasts, together with bottom-up analysis of our fleet. Beyond 2022, we expect large engine deliveries to gradually increase, albeit remaining below 2019 levels until the middle of the decade.

The cash flow targets for 2021 and 2022 exclude the impact of potential disposals but are stated after the hedge book cash settlement costs, previously announced in July 2020, of approximately £300m in each of 2021 and 2022 (with the balance of £750m of cash settlement costs paid by 2026).

We are assessing a number of forecasting scenarios given the uncertain market environment. To the extent that market recovery is delayed, our 2021 and 2022 targets would also be delayed. Each percentage point variance to our large engine flying hour estimates has around a £30m impact on flying hour related cash receipts.  

CHW (London – 27th August 2020)

Howard Wheeldon FRAeS 

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon



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