Yesterday’s Sunday Times article together with the separate editorial piece questioning whether Rolls-Royce would survive the current aviation industry turmoil without state intervention and that talked up ridiculous suggestions such as the possibility of a “long mooted’ takeover by Pratt & Whitney together with the amazing nonsense suggestion that “another possibility gaining traction amongst some in Whitehall: [that of] merging Rolls-Royce with Airbus” is the worst piece of unsubstantiated, speculative, insensitive and potentially damaging rubbish that I have ever had the misfortune to read. I expect much better from the Sunday Times than a piece such as this!
That Rolls-Royce has, along with all other companies engaged in the international commercial aircraft and component manufacturing arena together with airlines, airports and all those engaged in and around the aviation sector, been severely impacted due to the C-19 pandemic globally and has in the process been forced to adapt and change in order to survive is certainly not disputed.
It is a pity then that, rather than concentrate on the enormous effort that Rolls-Royce senior management have and are continuing to put in in order to ensure that the company can and will come out on the other side of C-19 and able to prosper, yesterday’s Sunday Times article along with the separate editorial piece centred on what I regard as misguided, inappropriate and damaging view suggesting that “due to the pandemic, the prospect of Rolls-Royce losing its independence, or requiring state support, has become less of a moonshot than at any time in recent history”.
Some of the many things that Rolls-Royce has done in order to mitigate and manage its way through the C-19 crisis have included cutting the workforce by around 17% (9,000 jobs). That resizing of the global business comes on top of 10,000 posts eliminated in recent years together with closure of sites – all of this in order to make the group more efficient and competitive for the future. That the direct result of C-19 would be that demand for commercial aircraft engines declining by more than one third and worse, engine flying hours during the worst of the pandemic falling by 75% required that the company take further robust action in order to secure its future and those of the highly skilled people it will continue to need. Other actions including shutting down for two weeks in the summer period have also ben proposed.
Addressing future liquidity needs has also been important. During the final quarter of FY2020 Rolls-Royce completed a massive refinancing of its balance sheet and cash flow requirements. This included, as to be fair the Sunday Times article did point out, £300 million from Bank of England Covid Corporate Financing Facility, £2 billion of export credit guarantees designed to underpin bank loans, raised a further £3 billion borrowings and completed a £2 billion rights issue from shareholders. Bottom line is that these actions combined have provided £9 billion of available liquidity for Rolls-Royce and which you, as you will see referred to below in the trading statement issued by the company just three weeks ago and in which CEO Warren East also told investors that FY2020 group free cash flow had remained in line with previous guidance.
In addition, Rolls-Royce has announced some subsidiary disposals and others are planned. Yes, additional loans taken on by the company will at some point need to be repaid and no one is denying that. But it is regrettable to me that there was little or no mention in the Sunday Times articles that during the final stages of what has been a long well-thought through and very necessary five year restructuring of operating activities combined with the more recent work of responding to the C-19 pandemic impact that there is no suggestion that Rolls-Royce has put itself in the position of being well-placed to weather the remaining part of this storm albeit that the author was forced to admit in the piece that, “few think it [RR] is likely to go bust any time soon”.
As mentioned above, it is just short of three weeks [on the 26th January to be precise] that Rolls-Royce provided shareholders with the following trading statement:
“Trading in December was broadly in line with expectations across all business units and we delivered good progress on our restructuring programme. Full year 2020 Group free cash outflow was in line with previous guidance, and in-year cash cost savings of more than £1 billion were achieved from our mitigating actions. Year-end liquidity was approximately £9 billion, at the upper end of the previously guided range.
Continued progress on vaccination programmes is encouraging for the medium-term recovery of air traffic and economic activity. In the near-term, however, more contagious variants of the virus are creating additional uncertainty. Enhanced restrictions are delaying the recovery of long-haul travel over the coming months compared to our prior expectations, placing further financial pressure on our customers and the wider aviation industry, all of which are impacting our own cash flows in 2021.
In this environment, financial forecasts remain highly sensitive to changes in external conditions and, while we are continuing to drive cost reduction, our current forecasts indicate a free cash outflow in the region of £2 billion in 2021. This is based on 2021 widebody engine flying hours at around 55% of 2019 levels (compared to the base case of 70% presented on 01 October 2020). Though significant uncertainty remains over the precise shape and timing of the recovery in air traffic and the phasing of engine (OE) concession payments, free cash outflow this year is forecast to be heavily weighted towards the first six months. We continue to expect to turn cash flow positive at some point during the second half, reflecting our forecasted profile of flying hours as they recover from today’s low base.
With liquidity of approximately £9 billion, we are confident that despite the more challenging near-term market conditions we are well-positioned for the future. We remain focused on completing our restructuring programme and footprint consolidation as well as maintaining cost control and capital discipline. During 2020 we removed around 7,000 roles, making good progress towards our target to remove at least 9,000 roles by the end of 2022. This restructuring will be a key enabler of our target to deliver at least £750 million of free cash flow (excluding disposals) as early as 2022, contingent on the expected recovery in engine flying hours.”
Apart from producing a raft of speculative and damaging views that are so easy to make and are not only wrong in their assessment of facts as well as being potentially damaging to the customer and investor alike let alone causing additional angst by those employed at Rolls-Royce, there is little or no mention at all of the ongoing and very successful parts of Rolls-Royce that include Defence, Nuclear and Energy which continue to trade very well.
To many this article, along with the separate editorial piece, harp on what is so easy to say or suggest but that in reality, has no foundation whatsoever. Neither, I might add, does any contrast with what Rolls-Royce is moving through today and what the company was forced to traverse through political misjudgements and that led, to the trauma suffered exactly fifty years ago this month. This isn’t the first and neither I suspect will it be the last time that we hear wild unsubstantiated and damaging speculation of a potential merger of Rolls-Royce with another big international aero-engine company.
As to the separate editorial claims “of the ‘city’ bubbling with rumours that Rolls-Royce could be forced into a merger with Airbus” and that “such a tie up might have attractions for ministers” I do wonder what planet the author of such remarks is living on.
Airbus is a truly great European company of course and one whose UK activities be they wing production, defence or space are hugely important for all of us. It has a long and indeed, very strong relationship with Rolls-Royce which is the engine supplier to its wide-bodied jets. But, just as many companies impacted by C-19 have been, Airbus is also one that is in no position to take on additional risk. Neither, in my view, would such a perceived arrangement be politically acceptable or desirable from a UK standpoint.
Rolls-Royce is a hugely important international company and one that has a diverse spread of activities that add to the underlying strength and value of the company. I am in no doubt whatsoever that having a strong management team that includes the appointment announced this very morning of a new Finance Director in the form of Panos Kakoulilis, until recently the former global head of Deloitte Audit and Assurance Practice, and who in May will take over the role from the current incumbent, Stephen Daintith, Rolls-Royce will not only survive as an independent but importantly, when it does emerge out of the C-19 crisis, it will prosper.
The reality is that Rolls-Royce is today financially and operationally strong. The aviation industry will recover from the impact of C-19 eventually and it will also be demanding of new generation aircraft propulsion systems that are more efficient from a cost of operation perspective and that meet new and demanding environmental standards.
Rolls-Royce has never stopped investing in its future and neither will it. The company has and continues to invested in new technology and future engine design and while the next generation UltraFan engine development is to be put on ice when testing concludes next year and until a next generation aircraft development is announced, Rolls-Royce when testing concludes next year, the company is also well engaged on hybrid-electric engine concept developments as well as hydrogen technology.
CHW (London – 15th February 2021)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785