Jet engine maker Rolls-Royce (RR.) has endured a torrid first six months to the year as Covid-19 has brought the civil aerospace industry to its knees. Its ‘power-by-the-hour’ business model – whereby engines are sold at a loss and earn revenue according to how long they spend up in the air – has been upended. With airlines around the world grounding their fleets, a July trading update revealed engine flying hours collapsed by 50 per cent in the first half of the year. We are therefore braced for some ugly numbers when its interim results are released on 27 August, with some hefty impairment charges likely to appear.
At the same time, Rolls has been haemorrhaging cash. On the back of a £3bn free cash outflow, the group may need to tap shareholders for additional funds, with speculation it will undertake a £1.5bn rights issue. Analysts at JPMorgan believe Rolls will need “at least £6bn (through equity sales and disposals) to put itself on a sound footing.” It is rumoured that Spanish subsidiary ITP Aero will be put up for sale.
As plane makers Airbus (FR:AIR) and Boeing (US:BA) cut production rates and civil aviation faces a potential multi-year downturn, it will take a lot to stop investors heading for the emergency exit – as things stand, Rolls’ shares are down almost two-thirds from the beginning of the year.
