Rolls Revises Maintenance Contract Revenues
COVID-19 has more or less sunk the long-haul passenger market since the pandemic began, meaning that the half-year results for Rolls-Royce were always going to be painful given the importance of the company’s ‘Power by the Hour’ maintenance contracts.
And while its defense arm was largely unaffected, the British OEM’s core civil aerospace division swung to a £1.83 billion (US$2.45 billion) operating loss for the first six months, after almost breaking even in the prior-year period.
The first half 2020 loss was hugely influenced by what the company termed “contract catch-ups” on its long-term service agreements (LTSAs). Rolls-Royce booked an £814 million ($1.08 billion) hit to operating profit due to predicted lower LTSA revenues in the medium term because of reduced flying hours and the risk of aircraft being parked.
Other “one-off” COVID-19 impacts to profit included a £309 million ($413 million) increase in future losses expected on some contracts, and a £95 million ($127 million) provision against potentially unrecoverable customer debts.
The most upbeat the company could be was to predict that civil aerospace would return to positive cash generation in 2022 under its base case forecast, which envisages an increase in engine flying hours to 70% of 2019 levels in 2021 and to 90% in 2022.
However, under the OEM’s “severe but plausible downside scenario,” a second wave of COVID-19 infections results in renewed lockdowns and travel restrictions and 64% lower flying hours in 2020 than in 2019--versus the 50% currently expected.
In this scenario the company believes it has enough cash to survive for 12 months, after which it would need to renew its £1.9 billion ($2.54 billion) revolving credit facility, which forms part of its £6.1 billion ($8.15 billion) of current liquidity.
To boost this war chest Rolls-Royce is now pursuing asset sales of £2 billion ($2.67 billion), including Spanish engine component manufacturer ITP.