Rolls-Royce says new Covid-19 strains will slash travel this year

Rolls-Royce has slashed its forecast of flying hours and expects to burn through £2bn in cash this year, as uncertainty about the new coronavirus variants and increased travel restrictions put the brakes on a recovery in air travel.

The engine-maker said it expects engine flying hours to be about 55% this year compared with pre-Covid levels in 2019.

The latest forecast is significantly down on the prediction made by Rolls-Royce, whose business model relies heavily on the number of hours its engines spend in the air, in October of a base case of flying hours this year running at 70% of the 2019 level.

Shares fell 9% after the update on Tuesday, making Rolls-Royce the biggest faller on the FTSE 100.

“Continued progress on vaccination programmes is encouraging for the medium-term recovery of air traffic and economic activity,“ the company said in a trading update. “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 cashflows in 2021.”

Rolls-Royce, which in October announced a £5bn emergency funding plan to weather the pandemic-fuelled slump in demand for its engines, said the reduction in flying hours means it expects to see an increased free cash outflow of £2bn this year. The company said it expects the cash burn to be steepest in the first half of the year and become cashflow positive as flying hours pick up in the second half.

“Significant uncertainty remains over the precise shape and timing of the recovery in air traffic,” the company said. “We continue to expect to turn cashflow positive at some point during the second half, reflecting our forecasted profile of flying hours as they recover from today’s low base.”

The company insisted it had a strong enough balance sheet to weather a delayed recovery in the aviation industry.

“With liquidity of approximately £9bn, we are confident that despite the more challenging near-term market conditions we are well positioned for the future,” the company said.

Rolls-Royce said it has cut 7,000 of 9,000 jobs, the biggest restructuring in the company’s history, which will save £750m annually upon completion in 2022.