Rolls-Royce has returned to profit, but the engineering group warned yesterday that the rebound in the aviation industry was taking longer to ignite than it had hoped.
The maker of engines for Airbus and Boeing admitted that the muted revival of air travel meant that it would miss a target to deliver £750 million in free cashflow next year. It blamed the “uncertain pace of recovery in international travel” for abandoning the goal.
Nevertheless, the FTSE 100 group swung back into the black in the first half and reassured investors that it had stopped haemorrhaging cash after cutting costs sharply when the pandemic hit last year.
Rolls reported an underlying operating profit of £307 million, compared with a £1.63 billion loss over the same period last year. It was buoyed by its defence business, which makes engines for military jets and reactors for Britain’s nuclear submarines, and a bounce at its power systems unit, which makes engines for boats, trains and other vehicles.
A significant portion of its revenue dried up early in the pandemic because of sharp falls in air traffic. Long-term maintenance and service contracts linked to the number of hours its engines are in flight are a cornerstone of its civil aerospace division, which accounts for about half of group turnover.
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In the first half, its engine flying hours were 43 per cent of pre-pandemic levels, only slightly higher than the 40 per cent recorded in the first few months of the year. Rolls said the £750 million free cashflow target was “achievable” when engine flying hours recovered to 80 per cent of 2019 levels.
Warren East, its chief executive, said that business aviation had already returned to pre-pandemic levels, but leisure travel continued to lag. “The demand is there, it’s just a question of when government puts schemes in place ... to allow international travel,” he said.
The company still expects to report a free cash outflow of £2 billion — down from £4 billion last year — but is aiming to turn cashflow-positive by the end of the year.
East, 59, said that the “exact pace of recovery” was outside the group’s control and thatit would continue to concentrate on making its operations more efficient. Rolls has largely completed a restructuring programme that will reduce its headcount by 9,000 — about a fifth of its total workforce.
It is in the midst of a disposal programme of at least £2 billion. Yesterday it confirmed that it had entered exclusive talks with a Bain Capital-led consortium on the potential sale of its Spain-based ITP Aero unit for a reported €1.6 billion.
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In the first half, its revenues fell from £5.4 billion to £5.2 billion and it reported an underlying pre-tax profit of £133 million, compared with a loss of £3.2 billion in the same period last year. Cash outflow was £1.17 billion in the second half, down from £2.86 billion.
Last autumn, Rolls executed an emergency recapitalisation aimed at providing cash to see it through to break-even if the recovery in aviation was not as swift as hoped. It raised £2 billion in a deeply discounted rights issue, issued £2 billion of bonds and secured a further £1 billion in loans and bank overdrafts.
Shares in Rolls-Royce rose by 5.9 per cent, or 6¼p, to 110¾p.
