Rolls-Royce Sees $2.7 Billion Cash Outflow on Travel Slump

Rolls-Royce Holdings Plc projected free-cash outflows of about 2 billion pounds ($2.7 billion) this year, saying new curbs on travel tied to the coronavirus will delay a recovery in long-distance flights.

The shares slumped after the U.K. jet-engine maker said Tuesday that it expects flying hours for wide-body aircraft to reach just 55% of 2019 levels. It had previously assumed a rebound to 70% this year.

The slowdown in air travel has hit long-distance flights the hardest, denting service revenue Rolls-Royce generates based on flying hours for twin-aisle jetliners equipped with its engines. Renewed curbs to fight the latest surge in virus cases are delaying a rebound, with planemaker Airbus SE last week slowing a ramp-up in production.

With a warning coming so early in the year, “one should anticipate caution,” said Sandy Morris, an analyst at Jefferies. “The main issue is not so much flying activity as the continued impact on the airline industry and the supply chain.”

Rolls-Royce shares were down 8% as of 8:23 a.m. in London. They have slid 60% in the past year.

Tightening Restrictions

Governments from Europe to the U.S. have tightened travel restrictions to slow the spread of highly contagious coronavirus strains that emerged in recent months. This has led airlines to cut back on flight schedules, delaying their return to financial health.

The U.K. is considering whether to impose hotel quarantines on arriving passengers, a development fiercely opposed by the travel industry. Such a measure would “destroy the travel and tourism sector as we know it,” the World Travel & Tourism Council said Tuesday. The measures already introduced should be enough to curb the virus while allowing travel to continue, it said.

Rolls-Royce said 2020 cash outflows were in-line with earlier guidance, set at 4.2 billion pounds in December.

The company said in October that it expected to stanch the bleeding significantly in 2021, with cash flows turning positive sometime in the second half.

It reiterated the guidance on the timing on Tuesday, as the impact of the slowdown is weighted more heavily in the first half.

The company added that it had cut around 7,000 roles in 2020 as part of its restructuring plans, making good progress toward a target of shrinking headcount by 9,000 by the end of 2022.

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