Rolls-Royce Slashes Delivery Target, Pledges More Cost Cuts

(Bloomberg) -- Rolls-Royce Holdings Plc lowered its forecast for wide-body engine deliveries and pledged greater cost reductions, while its chief warned investors that the company faces its biggest challenge in decades.

The British manufacturer plans to hand over 250 turbines in 2020, a 44% reduction from its previous estimate, it said Thursday. Rolls-Royce powered aircraft turbines logged a 90% drop in flying hours last month, hurting maintenance revenue.

The coronavirus pandemic has delivered a broadside across the aerospace industry, with Rolls-Royce particularly hard hit because it only makes engines for wide-body planes. Those aircraft will take longer to return to the skies, and with a downturn in demand for both new engines and maintenance services, Rolls-Royce is likely to emerge smaller from the protracted slump.

In response, Chief Executive Officer Warren East has stepped up cost-cutting plans, saying Rolls-Royce can save 1 billion pounds ($1.24 billion) this year, up from the 750 million-pound target given in April. The company is making stronger-than-expected progress in responsing to the disruptions as it faces the biggest challenge since the 1970s, he said in a virtual address to shareholders at the company’s annual general meeting.

“However, we must also take the difficult but necessary decisions to ensure the group emerges from this period with the appropriate cost base for what will be a smaller commercial aerospace market which may take several years to recover,” East said.

Rolls-Royce is considering a 15% cut to its workforce, people familiar with the matter said last week. The London-based company has placed 4,000 workers on furlough, it said Thursday, while making changes to align its civil aerospace and other business to the downturn. Employees have been asked to take a 10% pay cut while executives and the board have taken a 20% cut.

The shares slid 3.8% as of 1:21 p.m. in London, bringing the year-to-date drop to 59%.

Challenges Ahead

Planemakers Airbus SE and Boeing Co. have slashed production targets for this year and both companies predict recovery will be led by demand for narrow-body planes.

This suggests challenges ahead for Rolls Royce, which saw wide-body flying hours drop by about 25% in the first quarter. The company said last month that it was preparing for a reduction in engine delivery and maintenance.

Bloomberg Intelligence expects airlines to trim the amount they spend on maintenance by 50% or more from the second quarter to the fourth quarter. Rolls-Royce is one of the companies set to be most impacted, according to BI analyst George Ferguson.

Read more: Virus Cuts Aircraft Maintenance to $20 Billion From $35 Billion

Rolls-Royce was already facing challenges before the virus hit, as it battled continued issues with its Trent 1000 engines for Boeing’s 787 aircraft. The glitches soured relations with customers and pushed orders toward its rivals. The company was also coming to the end of a planned restructuring effort but now looks set for further upheaval as it races to slash costs.

Virtual AGM

Rolls-Royce said it will update employees by the end of the month on the likely impact of the pandemic on the size of its workforce. East said the company would consult the affected employees and unions in due course.

Rolls-Royce gets almost half its sales from units beyond civil aerospace. The defense business has been robust so far this year, the company said. Still, there is a risk that social-distancing measures create logistical challenges that impacts operations and suppliers.

The engine-maker’s free cash flow is likely to drop in the coming months but could improve in the second half as inventory reduces, engine flying hours recover and cost cuts take effect, according to Jefferies analyst Sandy Morris.

With flying hours down and planemakers unable to deliver some aircraft, “the first half 2020 free cash flow could look ghastly,” he said. “But Rolls-Royce is positioned to ride it out.”

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