Tredeem yourself in another era, in another world, more innocent: January 2020. Warren East, CEO of the jet engine manufacturer Rolls-Royce, is losing an understanding but now well-lubricated audience for his key speech in the aerospace sector and annual defense industry shindig. The word coronavirus is still firmly confined to the foreign sections of the newspapers (although Asian markets are starting to get nervous) and the industry is preparing for another year of growth.
Even a month later, on February 28, Rolls-Royce is able to shake off the threat from the virus with results “strengthening our confidence for 2020”. East expects the airline to reduce the number of Boeing Dreamliners grounded due to long-standing problems with Rolls-Royce’s “single digit” Trent 1000 engines by the end of June.
How different the world is now, as Rolls-Royce prepares for a commercial update on Thursday covering the period from its last update, in April. For investors who have been watching Rolls-Royce since air travel has stopped, the question has been: exactly how serious is it?
In a few months, the manufacturer has lost a large chunk of its revenues in the commercial aviation sector, which accounted for most of its activities in 2019. In favorable periods, the maintenance of the engines that guarantees it guarantees a constant flow of revenue; during the pandemic, which dried up, as the hours flown by its engines decreased by half only in March. On Thursday, investors will be thrilled to see if May and June showed anything like a rebound in the number of jets in the skies.
The company’s initial response to revenue success was to cut 9,000 jobs in an effort to save £ 1.3 billion a year in costs. About two thirds of the layoffs will be in the UK, which is a major blow to one of the few indigenous industrial leaders left in the UK, and particularly to Derby, where the weight of the cuts will fall. (In May, East’s sly “smirk” during a BBC interview on job cuts was heavily criticized on social media.)
However, even the ruthlessness of the third largest job cuts program by a British company during the pandemic was not enough to save Rolls-Royce’s credit rating from a painful trash downgrade after more than 20 years in investment level. S&P’s global assessments believed that there may be additional financial problems this year as the pandemic continues to disrupt air travel.
Rolls-Royce shares fell below 280 p, where they were in the middle of the financial crisis in February 2009. What will it take to push Rolls to the days of late January to late January, when the shares were worth more than double, at 683 p? Or in fact the 850p brand they came to when East took over nearly five years ago this week?
The way back seems really long, even if the company can rely on government subsidy funding and low-cost loans to avoid any existential threats – or even a return to nationalization in the 1970s. His access to cash and loans remains fairly healthy, despite his junk rating.
However, the Rolls-Royce engines are mainly bolted to long-haul planes. This means that its recovery depends on the fact that people all over the world are willing to spend 10 hours crushed against a stranger – which is enough to make both investors and travelers picky.