Ttake you back to another era, another more innocent world: January 2020. Warren East, managing director of the manufacturer of jet engines Rolls-Royce, loses a sympathetic but well-lubricated audience for his opening speech in aerospace and the annual defense industry shindig. The word coronavirus is still firmly limited to foreign sections of newspapers (even as the Asian markets are starting to stir), and the industry is preparing for another year of growth.
A month later, on February 28, Rolls-Royce manages to ignore the threat of the virus with results “strengthening our confidence for 2020”. East predicts that the company will reduce the number of Boeing Dreamliners immobilized due to longstanding problems with Rolls-Royce Trent 1000 engines to “single digit” by the end of June.
How different the world is now as Rolls-Royce prepares for a commercial update Thursday covering the period since its last update in April. For investors who have watched Rolls-Royce since air travel has stalled, the question has been: how bad is it?
In a few months, the manufacturer lost a large part of its revenues from commercial aviation, which represented the major part of its activity in 2019. In the good times, the maintenance of the engines it does guarantee a regular flow income; during the pandemic, which dried up, engine flight hours only halved in March. Investors on Thursday will be anxious to see if May and June have shown anything like a rebound in the number of sky jets.
The company’s initial response to the revenue decline was to cut 9,000 jobs in an effort to save £ 1.3 billion a year. About two-thirds of the layoffs will be in the UK, which is a blow to one of the few local industry leaders in the UK – and in particular to Derby, where the weight of the cuts will fall. (In May, East’s reckless “sly smile” during a BBC interview on job cuts was heavily criticized on social media.)
Yet even the cruelty of the third job loss program by a British company during the pandemic was not enough to save Rolls-Royce’s credit rating from a painful downgrade to unwanted status after more than 20 years. at the investment level. S&P Global Ratings has estimated that more financial difficulties could arise this year as the pandemic continues to disrupt air travel.
Rolls-Royce’s shares fell below 280p, where they stood in February 2009 at the depths of the financial crisis. What will it take to propel Rolls at the end of January, when the shares were worth more than double, to 683p? Or the 850p mark they were at when East took over almost five years ago this week?
The way back seems indeed long, even if the company can count on government grants and cheap loans to ward off any existential threat – or on a return to the nationalization of the 1970s. Its access to cash and loans remains fairly healthy, despite the junk rating.
However, Rolls-Royce engines are mainly bolted to planes that travel long-haul routes. This means that its recovery depends on the fact that people around the world are ready to spend 10 crushed hours against a stranger – which is enough to make investors as well as travelers delicate.