Rolls-Royce may be the jewel in Britain’s industrial crown, but in its 114-year history, the coronavirus crisis has left the engine-maker facing one of the most challenging times.
By raising $6.8 billion to survive global aircraft grounding, the Airbus and Boeing supplier has bought itself some time, but warns that 2020 will be much worse than expected.
Before it secured extra funds in November, analysts had raised the possibility that the maker of power plants for British nuclear submarines might need to be saved by the state.
And Prime Minister Boris Johnson sought to address concerns last month, saying the government would work with Rolls to ensure its long-term future as a “great, great British company” after credit agencies cut its debt rating to “junk”.
Rolls, one of only four major aero engine manufacturers worldwide, symbolizes British industrial interests at a critical moment for a nation that is seeking to claim its position in a post-Brexit world plagued by confusion about future trade ties.
Engine blade trouble
But current worries about a long-running engine blade problem have been intensified by concerns about the finances of Rolls, which poses a major stumbling block in an industry where airlines sign decade-long agreements.
With many airlines only paying when they fly, Rolls’ future depends on the recovery of engine flight hours on widebody intercontinental jets, and convincing its airframer partners and airline customers that its problems are behind it.
Without a recovery in engine flying hours, Rolls will struggle for revenue to repair its balance sheet, a pre-requisite for investing in new technology to secure its future and leave its problems behind.
Those troubles stem largely from cracked turbine blades in the Trent 1000 engines used in some twin-aisle jets and Rolls’ lack of a presence in single-aisle short-haul models, which are predicted to lift airlines out of the COVID-19 crisis.
Engine makers were locked in a long-running chess game even before the pandemic, which analysts say Rolls entered more dependent on out-of-favor intercontinental jets than its most direct rival US-based General Electric (GE).
Rolls has other divisions operating in nuclear and defense that are more resilient and it also hopes to raise more than $2 billion by selling assets in a challenging market.
Rolls is fine-tuning another bet on new engine architecture. Its UltraFan engine will be 25 percent more efficient than its early Trents by blending innovations in the core and the surrounding flow of cooler air, while being more flexible in size.
Although COVID-19 dented service revenue by speeding the demise of the Airbus A380, it helped Rolls by giving it more time to prepare for the only potentially new project: a possible Boeing 757 replacement that could lay the foundations for a future replacement to the troubled 737 MAX.
Vaccine hopes
Since a breakthrough in COVID-19 vaccines in November, Rolls’ shares have soared on hopes that the worst is behind it but they are still down by half from the beginning of the year.
It said last week the recovery in engine flight hours, the main driver of service revenues, was slowing due to a new wave of COVID-19 infections, and it would burn through 4.2 billion of cash this year, slightly more than it expected in October.
Decarbonizing
Along with other engine makers it increasingly faces a new problem which is how to decarbonize an industry that makes gas turbines.
Rolls-Royce told investors it will stick around to oversee the move to a post-carbon economy, but having resources to invest will depend on asset sales and a wide-body market recovery.
