The Rolls-Royce share price has made very little progress since announcing that staggering £4bn full-year loss just over three months ago.
At the time there was a feeling that things probably couldn’t get much worse, with the Rolls-Royce share price well off the lows of last year on expectation that the worst was probably behind it. Management was at pains to focus on a specific narrative, that things can only get better, choosing to focus on a more positive outlook.
This was predicated on estimating a free cashflow outflow of £2bn for 2021, based on wide body engine flying hours (EFH) of 55% of the levels of 2019, with an expectation of turning cash flow positive at the end of the second half of this fiscal year, with positive free cash flow of £750m in 2022, based on engine flying hours of 80% of 2019 levels.
Rolls-Royce share price stalls as EFH misses target
Rolls-Royce has already taken significant steps to reduce head count and cut costs, and said it is on course with a further £1.3bn of annualised cost savings, however the reality remains that the business is still heavily reliant for a good proportion of its annual revenue on EFH. Today’s numbers bear that out, with Rolls-Royce saying that in the first four months of 2021, large engine flying hours were at 40% of 2019 levels, supported by demand for cargo as well as the maintenance of key routes.
While Rolls-Royce management has said that this is in line with its planning assumptions and that expectations for this year remain on track, it would appear to rely on a significant uptick in the remaining eight months of this year to hit that 55% level outlined a few months ago. This remains a big ask given that any return to significantly higher levels of flying hours is likely to take at least another two months or so given the slow pace of reopening that is currently being seen.
As economies start to reopen for the summer season, we can expect to see some improvement in the overall number of engine hours flown, however as events in India, and other parts of the world have shown, the virus has continued to wreak havoc. This is likely to slow down any return to normal as we know it, as traffic light systems act as a further brake on overseas travel. This could keep the brakes firmly on the Rolls-Royce share price.
Positive outlook for defence arm
The defence part of the business appears to be performing well, with the outlook positive on the back of the UK government’s £2bn investment into a "world-leading future combat air system."
Management said there is still interest in the company’s Spanish operation ITP Aero, which appears to be being held up by Spanish officials, over concerns about possible job losses.
There was no detail about the sale of its Bergen engines unit, after earlier reports this week that the sale process had restarted, after the Norwegian government blocked the sale to Russian firm TMH Group on security grounds.