Back in July there was optimism that the second half of the year would be better than the first for Rolls-Royce. Sadly this hasn’t been the case so far, and the Rolls-Royce share price has continued to struggle. Shares that as recently as January were sitting at 680p are now just above 250p, as the aviation sector faces an uphill battle.

With continuing concerns about its precarious financial position, the Rolls-Royce share price is down 60% on the start of the year. In July Moody’s downgraded the engine manufacturer’s debt to junk status, citing the ‘significant challenges’ Rolls-Royce are facing.

On top of this, a major shareholder, ValueAct, has sold its 4.5% stake over concern over the long-term viability of the business model. The California-based investor had gradually dropped its stake in the company, which peaked at 10.9% in 2017, and has now exited entirely. On that news the Rolls-Royce share price fell further, hitting an unwelcome 11-year low of 246p.

Covid-19 takes a toll on aviation, and Rolls-Royce share price

There has been further speculation that Rolls-Royce may come under pressure to offload its Spanish operation ITP Aero to raise further cash amid the havoc Covid-19 has wrought on the aviation sector.

Covid-19 has had a huge impact on the industry, with passenger traffic down as much as 98% year-on-year during the peak of the pandemic. With customers taking steps to delay or cancel future aircraft orders, the Rolls-Royce share price and order book have been hit hard. Despite the return of air travel, after the widespread grounding earlier in the year, there is little sign of a return to anything approaching normality

The impact on civil aviation, which accounts for $9bn of Rolls-Royce turnover, and the grounding of commercial fleets has decimated its revenues, and could well lead to a cash burn of over £4bn this year alone. Rolls-Royce have already cut 9,000 jobs from its 52,000-strong workforce, and deferred bonuses for both its CEO and CFO as part of a £1.3bn cost-cutting attempt.

Engine issues continue to cause problems

Earlier in August, Rolls-Royce reported a problem with “a small number” of its newest engines, the XWB-84 which powers the A350. This latest issues is a further blow to the company, coming as it does on the back of its Trent 1000 issues. The news doesn’t bode well, given that costs for those earlier problems are set to amount to £2.4bn by 2023. Rolls-Royce have made efforts to explain that this is a less costly issue, but even a minor setback suggests a wider problem with quality control.

Quite simply this is yet another problem the business doesn’t need and is likely to add further costs to an already strained business model. It can only be a matter of time before the company is forced to raise extra capital, or convert some of its debt into equity.

There are signs of positivity, like the recent deal with Reaction Engines to develop new high-speed hypersonic propulsion systems for civil and defence purposes, as Rolls-Royce looks to design new greener solutions for air travel propulsion. The company is overdue some better news ahead of this week’s H1 numbers which aren’t expected to be particularly comfortable reading. The big question remains how much extra capital the company will need to raise in order to bolster its balance sheet, and whether it will be in the form of a rights issue or a disposal of assets.  

Rolls-Royce will announce its half-year results at 7am on Thursday 27 August - will the results help or hurt the Rolls-Royce share price?

 


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