Rolls-Royce returns to profit, but warns over international travel recovery

Embattled engine-maker Rolls-Royce returned to profit in the first half of 2021, but warned that the pandemic-hit international aviation industry is taking longer than expected to recover.

The Derby-based group posted bottom-line profits of £393 million for the first six months of the year in a marked improvement from mammoth losses of £5.4 billion a year ago, helped by swingeing cost-cutting.

On an underlying basis, it reported pre-tax profits of £133 million compared with losses of £3.2 billion a year earlier, while its preferred adjusted earnings measure showed profits

Shares lifted 3% on the better-than-expected result.

Rolls said international travel will bounce back once border restrictions are lifted, but warned that slower recovery will mean it takes longer to achieve a free-cash flow target of £750 million.

It said: “We are confident that, when border restrictions are lifted, the recovery of international travel will accelerate.”

Free-cash flow targets are “still achievable”, but it added that “based on current industry forecasts for the pace of recovery in international travel, this is likely to occur beyond the initial expected timeframe of 2022”.

It said cash outflow is improving from over £4 billion at one stage to £2 billion in 2021, with guidance that it will turn positive in the second half of 2021.

The engineering group’s civil aerospace arm – its largest division – has suffered as the coronavirus crisis hammered the global aviation industry.

While domestic and business travel markets are recovering, international travel is still lagging behind, according to the group.

It said large-engine flying hours were still less than half of pre-pandemic levels in 2019, at 43%, but this is up from the 34% seen in the second half of 2020.

Chief executive Warren East said the expansion of the UK’s travel list is “a very encouraging” sign.

He told BBC Radio 4’s Today programme: “We’re concentrating on what we can control.

“Clearly we can’t control how fast markets open up, but anything that governments around the world can do to open up air travel is good news for our business.”

He has sought to take swift action to cut costs and raise extra capital to strengthen the company’s battered balance sheet in the face of the crisis, last year ramping up savings targets to £1.3 billion by the end of 2022.

This includes swinging the axe on at least 9,000 jobs worldwide – two-thirds of which will affect the UK – and Rolls confirmed around 8,000 employees have already gone under the programme.

It has also told staff to take two weeks’ unpaid leave this summer as a further cost-saving measure.

The firm said its goal to raise at least £2 billion from selling off some parts of the business is “progressing well”, having announced a deal on Wednesday to offload Norwegian maritime engine maker Bergen to British group Langley Holdings.

It added that the sale of its Spanish unit, ITP Aero, is “moving forwards” and that it expects to complete the sale of the civil nuclear instrumentation and control business later in 2021.

Rolls confirmed late on Wednesday that it is in exclusive talks to sell ITP to investment group Bain Capital over a reported 1.6 billion euro (£1.5 billion) deal.

Mr East declined to comment on the price, except to say the group is holding “live discussions”.

Michael Hewson, chief markets analyst at CMC Markets, said: “There is no question that Rolls-Royce continues to face significant challenges due to the slow summer for aviation given its recent decision to ask its 19,000 staff to take unpaid leave for two weeks as it strives to preserve cash.”