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Rolls Royce Holdings Plc is likely to be a much smaller company in the coming years with aerospace facing an uncertain future.
The company is considering a 15 per cent cut to its workforce as the aviation industry contends with an unprecedented crisis because of the coronavirus pandemic, a person familiar said last week. Senior executives at the maker of jet engines have yet to finalise reductions of that magnitude and talks with labour unions are continuing.
The maker of widebody engines is particularly exposed to the fallout of the pandemic. The long-haul flights which use its engines are likely to be the last to recover, meaning the downturn in demand may last for a while. Rolls-Royce had already restructured the business after engine problems but now faces a smaller market with aircraft makers Airbus SE and Boeing Co. both slashing production rates.
Such action at some point appeared inevitable, said Sandy Morris, an analyst at Jefferies. We forecast full year group sales down 12 per cent, but civil aerospace revenue down 18 per cent mainly due to lower engine deliveries. The bad news really all happens in 2020.
Rolls-Royce confirmed the likelihood of job cuts without quantifying their possible extent, saying in a statement Friday that further action was needed to reduce spending and strengthen the company. It has promised employees more details before the end of the month.
The companys shares fell as much as 8.3%, and were down 3.4 per cent as of 8:49 a.m. in London. Rolls-Royce has lost about 57 per cent of its market value this year.
Worst-Case Scenario
Aerospace suppliers around the world are hunkering down for a protracted slump, after Airbus cut production rates by a third as Boeing also slashed its targets. Warren Buffett, whose Berkshire Hathaway Inc. owns supplier Precision Castparts Corp., warned at the companys annual meeting Saturday that the pain is spreading through the supply chain.
Were going to have aircraft in this country, were going to be flying. But the real question is whether you need a lot of new planes or not and when you are likely to need them and it affects a lot of people, Buffett said.
Airbus and Boeing both predict a recovery from the crisis will be led by demand for narrow-body planes and have slashed their targets for wide-body programs as a result. Rolls Royce only makes engines for these larger aircraft and makes a large proportion of its revenue from maintenance once the engines are in service.
"I would say that 8,000 job losses look like the potential toll from Covid-19, although I would hope that is the worst case," said Morris.
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