Inchinnan awaits jobs verdict
Rolls-Royce braced for tough week after credit downgrade
Jobs are under threat at the engine maker
Rolls-Royce is facing another tough week following the downgrading of its credit rating on the back of an anticipated slump in aircraft engine orders and maintenance contracts.
The company last week lost its investment-grade status — held for the past 20 years — after Standard & Poor’s downgraded the company to “junk” because of “prolonged weak profitability” and expectations of materially lower cash flow from its engine service contracts.
The downgrade affects the terms on which it can borrow money, though the company said it would not trigger any short-term early debt repayments.
However, it could have an impact on the share price because of actions by institutional investors. Many large investors will have to sell their debt holdings in the FTSE 100 company as they are restricted to investing in investment-grade bonds.
On Friday the company’s shares fell 14.9%, or 47.4p, to 271.6p, wiping £915m off its value.
This followed news that hedge fund manager Nicolai Tangen had sold his 5.2% stake in the company.
Since the start of the year the shares are down 60%, equal to £8bn in lost value.
News of the downgrade came just days after it announced plans to cut 9,000 jobs at its sites in the UK, mainly from its civil aerospace division. It is due to confirm which locations will be affected.
Richard Leonard: written to PM and CEO (pic: Terry Murden)
In response to concerns of workers at Inchinnan, Glasgow, Scottish Labour leader Richard Leonard has written to the Prime Minister demanding an industrial strategy to save jobs and to the company’s CEO Warren East asking him to examine other options to redundancies.
However, Mr East has already expressed his own regret at having to make such an announcement, describing it as “terrible news” for employees, and the company said the cuts would help it save around £1.3 billion a year, enabling it to meet expected medium-term demand.
Like many of its aerospace peers, it has had to adjust its cost base to a market which could be up to half the size in the next four years as a result of the coronavirus pandemic. Airlines do not believe air travel will return to 2019 levels until at least 2023.
While demand will fall for new engines, Rolls makes most of its income through servicing those that are already in operation and a reduction in flight hours means it will lose huge chunks of revenues from maintenance.
The aviation and aerospace industries are hoping the UK government will put together a package of support, having indicated that “key” sectors of the company are being considered for help.
The company is hoping to secure work for its defence division to help mitigate the impact of severe cuts to its civil aerospace business.
On Friday it announced it is to supply 40 engines and generator sets for five new Type 31 general-purpose frigates for the Royal British Navy.
It is working on Britain’s new fighter jet, Project Tempest as well as competing with GE to create new engines for America’s B-52 bomber jets. It is also working with Bell Helicopters on new designs for the US military helicopter fleet.