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Rolls-Royce Holdings Chief Executive Officer Warren East’s five-year bid to revive earnings has been shattered by the coronavirus as the UK engineering giant moves to scrap 9 000 jobs and considers closing sites.
The jet-engine maker will cut 17% of its workforce and boost savings goals to contend with a travel slump that’s drastically shrunk the aviation market, it said Wednesday. The plans assume that airliner demand will contract by about a third from 2019 levels and take three to five years to rebound, East said.
“The impact of Covid-19 on global aviation is not going to be short term and therefore our reaction can’t be short term,” the CEO said on a conference call. “We’re trying to protect jobs for the future.”
Rolls-Royce is particularly exposed because of its focus on wide-body aircraft that will play a reduced role in global fleets as travel comes back. The pandemic crisis has depressed economies, and the return to flying will be colored by health-related restrictions that discourage long-distance journeys.East said before the outbreak that London-based Rolls was turning a corner after years of restructuring that saw it eliminate about 10,000 posts in an effort to become more agile and productive.
Now, the company faces the test of rapidly resizing its business. The CEO said on the call that the aerospace firm already has sufficient liquidity to get through the pandemic but must protect future jobs by acting now.
Rolls-Royce shares traded 4.8% higher at 280.40 pence as of 3:15 pm in London. The gain pares the decline this year to 59%, valuing the business at 5.4 billion pounds.
East said the company aims to make more than half of the job cuts this year, after union consultations that could take months. He added that two-thirds of the employees in civil aerospace are in the UK with one-third in the rest of the world and that’s “a good proxy” for where the ax will land.
The Unite union labeled the cuts “shameful opportunism” after Rolls accepted public money to furlough workers. It plans to meet with the company in coming days to seek a different approach and will press the U.K. government to protect manufacturing, according to a statement. A government spokesman said the news was “disappointing.”
The high number of job cuts suggests Rolls isn’t expecting a quick “V-shaped” recovery, said Norbert Kretlow, an analyst at Commerzbank AG.
The reorganisation will predominantly impact the civil aerospace business but also have implications for central support functions, East said in a Bloomberg Television interview. The company also said in a statement that it’s carrying out a detailed review of its facility footprint.
“This is a general reduction in the level of demand, both for our new engines and for servicing of existing engines,” East said. “It’s a reduction of manufacturing capacity but it’s also a commensurate reduction of office staff needed to support that manufacturing capacity.”
The company’s main civil engine plants are in Derby, central England, Singapore, and Dahlewitz near Berlin, while it has maintenance sites in other locations. The company has a presence in 50 countries, East said.
Cost savings
East, who joined from semiconductor developer ARM Holdings Plc, had told investors that Rolls-Royce needs to save 1 billion pounds this year as it faces the biggest challenge since the 1970s, when it was nationalised after entering liquidation. That figure will now be extended to 1.3 billion pounds on an annualised basis, including 700 million pounds from job cuts.
The company would consider taking advantage of the UK government’s Covid Corporate Financing Facility to ensure extra liquidity but it would “be a relatively small amount of funding,” he said Wednesday.
While the cuts are an “essential step,” Rolls needs to do more to provide clarity on the cost base, Sandy Morris, an analyst with Jefferies International, wrote in a note.
Rolls-Royce had already taken measures to ensure extra cash flow, announcing in April that it would suspend its dividend and borrowing 1.5 billion pounds to boost reserves. The company also cut its forecast for engine deliveries this year, and now plans to produce 250, down from a previous estimate of 450.
It was reported earlier this month that Rolls was considering a 15% cut to its workforce.
