Rolls-Royce Holdings Plc Chief Executive Officer Warren East’s five-year bid to revive earnings has been shattered by the coronavirus as the U.K. 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, according to a statement Wednesday. The plans are based on the assessment that the wide-body market will shrink 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 larger aircraft that will play a reduced role in global fleets as travel comes back. The pandemic crisis has depressed economies, and the return to flight will be colored by health-related restrictions that will discourage long-distance flights.
East said before the outbreak that the London-based company 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, Rolls-Royce faces the test of rapidly resizing its business. East 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 as much as 4.9% lower and were down 2.2% to 261.8 pence as of 9:45 a.m. in London. The drop took the decline this year to 62%, valuing the business at 5.1 billion pounds ($6.2 billion).
Job Cuts
East said that 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 U.K. with one-third in the rest of the world and that’s “a good proxy” for where the ax will land.
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 reorganization will predominantly impact the civil aerospace business but also have implications for central support functions, Rolls-Royce said. The company also said it’s carrying out a detailed review of its facility footprint.
Its 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 nationalized after entering liquidation. That figure will now be extended to 1.3 billion pounds on an annualized basis, including 700 million pounds from job cuts.
The company would consider taking advantage of the U.K. government’s Covid-19 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 plane engines, down from its previous estimate of 450.
It was reported earlier this month that Rolls was considering a 15% cut to its workforce.
