Shares in Rolls-Royce tumbled nearly 15 per cent after a cut to its credit rating plunged it even deeper into crisis.
In yet a further sign of the devastation the Covid-19 pandemic is wreaking in the aerospace sector, Standard & Poor’s downgraded the engineering group’s debt to ‘junk’ status and warned of ‘prolonged weak profitability’.
Planes around the world – many powered by Rolls engines – have been grounded as governments fight to control the coronavirus outbreak.
This has hit demand for new engines and poses a serious threat to the crucial income Rolls earns from servicing such engines. The loss of its investment grade rating – which it has held for the past 20 years – means some of its large investors will have to sell their debt holdings in the company.
S&P’s decision is the latest hammerblow to Rolls – which for decades has been one of Britain’s most prestigious companies. Shares were down 14.9 per cent, or 47.4p, to 271.6p, wiping £915m off the value of the company.
Traders also digested news that Norwegian hedge fund magnate Nicolai Tangen had sold his 5.2 per cent stake in the company.
More than £8 billion has been wiped off Rolls’ market value so far this year – a drop of around 60 per cent.
A Rolls spokesman said S&P’s decision was ‘disappointing’. But they added it would not affect any of its borrowing and that the company has been quick to cut spending to manage the impact of the Covid-19 outbreak.
Rolls announced last week it will need to cut 9,000 jobs to survive the crisis, 8,000 of which will be in its civil aerospace division.
This could include up to 6,000 roles in the UK, centred around the company’s Derby heartland.
Rolls-Royce chief executive Warren East admitted the plans were ‘terrible news’ for employees but estimated it would help save around £1.3 billion a year.
Airlines do not believe air travel will return to 2019 levels until at least 2023.
This will hit Rolls because it means demand will fall significantly for new engines. But it will also hit the FTSE100 company because it makes most of its income through servicing engines that are already flying – and a dramatic reduction in flight hours in the coming years means it will lose huge chunks of revenues from maintenance.
Analysts also believe the slowest segment of the market to recover will be long-haul flights – and Rolls-Royce only supplies engines for big jets that can fly long-distances.
Before the aviation crisis hit, the company was working through a significant restructuring kicked off by East in 2018 that involved cutting thousands of middle management jobs.
The group has also had to contend with a huge bill for problems with the engines it supplies to Boeing’s 787 Dreamliners, used by airlines such as Norwegian and British Airways.
In 2016 it discovered that the heat generated by the engines was making the blades crack faster than expected. Rolls-Royce expects the total bill for replacing and fixing the engines to come to £2.4 billion between 2017 and 2023.
There could, however, be hope for the company outside its aerospace arm. It also has a large defence division and is working on Britain’s new fighter jet, Project Tempest. Still at the design stage, the jets are expected to join the RAF from 2035.
The company is also in the running for two potentially huge contracts in the US defence market.
It is going head-to-head with GE for a deal to create new engines for America’s classic B-52 bomber jets and is working with Bell Helicopters on new designs for the US military helicopter fleet.
Back in the UK, Rolls is also leading a consortium aiming to build small modular nuclear reactors, which would be a quicker and cheaper way of setting up new nuclear power projects.