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Rolls-Royce dives on £2bn cash burn warning amid travel sector pain

Written by on 26/01/2021

Travel-related stocks are feeling significant pain in anticipation of tougher curbs to limit the spread of coronavirus.

A deluge of negative news for the travel sector on Tuesday, including the likelihood of mandatory hotel quarantines for UK arrivals, dented sentiment across the board along with recent tentative vaccine-driven recoveries in market values.

Rolls-Royce led the fallers on the FTSE 100, nosediving by more than 10%, after it blamed tightening COVID-19 restrictions globally for a downgrade to its expectations on how much its engines would fly this year.

Passengers arrive in the arrivals area at Heathrow Airport, in London, Monday, Jan. 18, 2021. The UK closed all travel corridors from Monday morning to protect against the coronavirus with travellers entering the country from overseas required to have proof of a negative COVID-19 test. (AP Photo/Matt Dunham).
Image: Weak passenger demand spells pain for airports, airlines and the makers of the engines used to power the planes

It warned of a £2bn cash outflow during the current year, reflecting its updated forecast that flying hours would now only recover to about 55% of 2019 levels.

The company, which powers Boeing 787s and Airbus A350s and is paid based on the number of hours its engines are in use, had said in October that it expected a return to 70% of pre-crisis activity.

Airline stocks fell in sympathy – not helped by a UK minister’s comments, in an interview with Sky News, that now was not the time to be booking holidays abroad.

The owner of British Airways, IAG, was the second-largest faller on the FTSE 100 with its stock more than 4% down.

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This picture shows British Airways planes grounded at Heathrow's airport terminal 5, in west London, on March 16, 2020.
Image: Airlines are operating at a vastly reduced capacity

EasyJet shares were 3.5% lower.

Holiday firm TUI saw its stock drop by 3% while rival Saga, which targets cruises and other breaks for the over-50s, saw its shares drop by more than 1% despite revealing total bookings of £127m for the current year.

Rolls-Royce stock remains more than 50% down over the past 12 months compared to a 10% hit for the wider FTSE 100.

The company, which moved to bolster its balance sheet through measures including a rights issue and thousands of job cuts last year, said it had £9bn of liquidity to ride out the pandemic storm.

Of the planned 9,000 job cuts announced, 7,000 had already been completed, it said.

Rolls told investors: “Continued progress on vaccination programmes is encouraging for the medium-term recovery of air traffic and economic activity.

“In the near-term, however, more contagious variants of the virus are creating additional uncertainty.

“Enhanced restrictions are delaying the recovery of long-haul travel over the coming months compared to our prior expectations, placing further financial pressure on our customers and the wider aviation industry, all of which are impacting our own cash flows in 2021.”

Commenting on the share price reaction Neikl WIlson, chief market analyst at markets.com, said: “Rolls has been battered by the pandemic as civil aviation activity has been smashed, but management expect to turn cash flow positive in the second half of the year as widebody flying hours pick up.

“The question is whether the pace of vaccine rollout and government easing of restrictions matches their expectations.”

 Sky News

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