Rolls Royce Braces for Turmoil With 8,000 Jobs on the Line

(Bloomberg) --

Rolls Royce Holdings Plc is likely to be a much smaller company in the coming years with aerospace facing an uncertain future.

The company is considering a 15% cut to its workforce as the aviation industry contends with an unprecedented crisis because of the coronavirus pandemic, a person familiar said last week. Senior executives at the maker of jet engines have yet to finalize reductions of that magnitude and talks with labor unions are continuing.

The maker of widebody engines is particularly exposed to the fallout of the pandemic. The long-haul flights which use its engines are likely to be the last to recover, meaning the downturn in demand may last for a while. Rolls-Royce had already restructured the business after engine problems but now faces a smaller market with aircraft makers Airbus SE and Boeing Co. both slashing production rates.

“Such action at some point appeared inevitable,” said Sandy Morris, an analyst at Jefferies. “We forecast full year group sales down 12%, but civil aerospace revenue down 18% mainly due to lower engine deliveries. The bad news really all happens in 2020.”

Rolls-Royce confirmed the likelihood of job cuts without quantifying their possible extent, saying in a statement Friday that further action was needed to reduce spending and strengthen the company. It has promised employees more details before the end of the month.

The company's shares fell as much as 8.3%, and were down 3.4% as of 8:49 a.m. in London. Rolls-Royce has lost about 57% of its market value this year.

Worst-Case Scenario

Aerospace suppliers around the world are hunkering down for a protracted slump, after Airbus cut production rates by a third as Boeing also slashed its targets. Warren Buffett, whose Berkshire Hathaway Inc. owns supplier Precision Castparts Corp., warned at the company's annual meeting Saturday that the pain is spreading through the supply chain.

“We're going to have aircraft in this country, we're going to be flying. But the real question is whether you need a lot of new planes or not and when you're likely to need them and it affects a lot of people,” Buffett said.

Airbus and Boeing both predict a recovery from the crisis will be led by demand for narrow-body planes and have slashed their targets for wide-body programs as a result. Rolls Royce only makes engines for these larger aircraft and makes a large proportion of its revenue from maintenance once the engines are in service.

“I would say that 8,000 job losses look like the potential toll from Covid-19, although I would hope that is the worst case,” said Morris.