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Assumptions behind a cash flow warning could prove optimistic
Thursday 28 Jan 2021 Author: Tom Sieber

Shares in aircraft engine maker Rolls-Royce (RR.) remain highly volatile with its latest trading update (26 Jan) revealing cash flow pressure as much of the aviation sector remains grounded.

A delay in a recovery among its customer base in the airline industry was always a material risk even with the breakthrough on vaccines. That risk has been heightened by the emergence of new, apparently more infectious strains of Covid-19.

These factors, combined with the uneven pace of vaccine rollout globally, are putting pressure on governments to impose travel restrictions.

The resulting reduction in flying hours has a big impact on Rolls-Royce in the short and long term as the lucrative spares and repairs contracts for its engines rely on planes being in the air.

A £2 billion cash outflow, up from the previously guided £900 million, is based on 2021 large engine flying hours at 55% of 2019 levels. This could still prove overly optimistic.

The business has made tangible progress in cutting costs and has £9 billion liquidity. It is also trying to sell £2 billion of assets.

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