UK engineering giant Rolls-Royce needs to sell $2bn worth of assets to make up losses caused by the pandemic.

The pandemic could force Rolls-Royce to sell some of its businesses

Rolls-Royce has identified a number of potential asset disposals to raise £2bn ($2.53bn) needed to survive the long-term effects of the Covid-19 pandemic. Assets include Spanish aero engine and gas turbine manufacturer, ATP Aero, which reported a modest £41m operating profit during H1 2020.

Selling assets is essential for strengthening the company’s balance sheet, which reported net debt of £1.7bn ($2.15bn) as of June 30. This is expected to more than double by the end of the year.

Rolls Royce has £6.1bn ($7.7bn) of liquid cash and a £2bn ($2.5bn) loan that it hopes will help the business keep ticking over the next year and a half. However, additional cash will need to be raised if the pandemic continues and the aviation industry is slow to recover.

Covid-19 sparked a crisis for the company

Rolls-Royce is paid by airlines based on the number of hours its engines fly. The group’s large engine deliveries and flying hours dropped by 50% during the H1 2020 with a 75% decline in flying hours during Q2.

A lack of orders and air travel during the pandemic has had a detrimental effect on Rolls-Royce. The company experienced a catastrophic £5.36bn ($6.8bn) loss before tax during the H1 2020. This was despite a large restructuring of the civil aerospace business, which took place on 20 May and involved laying off 9,000 employees and consolidating manufacturing activities.

Several countries, including China, have experienced fresh outbreaks of Covid-19, resulting in regional lockdowns. This will create more uncertainty regarding the easing of travel restrictions and the pace of economic recovery. Reintroduction of travel restrictions will increase the chances of asset disposal for Rolls-Royce.

Resilience in other business activities could help Rolls-Royce prevail

Rolls-Royce power and defence activities have demonstrated greater resilience to the pandemic. The group’s defence business reported gross profit of £210m ($625m) during the first six months of 2020, up 13% year-on-year.

Defence accounted for 20% of the group’s revenues in 2019. Maintaining strong profits and positive growth will help offset losses experienced by the group’s civil aerospace activities. Rolls-Royce is expected to focus on its defence and power divisions to strengthen its chances of recovery.

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