Rolls-Royce reorganising to address Covid-19 impact
Image courtesy Rolls-Royce
Rolls-Royce have already taken action to strengthen the financial resilience of its business and reduce our cash expenditure in 2020. It is, however, increasingly clear that activity in the commercial aerospace market will take several years to return to the levels seen just a few months ago, so it must now address these medium-term structural changes, as demand from customers reduces significantly for its civil aerospace engines and aftermarket services.
Warren East, Rolls-Royce, CEO said: “This is not a crisis of our making. But it is the crisis that we face and we must deal with it. Our airline customers and airframe partners are having to adapt and so must we. Being told that there is no longer a job for you is a terrible prospect and it is especially hard when all of us take so much pride in working for Rolls-Royce. But we must take difficult decisions to see our business through these unprecedented times. Governments across the world are doing what they can to assist businesses in the short-term, but we must respond to market conditions for the medium-term until the world of aviation is flying again at scale, and governments cannot replace sustainable customer demand that is simply not there. We have to do this right, which means we will work closely with our employee and trade union representatives as appropriate, look at any viable alternatives to mitigate the impact, consult with everyone affected and treat our people with dignity and respect.”
In addition to the savings generated from its proposed headcount reduction, Rolls-Royce will also cut expenditure across plant and property, capital and other indirect cost areas. The proposed reorganisation is expected to generate annualised savings of more than £1.3 billion, of which it expects headcount to contribute around £700 million. The cash restructuring costs related to these actions are likely to be around £800 million, with outflows incurred across 2020 to 2022.
The proposed reorganisation will predominantly affect Rolls-Royce's Civil Aerospace business, where it will carry out a detailed review of its facility footprint, with implications for its central support functions.
Rolls-Royce's Power Systems business and ITP Aero are currently developing, negotiating and executing extensive measures to deal with the current situation.
Its Defence business, based in the UK and US, has been robust during the pandemic, with an unchanged outlook and does not need to reduce headcount. As part of the reorganisation, Rolls-Royce will ensure its internal Civil Aerospace supply chain continues to support its defence programmes and explore any opportunities to move people into its Defence business.
Due to the need to consult with the appropriate employee and trade union representatives, Rolls-Royce are not providing further details of the impact of the proposed reorganisation on specific sites, or countries, at this stage.
The restructuring announced on 14th June 2018 will transition into this wider proposed reorganisation. Focused predominantly on reducing the complexity of our support and management functions, the programme has substantially delivered on its objectives.
Warren East added: “The strategic choices that we have made over the last few years have helped us to respond rapidly to COVID-19 and the synergies between our divisions leave us well placed to capitalise on the long-term potential of our markets. The world on the other side of this pandemic will need the power that we generate to fuel economic recovery. I absolutely believe the call for that power to be more sustainable will be stronger than ever. This plays to our strengths.
"We must ensure that we are able to continue to innovate and play our leading role in enabling the vital sectors in which we operate achieve net zero carbon emissions. We have emerged from troubled times before, to achieve incredible things. We will do so again.”
Commenting on the published plans, ADS Chief Executive Paul Everitt said: “This signals a very difficult period for Rolls-Royce, its employees and its extensive UK supply chain.
“The crisis is having a major impact on aerospace companies who provide high value, long-term jobs in all regions and nations of the UK, putting thousands more jobs at risk now and in the months ahead.
“To minimise the impact on jobs and manufacturing capability in the long-term we need urgent action by Government.
“The UK must lead the re-opening of international aviation, put in place additional public support for development of new low carbon technologies, bring forward major defence and space programmes and establish long-term funding mechanisms to help our supply chain survive and prosper as growth returns to the sector.”
Nicolas Jouan, Aerospace and Defense Analyst at GlobalData said: “The job cuts by Rolls-Royce is not a surprise as the company said last month that it was working on a restructuring plan that would cut up to 15% of its workforce - most of it in its civil engine segment. New figures would actually represent around 17% of the company’s staff.
“Rolls-Royce already suspended dividend earlier this year and the company has had to make some difficult decisions to weather the storm of COVID-19 - especially as its civil aerospace engines and maintenance, repair and overhaul (MRO) businesses are suffering from the collapse of air travel.
“Rolls-Royce arguably had no choice in the matter. Its business, as a pure-player of the engine and power system industry, is one of the most badly touched by the COVID-19 outbreak and is almost entirely reliant on the output of plane manufacturers Airbus and Boeing. The two companies have themselves announced staff and production cuts. The A350 and the B787 have dropped respectively to six and 10 units per month. Both models fly with Rolls-Royce’s Trent engine, whose market share in the wide-body segment climbed above 50% before the crisis. Rolls-Royce expects to save £1.3bn annualised through reorganisation - mostly relying on announced job cuts.
“The reality is that Rolls-Royce needs to adapt its production to the demand from plane makers, or takes the risk to stockpile engines for non-existent aircrafts.”
