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Sep 21, 2020

Rolls-Royce hits 17-year low as slump deepens for airlines

Workers carry out maintenance on a turbofan engine, manufactured by Rolls-Royce Holdings Plc, on a grounded passenger aircraft operated by Azul SA at Chateauroux airport in Chateauroux, France, on Thursday, Aug. 27, 2020. The single-runway airport located in France’s flat, central basin has turned away airlines seeking to store more planes -- a sign the global aviation slump is deeply set despite some easing of travel restrictions.

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Rolls-Royce Holdings Plc fell to its lowest in 17 years after detailing a plan to raise as much as 2.5 billion pounds (US$3.2 billion) to brace against a drought in demand for aircraft engines.

Shares of the U.K. company slid for a fifth straight session on Monday, dropping as much as 12 per cent after saying two days earlier it’s reviewing options including a rights issue, other forms of equity and new debt.

Rolls-Royce has lost more than three-quarters of its value this year amid a broad industry downturn triggered by the coronavirus pandemic. The company has been particularly hard hit by the drop in long-distance travel, which has sharply curtailed demand for the wide-body planes its engines power. Many aircraft in the existing fleet have been temporarily or permanently grounded, depriving Rolls-Royce of vital maintenance revenue it collects when they fly.

Lufthansa, Air France

The point was driven home by Deutsche Lufthansa AG on Monday. The German carrier said it’s accelerating fleet and staff cuts amid mounting concern about the severity of the downturn.

Europe’s biggest airline will pull 150 jets by mid-decade, 50 more than in its previous plan, leading to more job cuts than the 22,000 already due to go, according to a statement. The decision will lead to an impairment of as much as 1.1 billion euros in the third quarter. The shares fell as much as 11 per cent, the most in more than three months.

Plane maker Airbus SE, supplier Leonardo SpA and Air France-KLM shares were also hammered, with the head of the Franco-Dutch carrier echoing Lufthansa in warning more cost cuts may be needed after travel demand dropped off at the end of the summer holiday season.

In an interview published Monday in L’Opinion, Chief Executive Officer Ben Smith said the pandemic is forcing the company to accelerate and deepen its revamp. The airline will only operate profitable flights, he was quoted as saying, and reiterated that talks are ongoing with its shareholders for a recapitalization because a state rescue plan is only enough for less than a year.

‘Difficult’ Recovery

A recovery in travel demand within the next five years “will be difficult,” French Transport Minister Jean-Baptiste Djebbari said Monday in an interview on LCI television, citing uncertainty about business travel and the possibility that consumer habits may change in favor of sustainable travel. The crisis will lower the number of operators in the industry and could raise ticket prices, he said.

Rolls stock sank 11 per cent as of 4:20 p.m. in London, giving it a market value of 3.16 billion pounds, while Airbus and Air France-KLM shares dropped as much as 6.7 per cent and 7 per cent respectively. Leonardo stock fell to its lowest level in four months.

Rolls Dilution

While a share issue would dilute existing investors at the lowest prices since 2003, Rolls-Royce has also seen its debt downgraded to junk this year, meaning borrowing would come at a higher cost than before the pandemic.

The company is in talks with sovereign wealth funds, including Singapore’s GIC Pte, as it turns to investors for the funds next month, the Financial Times reported, citing three people with direct knowledge of the matter. The company is working with Goldman Sachs Group Inc. on the planned equity raise.

“We continue to review all funding options to enhance balance sheet resilience and strength,” Rolls-Royce said in a statement on Saturday. The options include “a variety of structures including a rights issue and potentially other forms of equity issuance. Our review also includes new debt issuance,” it said.

The company said it hasn’t decided if it’s moving ahead with any of the options or the timing of the fundraising. Last week, it said it’s continuing to consider ways to bolster its coffers after the coronavirus-driven aviation downturn slammed revenue.

--With assistance from Richard Weiss.