Rolls-Royce is the avatar for all of aviation’s gloom

In most industries, service revenues are the kind of resilient income stream companies want in a crisis. Aviation is the exception—and Rolls-Royce the public face of it. On Thursday, the engine maker’s London-listed shares plunged about 10% after it estimated that cash outflows will total GBP4b in 2020, compared with analyst expectations of GBP1.2b. A one-off change to invoicing practices is one big reason. The more serious one is that engine flying hours are likely to fall 55% this year. About 90% of Rolls-Royce’s flagship Trent engines are under service agreements whereby airlines make steady maintenance payments based on how much they are used. Unlike plane makers Boeing and Airbus, which will make money from each plane that they manage to keep in their order backlogs, engines are often sold at a loss. Manufacturers make up the difference over time in the form of aftermarket repair and maintenance revenues. History shows that, during downturns, this income is far more volatile than aircraft sales and airfare revenues, because carriers park a big chunk of their fleets and forgo shop visits. Rolls-Royce said Thursday that engine receipts will fall short for the next seven years. Yet the outlook wasn’t as bad as it could have been. The company said free cash flows should amount to “at least” GBP750m by 2022, not far off its much-touted pre-pandemic target of GBP1b for 2020.<br/>