We know coronavirus is hurting the airline industry. People are in lockdown – unable to even go to the pub, never mind fly on holiday. This will end, though. The question for Rolls-Royce Group (LSE: RR), however, is whether air travel will ever be the same again.
Changing trends
As I see it, Rolls-Royce is going to be hit on many fronts, even after the coronavirus concerns fade. Firstly, some airlines – its customers – may go bust. Though one would expect in the long term other companies to fill the holes, running an airline does not exactly have the lowest barriers to entry.
Secondly, airline travel itself may drop off. Some people are likely to be more cautious of traveling to areas affected by Covid-19 even after governments declare it safe.
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The increased use of video conferencing could also have an impact. From a business perspective, it is cheaper and greener to take international meetings using Zoom than it is to fly people to another country and put them up in hotels. We have had no choice to do this under lockdown, and so have proven it works.
Lastly and most worryingly, we don’t know the state of the economy after lockdown. As well as a number of big industries like airlines, many small businesses are likely to go bankrupt. There is talk of a potential recession, but even without this, many people will have less money to spend. Holidays that require flying are usually the first thing to get cut when a family has no money.
Rolls-Royce as an investment
For me, these concerns undermine Rolls-Royce as an investment right now. If people are not flying, airlines will not need to buy or maintain as many engines. Perhaps even worse than the airlines themselves, those in the supply chain may be even more effected.
To put it simply, an airline will have more direct control over how it reacts to its market. Cutting flights, changing prices, or offering deals could all help offset financial troubles. For Rolls-Royce, however, if its main customers are not buying its main products, its choices are limited.
This month the company suspended its dividend for the first time since privatisation in 1987. It also abandoned its profit and cash targets for the year. Rolls-Royce is already in the middle of a broad restructuring, which won’t be helped if funding dries up.
Last year the company saw its credit rating downgraded to near junk. Despite this, Rolls-Royce has managed to secure a £1.5bn credit facility, and along with news that it has found £750m in cash savings, has seen its share price hold pretty firm in April.
Before lockdown I would have had confidence in Rolls-Royce, but in this environment things are just too uncertain. I think in the long run things should return to normal – give or take – but that seems a long way off if you want to make gains in Rolls-Royce shares.
