The Rolls-Royce (LSE:RR) share price continues to see high volatility in the FTSE 100. The share price fell 11% last week, for several reasons I’ll discuss later on. Even with this fall, if I’d bought the stock three months ago I’d still be up 26%. So it’s swings-and-roundabouts depending on how I want to look at things. If I was invested and up 26%, I could use this dip to buy more. But if I’d been holding the stock for a year or more, this extra 11% fall would have added to the money I’d already lost on it after earlier falls. So let’s try and take the emotion out of this and look at it more factually.
Flight restrictions
In the early part of the week, the Rolls-Royce share price was hampered by the news from the US and UK on flight restrictions. In the US, President Biden is reintroducing travel restrictions into the country. The UK is one of the countries on the list, along with many others. Here in the UK, additional travel restrictions were also added last week.
This has an indirect impact on Rolls-Royce, but it’s still a significant one. If airline operators aren’t flying, there are no flying hours. The services Rolls-Royce provides won’t be needed. From new engine manufacturing to servicing existing parts, demand simply won’t be there in the commercial aviation sector. This was a reason for the Rolls-Royce share price fall.
On the flipside, the fall may be misplaced. After all, Rolls-Royce is a diversified business. It has marine and defence areas that should see demand remain firm, despite the above news. So the loss on the commercial side could be offset by these other areas.
Sentiment weighing on Rolls-Royce shares
Rolls-Royce issued a trading update last Tuesday morning. Cash savings of £1bn by year-end were achieved, and a £9bn liquidity fund is definitely a positive. However, there were downward revisions elsewhere. Forecast engine flying hours were revised down from 70% of 2019 levels to 55%. The company also spoke of a free cash outflow of £2bn for this year. These negatives clearly weighed on the Rolls-Royce share price. It appears the outlook for the coming year isn’t as bright as previously expected.
The final reason for the knock to the share price was broader risk sentiment surrounding the Covid-19 vaccine. A viable vaccine is important to the stock price, as it will enable more flying hours. So with the news of a tussle between the UK, EU and vaccines manufacturers regarding supply didn’t help. Add to this heightened concern about the South African and Brazilian variants over the past few days.
The Rolls-Royce share price isn’t just driven by company-specific factors, but general risk sentiment as well. The FTSE 100 index was down around 300 points on the week. So naturally this negative sentiment weighed on all constituents.
The Rolls-Royce share price may not continue to fall if this sentiment changes. In the mid-term, lifting of travel bans should see the stock move higher. For 2021, more upbeat trading updates could be released as the cost-cutting filters down to the bottom line. Personally, I’d sit more in the “buy-the-dip” camp than the “wouldn’t touch with a bargepole”.
