Rolls-Royce (LSE:RR) recently noted that the remote work trend has cut air travel. According to the company’s 2020 full year presentation, “some travel [was] displaced by advances in virtual platforms for business connectivity”. With the number of new Covid-19 cases dropping in many places, however, there is a possibility that many areas of the world will control the pandemic this year and fewer businesses might use remote work in the near and medium term. Here’s how I think the changing conditions concerning remote work could affect the Rolls-Royce share price as a result.
Remote work has been a headwind
Remote work or working online has been a headwind for Rolls-Royce since the beginning of 2020.
Due to the desire to socially distance, remote work took off during the pandemic. As a result, virtual platforms that allow for business connectivity (such as Zoom) surged in terms of activity. With more people doing work remotely, fewer people have had to travel through air. Many conventions that were normally in person were switched to virtual, for example.
Rolls-Royce has been affected by this trend because it depends on civil aviation for a big part of its business. Specifically, the company makes a lot of its money from long-term contracts that are dependent on those engine flying hours. If fewer people fly due to remote work, total engine flying hours could decrease.
Can the Rolls-Royce share price surge if remote work decreases?
With the vaccine rolling out in many places, the pandemic could be controlled in many places this year. As a result, there is the potential for less remote work and more air travel. If that happens, Rolls-Royce could benefit fundamentally.
While the company could benefit from less remote work, I don’t know if the Rolls-Royce share price will surge because of it. The market looks ahead, and has likely already priced in much of the future effects of remote work usage decreasing.
It’s also important to note that many believe remote work is here to stay in some fashion. Many employers have noticed that they can get the same amount of work done for many jobs with remote work being included. Many employees also like working from home. Although their employees might still have to come to the office, many won’t have to come to the office every day given that they can work some days remotely.
My final Foolish thoughts
I’d buy and hold the stock at the current share price. I reckon there are many fast-growing economies that have relatively low penetration of flights per person that could drive demand for new airplanes for decades to come. Given Rolls-Royce’s moat in aerospace engines and status as one of the leaders in an industry dominated by few firms, I believe the company will benefit from that trend.
Rolls-Royce does have risk in the near term given new Covid-19 variants that have created uncertainty. If the variants become more resistant to vaccines than expected, the pandemic could last for longer and the company’s civil aerospace business might continue to not do well. This might not be good for the Rolls-Royce share price.
All in all, however, I think the stock has a lot of potential in the long term given the growth in civil aviation.
