Rolls-Royce Group (LSE: RR) is gaining of late. And my Motley Fool colleague Rupert Hargreaves has recently offered a thought-provoking take on it. Well, my thoughts, at least, are provoked as I watch the Rolls-Royce share price continue the climb that’s taken it up 30% in a little over a month. That does just reverse an earlier decline, though, and the shares are flat overall in 2021.
I have been making a mistake, along, I think, with a lot of other investors. I’ve been thinking about Rolls-Royce as if, once we’re finally out of all the pandemic damage, it will still be the same company of old.
Until something like low-orbit space travel becomes economically feasible, we’re stuck with conventional aviation for getting get us any distance around the globe in a reasonable time. And the demand for Rolls-Royce’s engines, and maintenance and repair services, will still be there. That’s a bullish factor supporting the Rolls-Royce share price, for sure.
But two things might have changed the aviation business for good. One is the Covid-19 pandemic. Or rather, the knowledge of what a pandemic can really do. Until 2020, a global pandemic had been one of those end-of-the-world threats that we see in post-apocalyptic movies. Though scientists had been warning of the inevitability for decades, nobody really paid much attention to them.
We now know the reality, and that we’ve been very lucky that Covid-19 has had such a relatively low mortality rate (so far, he says, not wanting to tempt evolution into coming up with a far worse variant). Will that hold people back from the skies? I’ve seen airlines talking of achieving 75% of pre-pandemic capacity by the end of 2021. But I have my doubts, and I see a real chance we won’t get back to the old ways for a while yet. Or the old Rolls-Royce share price.
Then there’s the fossil fuel energy crisis. The development of renewable energy sources for domestic and industrial needs, and for motor transport, is well under way. But there’s little sign of any commercially viable substitute for hydrocarbon-based aviation propulsion being realised any time soon.
When alternative — presumably electric — aero engines become a thing, Rolls-Royce will surely be in the vanguard of their development. It’s not something that a newcomer is likely to take over, and the existing engine makers enjoy some formidable barriers to entry. But in the years before such technological change, how badly will hydrocarbon-based aviation suffer? It could be significant.
Where will the Rolls-Royce share price go?
Anyway, the bottom line is what does all this mean for the Rolls-Royce share price? In the medium term, I think it’s all about getting bums on plane seats again. To be specific, enough of them to get Rolls back to sustainable profit before its current liquidity becomes strained. If that happens, I think it could climb again.
But for the long term, I don’t think we have a new valuation basis worked out yet. So I shall wait.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.