Over the past year, Rolls-Royce (LSE:RR) shares have fallen by 14.6%. For the past few months, they have struggled to even rally back above the psychologically important 100p level. With us now in a summer of air travel chaos and a cost-of-living crisis, I’m struggling to think of reasons why the Rolls-Royce share price could rally.
Civil aerospace performance is key
At a group level, Rolls-Royce has a variety of different divisions that help to generate revenue. However, the civil aerospace arm is the dominant area. In the 2021 results, it contributed revenue of £4.5bn towards a total figure of £11.2bn. Therefore, the fate of this area is key for the business overall.
I don’t think the outlook for civil aerospace is positive. In recent weeks, we’ve seen thousands of flights cancelled in the UK. This isn’t just a UK-specific issue, with similar problems being reported on around Europe.
It’s not for me to decide the root cause of who is to blame for the summer meltdown. Yet the key point is that air miles aren’t going to be increasing. This has a knock-on impact for Rolls-Royce, which won’t need to service, maintain or offer new engines for planes that aren’t flying as much.
Another point of concern is the cost-of-living crisis. Even if flight operations get resolved in coming months, I wonder how much demand in H2 will be seen. Outside of summer holidays, I think many consumers will look for domestic trips, rather than flying abroad. The cheaper option should help to conserve finances during a time when money it tight. This could be the same for business aviation, too.
Further macroeconomic challenges
In the upcoming half-year report, due out next week, I expect the business to flag up more problems. These relate to the increase in core raw material prices, as well as other inflationary pressures.
Further, in the recent trading update, the business commented that “we are working closely with our global supply chain to limit the impact of disruption and will continue to adapt our plans as the global situation evolves.” As far as I can tell, disruption in this regard has only gotten worse, not better, since then.
These business challenges aren’t unique to Rolls-Royce. I don’t blame management for not being able to deal with higher input costs. However, I do think that these issues mean that Rolls-Royce shares will struggle to materially move higher until resolved.
The flipside for the Rolls-Royce share price
I don’t want to come across all doom and gloom. It’s purely my viewpoint and I could be wrong. For example, the defence division is continuing to perform well, with the trading update referring to a strong order book. Rolls-Royce Electrical and Rolls-Royce SMR are also growing, with the backing from third party investment.
It’s also true that the blip in civil aerospace could just be for the rest of the year, with a brighter outlook for 2023 and beyond. Only time will tell in this regard.
Ultimately, I don’t feel comfortable enough to invest right now, so will be looking for options elsewhere.
