It has been a brilliant few years for Rolls-Royce (LSE: RR) shares. They have consistently been among the strongest performers on the FTSE 100 for several years on the trot. The share price is up a whopping 983% over the past half-decade.
What about 2026 so far?
The share price has essentially gone nowhere. It started well and indeed hit a new all-time high. However, it has since given up those gains and stands around 1% lower than where it began the year.
So, what is going on? Could this be a buying opportunity for my portfolio, or a warning signal that the long bull run in Rolls-Royce shares may have run out of steam?
The main problem is civil aviation
Shares never fall or rise for just one reason. There are always multiple factors that help to drive a share price, sometimes rationally so, but at other times without obvious rhyme or reason.
Having said that, sometimes the price action in a given share over a certain period can largely be pinned on a key driver.
I think that is the case with Rolls-Royce shares right now. The driver as I see it can be summed up as declining civil aviation economics.
By that I mean that the current war in the Middle East, with direct risks for tourists and other travellers, is likely to suppress civil aviation demand, eating into airline revenues. Meanwhile, surging jet fuel costs are piling on costs for the airlines.
Lower revenues combined with higher costs means a likely freeze on non-essential expenditure. That probably means airlines pushing back or cancelling orders for new aircraft. Fewer flying hours could lead to less of the costly deep services jet engines are required to go through after a set number of hours in use.
As civil aviation is the largest of Rolls-Royce’s three main business areas, that could be bad news for profits at the firm – hence why the shares are down.
Things are bad, but they’re not terrible
Still, Rolls has not yet indicated any specific concerns about a potential hit to profits.
Maybe it never will, because for example it can squeeze efficiencies out of the business to help keep earnings steady. It has proven effective at cost management in recent years.
Also, it is not yet clear that airlines are seeing passenger demand fall substantially on a global basis, rather than a more regional one. Nor is it clear how long any demand fall will last.
Still, with a weakening global economy and ongoing travel fears for many flyers, I think there are hard times ahead for civil aviation and those will last at least for months, not weeks.
Civil aviation is only one of Rolls’ businesses. Its defence division could well see customer demand keep growing, as it has in recent years. Similarly, high oil prices could be good not bad when it comes to demand for the company’s power systems business.
But as we saw during the pandemic, when Rolls’ civil aviation business does poorly, it affects the whole company’s performance significantly.
Even after this year’s lacklustre performance to date, Rolls-Royce shares are selling for 41 times earnings. That looks expensive to me and I will not be touching them.
