Manufacturing jet engines is difficult and complex. It’s not surprising then, that the industry has been dominated by just a handful of firms. In the past, this limited competition, and the growing Chinese aerospace market, made investments in leading jet engine maker firms such as Rolls-Royce (LSE: RR) shares look pretty savvy.
Recently, however, the industry has fallen on hard times as Covid-19 has really hurt air travel in 2020.
Due to the decline in air travel, airlines around the world have run into financial difficulties. That, in turn, has translated into softer demand for airplanes and, by extension, new jet engines.
As a result, jet engine makers have experienced exceptional turbulence. Despite its recent rebound, Rolls-Royce shares are still down around 67% year-to-date at the time of writing.
Given the decline in Rolls-Royce stock, is there a potential opportunity for a smart investment? In my view, the viability of Rolls-Royce as an investment boils down to the outlook for the air travel industry. And, again in my view, the air travel industry is dependent on Covid-19.
Here are three critical factors I’m looking at.
The more effective the Covid-19 vaccine, when it appears, the faster the world reaches a state of herd immunity and the faster air travel can return to normal. Herd immunity happens when enough people are immune to a disease that it doesn’t spread.
Currently, it is unclear how effective the potential Covid-19 vaccines will be given that none are approved in the West yet. For some scientists, any vaccine that’s 50%–60% effective for Covid-19 is good enough. Some believe that the eventual effectiveness of the Covid-19 vaccine could be 70% or higher. Obviously the higher the better for the vaccine effectiveness metric.
How many vaccines for Covid-19 are approved
Another factor I think that’s important for Rolls-Royce shares is the number of approved vaccines for Covid-19 approved.
Currently, the world is manufacturing a number of vaccine candidates for Covid-19. This is even before they are found to be safe and effective. Nations are doing this to have vaccines to distribute faster in the event they are approved. If there are more vaccines to distribute, the world could reach herd immunity faster.
How quickly vaccines are actually taken when they’re available
Yet another factor for Rolls-Royce shares in my opinion is how quickly people take the Covid-19 vaccines when they become available.
Although it would seem logical that everyone would want to take the vaccine as soon as possible, this isn’t the case.
According to a Wall Street Journal/NBC poll of American registered voters, for example, only 20% of responders said they would take a vaccine as soon as possible.
Half of the poll’s respondents said they would wait a while before taking the vaccine. Another 10% said they would only take the vaccine if the government mandated it.
Given that the eventual approved Covid-19 vaccine might not be 100% effective, the world needs as many people to take safe and effective vaccines as soon as possible to reach herd immunity status faster.
To that end, how well governments do in terms of educating the public on a Covid-19 vaccine, allaying potential fears, and promoting vaccine usage would go a long way in terms of accelerating the normalization process for both the economy and in terms of air travel.
Jay Yao 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.