The FTSE 100 took a huge hit on Monday, losing £44bn in value as fears of a worldwide Covid-19 resurgence sparked a mass sell-off. The index fell 2.3%, closing at 6844.4, its lowest closing point since April. Travel stocks were hurt the most, down 3.5% to levels not seen since last year.
Two of the biggest losers were Rolls-Royce (LSE: RR) and International Consolidated Airlines Group (LSE: IAG). They have regained their losses over the past two days, but are still near historic lows. The Rolls-Royce share price is currently 97p, down from 1,088p in August 2018, while the IAG share price is 171p, down from 726p in June 2018.
With international travel still up in the air, is the tremendous potential for growth in these stocks worth the risks?
A brighter tomorrow
The majority of Rolls-Royce’s revenue comes from its global reputation as a builder and repairer of civilian aircraft. A price recovery to the giddy days of 2018 is dependent on a strong recovery of the civilian aviation sector. This will be almost entirely down to how the global coronavirus situation develops over the next couple of years. While the Rolls-Royce share price is down 20% in the last month alone, there is reason to be optimistic. In the UK, every adult has been offered a first vaccine dose, with all restrictions lifted from 19 July. The situation is moving in Europe and the USA, but at least half of adults have had their first dose.
There are risks though; the company has been selling off assets to improve its financial position. In December, it sold its civil nuclear business to Framatome. In February, it sold Bergen Engines to TMH Group. It is currently trying to sell its 50% stake in AirTanker, a military aircraft provider. The plan is to release £2bn of equity into the business to help weather the ongoing storm.
I think the key question is whether aviation restrictions end before Rolls-Royce runs out of money. If all goes well, international travel could bounce back sharply, with a corresponding share price increase. If not, the share price could sink even further. I think the risks of buying this FTSE 100 company could be worth the reward in the long term.
Come fly with me
IAG is the owner of both British Airways and Aer Lingus. Even more than Rolls-Royce, its recovery is entirely Covid-19-dependent. Although ‘Freedom Day’ came two days ago, the UK is still in the middle of a ‘pingdemic.’ One quarter of schoolchildren are off school, and employers have branded the current self-isolation rules ‘unworkable.’ Even with relatively high vaccination rates, the UK requires vaccinated French tourists to isolate. Meanwhile, vaccination rates abroad are still too low to facilitate mass air travel, with most countries still hostile to the idea of regular tourism.
I don’t think the numbers are looking good. IAG lost over one billion euros in the first quarter of this year alone. The second quarter earnings report is coming up next week, and it seems likely that a similar loss will be incurred. Yesterday it lost a court bid to force the UK government to explain how it justifies coronavirus rules restricting air travel. Even as a FTSE 100 stock, the uncertainty is too much for me to buy right now.
Charles Archer 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.