Of all the companies suffering in the Covid-19 pandemic, the plight of Rolls-Royce (LSE: RR) pains me more than most. For years I’ve considered it an excellent company and a great long-term investment. But the Rolls-Royce share price has crashed 80% in 2020.
And that’s even after an impressive 50% rebound in November, on the back of vaccine test success. Will the recovery continue?
I’ve always rated Rolls as a top ‘picks and shovels’ company. That’s named after the old gold-rush days, when some prospectors struck it rich while others found nothing but dirt. But whoever hit the gold, those selling the picks and shovels pocketed healthy profits.
Defensive Rolls-Royce share price?
The airline industry is a bit like that. It’s extremely competitive, and airlines have little in the way of differentiation. Warren Buffett famously looks for companies with defensive moats, and even he now reckons buying airlines is a mistake. But whichever carrier is making the best profits, the companies providing the engines should prosper. And that, I’ve always thought, gives the Rolls-Royce share price a defensive edge.
The only problem is, the pandemic has laid them all low. It’s like the gold has all been worked out, and the miners have all left town.
But with the arrival of multiple successful vaccines, the sun-seekers will soon be flocking back to the travel agents and the airports, right? And that will push the Rolls-Royce share price up again, won’t it?
Vaccination timing
Well, the vaccine will not reach everyone overnight. Many of us will have to wait months before we get our jabs. And for the aviation industry, I see another aspect. Let’s look at the priority order for vaccinations.
NHS and other frontline workers will be at the head of the queue. Folks in care homes, the old and the vulnerable, will be next. Others with underlying conditions come after that, and then healthy older people. And finally, the young and fit are at the back of the queue.
So with the exception of frontline workers, people will get their vaccinations roughly in the reverse order of their likelihood of going flying. And frontline workers may well be under pressure to hold off on their holidays too. I suspect aviation won’t recover as quickly as investors hope. And the Rolls-Royce share price will face continued pressure.
Long-haul, short-haul
Even when the planes do start to return to the skies, I see one more thing that could hold Rolls-Royce back. My Motley Fool colleague Karl Loomes has explained it well, and it’s all to do with how far people want to fly. Rolls-Royce is mostly in the long-haul market, selling and supporting engines for wide-bodied jets. But experts reckon demand for short-haul flights will recover fastest, with long-haul demand currently close to zero.
Putting this all together, I think the aviation recovery will be slower than the optimists hope. And Rolls-Royce’s part of it might well not arrive until nearer the tail-end.
For the Rolls-Royce share price, I think that could well mean a traumatic 2021 with little progress. And I can’t see a clearer picture of longer-term prospects emerging until at least the summer. I’m not buying now.