Engine maker Rolls-Royce (LSE: RR) has seen its share price suffering because of coronavirus. In the short term, travel restrictions have reduced its engine maintenance revenues. As long-run prospects go, the airline industry looks to be in trouble.
But the company’s Chief of Engineering and Technology Simon Burr has now highlighted some opportunities Covid could offer the company. He cited a new focus on engines for narrow-bodied aircraft and a commitment to future technology as a focus for the company. Investors may be looking for any ray of hope for the Rolls-Royce share price, but have they found it?
Traditionally, Rolls-Royce has focused on engines for the wide-body aeroplane market. Put simply, these are the larger aircraft used for long-haul intercontinental travel. The problem is, most experts agree that this sector will have the slowest recovery, even with a Covid vaccine.
Long-haul travel is more expensive, and is usually a bigger commitment in time than short flights. Traveling between more distant countries, such as those in Europe and Asia, tends to mean a higher variety of regulations surrounding Covid.
In terms of the airline industry’s prospects, short-haul flights will be the easiest to keep running. If companies go bust, short-distance travel with smaller planes will be the easiest market for new entrants. If a recession happens, the cheaper holidays of shorter flights will dominate. Rolls-Royce is addressing this issue with its UltraFan jet engine, which is suitable for a wider range of aircraft.
Should this help the Rolls-Royce share price so much?
But should this boost RR shares? This is the question I’m currently asking myself. I think the answer is both yes and no. I definitely think a move into narrow-bodied jetliners is a good one. This is in the long term however, and an 8% jump on the day for the Rolls-Royce share price does seem a bit much.
Of course, this comes in the of a vaccine rally. Many firms hit by Covid, including Rolls-Royce, have seen their share prices bounce back this past month (with varying degrees of legitimacy in my opinion).
The future of air travel
Another positive coming from Burr’s statement is the company’s commitment to future technologies. He suggested that Covid may be causing a slump that sees airlines innovate and push towards new technologies.
Specifically, he mentioned hydrogen propulsion. Rolls-Royce is in contact with Airbus about the technology, and has not ruled itself out of working with the European firm. Airbus’s current plans see the use of hydrogen engines by 2035.
As I said, in the near term, Rolls-Royce is focusing on its UltraFan jet engine. Unlike its current Trent series, the UltraFan will have thrust range suitable for the full spectrum of jetliners. This brings some adaptability as well its use in narrow-bodied planes.
Again though, I still think it’s too early for Rolls-Royce to see much benefit in its share price. Ground tests for the UltraFan are due to begin next year. But expected production has already been delayed from 2025 to the end of the decade.
That said, I think both of these moves will help secure the company’s future. With a vaccine on its way, things are looking up regarding Covid woes. The Rolls-Royce share price may just be cheap enough to lock in some long-term growth.
The post Why is the Rolls-Royce share price up 8% today? appeared first on The Motley Fool UK.
Karl 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.
Motley Fool UK 2020