Airline industry to soar again?
3rd June 2021 |
In 2020 the global airline industry hit rock bottom. Forcible closure around the world tends to do that to an industry.
But as the saying goes, once you hit rock bottom, there’s only one way to go from there… up.
The Covid-19 pandemic grounded the industry. And ever since, it’s been a tense waiting game with false starts about when things may be allowed to return to normal again.
Some argue things may never return to normal in the airline industry. Not us. But we’ll get to that in a moment.
What cannot be ignored is the industry has been hit hard financially and psychologically from the last year and half.
Job losses in the airline industry have been extremely high.
In the UK for example, airlines have seen the second most job losses, as an industry, since the pandemic began.
According to data from April, the airline industry (with 37,104 job losses) is only behind the hospitality industry (48,379) in this respect.
The demise in air travel has had a direct impact on businesses very dependent on it. This group includes airlines, tourism businesses and aircraft manufacturers. Notably, it led to Rolls-Royce Holdings’ (LSE:RR) stock price taking a fair battering.
However, we believe the worst is now over for the global airline industry. In particular we see a strong recovery from the UK airline industry.
This is because UK international travel was officially restarted on 17 May.
On 10 May, UK Prime Minister Boris Johnson confirmed that the UK would be moving into stage three of the four-stage “roadmap” to post-Covid-19 normality.
That is the stage where we are now.
The fourth and final stage set to come into play on 21 June, barring any delays.
The plan will permit air travel, without the need for quarantine in either direction, to and from “green-listed” countries.
In particular, Portugal is open for travel. Many holidaymakers have already wasted no time in heading there for a last-minute holiday.
However, it’s worth noting that many of the green-listed countries currently have their own restrictions on people – including UK tourists – entering them. We expect the situation to change for the better in the coming months.
For all the limitations and problems, the creation of the green list is a move in the right direction for the UK airline industry.
The next UK government review is due to take place on 7 June. It looks likely that many popular tourist destinations will be added to the green list, including Greece (and Greek islands) and the Balearic Islands.
The outlook is certainly looking a lot more promising for the UK airline industry – and I believe it should mark the beginning of a major recovery in its fortunes.
This is welcomed by Rolls-Royce Holdings, which is a critical supplier of engines and components to the airline industry. Its fortunes are tightly aligned to the success of the airline industry globally.
Like the airline industry, we consider it having hit rock bottom and is well on the way up from here.
The bottom appears to have been 2 October 2020. Rolls-Royce’s share price was just 38.98p, the lowest it has been for just under 18 years.
Now at the time of writing, it sits at around 111.78p – a healthy increase of 179% from its October low.
The company has weathered the impact of the pandemic impressively. Despite facing losses, it has continued to innovate and add value for its customers.
In addition, its diversification across industries such as shipping, nuclear and technology has helped it to offset the decline in the airline industry.
Now, one of Rolls Royce’s latest ventures suggests that it is shifting its focus back to the re-emerging airline industry.
On 6 May, Rolls-Royce unveiled its new Pearl 10X engine at Le Bourget airport in Paris. It is the third and most powerful member of its Pearl engine family.
It will exclusively power Dassault’s brand-new flagship aircraft, the Falcon 10X. Dassault is a French aircraft manufacturer of business jets.
Compared to Rolls-Royce’s last generation of business engine, the 10X engine is 5% more efficient, and produces lower levels of noise and emissions. At the same time, it will allow customers to travel nearly as fast as the speed of sound.
Chris Cholerton, president of civil aerospace at Rolls-Royce, described the engine unveiling as a “special day” and “the start of a successful partnership”.
The engine is currently being tested at the Rolls-Royce Centre of Excellence in Germany. Interestingly, its capability of operating on 100% sustainable aviation fuel (SAF) is being assessed.
This is an interesting development because that also throws up the possibility these engines may find Velocys (LSE:VLS) pioneering SAF pumping through their fuel lines.
So while there’s certainly a benefit for Rolls-Royce to be delivering sustainable fuel capability engines, the added benefit to our other stocks, while it may not be so apparent, certainly exists as well.
Now we should add, that this is speculation on our part. First the engines need to be properly certified with SAF and the fuel from Velocys needs to get to a production and supply quality and quantity too.
But it’s an example of how some of our stocks’ futures can potentially intertwine and how you can see our thought process emerge as we bring you recommendations across a diverse array on industries and opportunities.
We reiterate our buy recommendation on Rolls-Royce and Velocys. We see undoubted upside potential in both stocks as the airline sector gets back on its feet again.
Buy list update
HYVE Group (LSE: HYVE)
HYVE Group connects millions of people worldwide through its virtual and in-person events. The pandemic has had a damaging impact on the business. The lack of footfall has meant that it has lost out on revenues from in-person events. It has had to adapt, and to host the majority of its exhibitions virtually.
However, the company is now looking to capitalise on the easing of lockdowns around the world. This week, the company has confirmed that it is looking to raise money, and boost its post-pandemic growth.
According to reports, the company is in talks with Carlyle, a leading private equity (PE) firm. The proposed investment from Carlyle is set to be around £250 million. It would require shareholder approval. According to Market Watch, HYVE’s management has stated that it will “prioritise minimal dilution to existing shareholders.”
These kinds of PE deals can be hit and miss with shareholders. While the company wants to minimise dilution, that doesn’t mean there won’t be dilution. The expectation is the cash will help boost the roadmap of the company coming out of lockdown, but again, it’s a case of having to wait and see the reaction in the market.
We still expect the company to scale-up as the world returns to physical events. In fact, we believe there will be a boom in these events as people realise their importance and, frankly, get sick of virtual events. This could lead to extra revenue, business growth, and opportunities that we haven’t anticipated and overall, an increase the company’s valuation.
We reiterate our BUY recommendation on the stock.
Trackwise Designs (LSE: TWD)
On 13 May 2021, Trackwise Designs announced it has signed a multi-year agreement with CathPrint AB. CathPrint AB is a Swedish manufacturer of medical device products.
CathPrint AB has developed its own printed circuit board (PCB) technology, called CathPrint Technology. It is designed for use in catheters. A PCB is a platform that connects electrical components together so that a device can function.
The agreement will see Trackwise supply its signature Improved Harness Technology (IHT) PCB parts for use in CathPrint’s products.
Trackwise’s IHT is patented, and it enables PCBs to be manufactured to any length. It provides cost efficiencies and excellent functionality for machinery in many industries, including aviation, automotive and medical.
In this case, the IHT enables electrical components to be incorporated into catheters. Currently, catheters are largely hand-crafted.
This partnership will bring an extra revenue stream to Trackwise. It demonstrates the functionality of its IHT, with it now being firmly established across the medical, aviation and automotive industries.
We believe that the IHT will be the main driver of the company’s revenues for the foreseeable future. Its quality and efficiency are making it difficult for the markets in which it operates to ignore.
We reiterate our BUY recommendation.
The Frontier Tech Investor “Top Three”
Sometimes it’s hard to decide on which stocks to invest in from our buy list.
Below is our Frontier Tech Investor “Top Three” section showing three stocks in open BUY positions. If you’re trying to figure out what to invest in next, these are three that we think are a great place to start.
This doesn’t mean our other stocks are no good: this is just a tool to help you spot the next Frontier Tech Investor stock that could be worthy of your consideration.
Kanabo Group (LSE:KNB) – one of the world’s most controversial investment ideas is around the legalisation of medicinal and recreational cannabis. It’s sweeping across Canada and now the United States. Both countries are leaders on the way to legalisation. In Australia a similar path is being followed. And now the UK is on the same track. Kanabo is one of the newest and best plays in this huge investment opportunity. You can find our recommendation here.
IQE (LSE:IQE) – our most recent recommendation, IQE, is a key part of the supply chain getting semiconductors into the world. You can find our latest discussion on IQE here, and a link to the original report here. With a gigantic increase in the demand for semiconductors, the world is facing a “chipageddon”. This is a situation where there simply aren’t enough semiconductors to supply the world’s biggest, most demanding companies. IQE is one of the few UK-listed stocks that are a play on this theme.
Velocys (LSE: VLS) – there’s no doubt that governments will continue to push their “green agenda”. This means that they will do what they can to support industry in ways that will help enable carbon neutral economies. Velocys is a big part of this – developing sustainable fuels for transport and logistics (in particular aviation) with pioneering technology. Some discussion, and a link to our original recommendation of Velocys can be found above. If you’re looking for a great “green energy” play, Velocys is a very good place to start. You can find the original recommendation here.
Sam Volkering
Editor, Frontier Tech Investor
Elliott Playle
Junior Analyst, Frontier Tech Investor
