Rolls Royce versus Spirit Airways

Rolls Royce hit a market cap of £50 billion today for the first time. That recovery has been driven by the robust recovery in demand for jet engines, from both the commercial airline and defense sectors.

The logic is reasonable. In the depths of the pandemic the company was suffering because no one was travelling. The large number of infections and deaths on cruise liners soured the public on travel.

Then uncertainty was amplified by the misinformation percolating through society about the dangers of the virus. That led to uneven application of vaccination, distancing and decontamination rules. Most people concluded it was not worth the trouble to travel anywhere.

A significant part of Rolls Royce’s business is maintenance contracts on jet engines. Fewer miles flown means less need for maintenance. That resulted in the share collapsing and it did not begin to recover until air traffic began to trend higher sustainably towards the end of 2022.

The war in Ukraine then provided a new source of demand from the defense sector. That is likely to be a durable trend since most of the arsenals expended in the war are older models. A significant re-arming trend will follow the war .That suggests the defense sector will find a higher floor than it enjoyed before the conflict began.

Last week, Spirit Airlines finally succumbed to bankruptcy. The company has been shopping around for a merger. For a while a tie-up with JetBlue, then Frontier looked likely, but those talks did not result in an agreement.

Several small airlines have come and gone since the pandemic but Spirit is a major company with 202 planes. The failure of a discount airline is not the norm for the industry.

Spirit has been following the path to success of companies like Ryanair and EasyJet. It sold low cost seats and charged for baggage and added extras. The problem is the sector is competitive and the company has not succeeded in filling planes.