Rolls-Royce share price dropped for three consecutive days, reaching its lowest level since April 7 as crude oil soared. It dropped to a low of 1,160p, down sharply from the year-to-date high of 1,420p.
RR stock chart | Source: TradingView
The ongoing Rolls-Royce stock crash happened after President Donald Trump delivered another TACO (Trump Always Chickens Out) on Iran. In a statement on Tuesday, he decided to offer Iran an extension to the ceasefire.
He did that after Iranian officials decided to skip talks with the United States in Pakistan. In a statement, Iranian officials said that there was no need for the talks as the US has continued issuing sanctions and blockading the Strait of Hormuz.
As a result, crude oil prices soared, with Brent nearing the key resistance at $100. This trend may continue if the war restarts in the near term.
As we wrote earlier, Iran believes that a prolonged war, while painful, will prevent the US from launching another attack. It also believes that a long war will lead to victories by Democrats in the November election.
All these issues are risky for Rolls-Royce share price because of its civil aviation business, which accounts for 51% of its revenue. For one, a prolonged war means that its business in the Gulf region will be hindered. This explains why aviation stocks like IAG and EasyJet are slumping today.
At the same time, there is a risk that there will be jet fuel shortages in Europe, a move that will reduce flight hours of most of its clients. Such a move would also limit its business growth.
For starters, Rolls-Royce Holdings makes most of its money in the long-term service contracts it offers its airline customers. These contracts are billed on a per-hour basis.
As the cost of flying soars, there is a risk that airlines will reduce their routes to save costs. Indeed, in a statement on Tuesday, Luthansa, a top client, announced that it would cut 20,000 flights to save costs, and more companies may do the same if the war becomes prolonged.
Other companies like KLM and SAS Scandinavian Airlines have all slashed flights, a trend that may continue in the near term.
Still, on the positive side, there are signs that the stock will rebound once the war ends. For example, RR stock jumped from 1,080p to 1,300p after Trump announced his ceasefire.
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