- Investors see optimism after panic sell-off
- Jefferies analysts see limited impact
- Rolls-Royce shares rallied 585% in two years
Aero-engineer Rolls Royce (RR.) is near the top of the FTSE 100 leaderboard on Tuesday (3 Sep) after analysts increasingly suggest a component failure that led airline Cathay Pacific (0293:HKG) to cancel some Airbus (AIR:EPA) A350 flights is probably less serious than Monday’s panic sell-off might imply.
News broke late yesterday afternoon (2 Sep) that a Cathay Pacific Airbus A350-1000 encountered an engine-related issue during a flight from Hong Kong to Zurich, leading to a widespread inspection of its A350 fleet. The inspections revealed similar problems in other engines, requiring component replacements.
The incident resulted in the cancellation of numerous flights as repairs were carried out. While this is the first reported case of this specific component failure on an A350 engine, it flags the potential for unforeseen issues in complex aircraft systems.
PANIC SAW £2.7 BILLION WIPED OFF MARKET CAP
The market’s reaction, which saw Rolls-Royce’s shares fall 6.5%, wiping £2.7 billion off its market cap, appears to have been overly severe given the potential limited scope and financial impact of the issue, said analysts at Jefferies.
They emphasised that the affected engine, installed on the A350-1000 delivered to Cathay Pacific, ‘was delivered in early 2019 and was the 15th ever delivered A350-1000. Since then, it has only been in storage for 18 days, and continued operations even through the COVID pandemic’, the analysts said.
Reuters reported that the affected parts are thought to be fuel nozzles, which are easier to reach and examine than more crucial components like blades.
Drawing parallels to past challenges faced by Rolls-Royce, particularly the Trent 1000 issues, Jefferies analysts note that the Trent 1000’s troubles were far ‘more complex and costly.’
Rolls-Royce shares moved 3.5% higher in Tuesday trading to 480p. The stock has rallied hard during the past two years as the company worked tirelessly to bounce back from complex problems that affected its fleet of Trent 1000 engines.
‘Given this is still a fluid situation, shareholders need to brace themselves for more share price volatility’, said AJ Bell investment director Russ Mould.
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Steven Frazer) and the editor (James Crux) own shares in AJ Bell.
