There are two stocks in the FTSE 100 that look to me to be some of the top recovery plays on the market. IAG (LSE: IAG) and Rolls-Royce (LSE: RR) both present different ways to invest in the recovery of the global aviation sector.
However, I think one of these businesses has more potential as a recovery investment than the other.
IAG share price plunge
When the coronavirus pandemic began, the travel industry was one of the first sectors to go into lockdown. Two years on, the industry is still a shell of its former self. Even the most optimistic analysts do not believe that sales will return to 2019 levels until the middle of the next decade across the industry.
As the travel industry ground to a halt, both IAG and Rolls had to pull out all of the stops to try and survive. At the height of the crisis, some analysts speculated that these businesses would never make it out alive.
The industry has now passed the worst of the crisis, although there will always be the chance that a more deadly variant will emerge. Over the past two years, these two companies have been busy raising money and slashing costs to keep the lights on. Now they are out of intensive care, they can focus on the recovery.
Rolls-Royce share price recovery
IAG has seen a significant improvement in sales over the past six months. Consumers seem happy to travel again, and the removal of travel restrictions makes it easier to move around the world. The owner of British Airways is trying to capitalise on this rising demand for travel with sales and more seats on the most popular routes.
A growing order backlog for new aircraft is a strong sign that the aviation industry is recovering.
It is also a strong sign that the outlook for Rolls, one of the leading manufacturers of engines for the civil aviation industry, is improving. Most of the company’s income is derived from service contracts attached to the engines it sells to aircraft manufacturers, and these contracts are linked to the number of flying hours each machine completes.
So, with more aircraft back in the sky, and more planes on delivery, it seems as if the group is well on the way to recovery. However, challenges such as rising costs and a lack of skilled engineers could hurt the organisation’s growth.
Still, considering the fact that the firm is a supplier to the whole industry and owns a lot of valuable technology, I would rather buy Rolls than IAG. The latter has to compete with other companies which are all competing for travellers’ business. The engineer has its own niche in the market. As long as the aviation industry recovers, its top and bottom lines should as well.
Rolls-Royce also supplies valuable nuclear technology to the Royal Navy. This provides a defensive, fixed revenue stream for the group.
As such, I believe the Rolls-Royce share price has a much better outlook than the IAG share price over the next five to 10 years.
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Rupert Hargreaves 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.
