European Travel Stocks’ Long Road Back: Five Things to Watch
After a traumatic six months for the travel and leisure industry, the focus in the second half of the year will be on how quickly countries can open back up and how well surviving companies adapt to future challenges of the pandemic.
As concern over a second wave of the virus lingers around the world, uncertainty remains the watchword for airlines, cruise operators, tour providers, pubs, restaurants and hotels. The combined price target for the Stoxx 600 Travel & Leisure Index on a 12-month basis implies less than 4% upside after a 33% drop in the year to date, and cost control and the repair of damaged balance sheets are likely to be a key area of focus for investors.
At least with summer vacation hotspots like Spain, Greece and Italy reopening their borders, and businesses becoming more accustomed to social distancing guidelines, there’s some possibility of a revival, albeit a slow one.
“Some people don’t have the spending power they had before the pandemic,” David Madden, market analyst at CMC Markets U.K., said by email. Others will be cautious about traveling for health reasons, or simply because the experience won’t be as good as it was before, due to social distancing and fear of partial lockdowns, he said.
Here are five things to watch in the sector for the remainder of the year:
The speed at which borders reopen and the relaxation of quarantine rules will be extremely closely-watched metrics for airlines. The biggest carriers operating in the U.K. sued the government to overturn a requirement that people arriving in Britain self-isolate for two weeks, which carriers claim will have “a devastating effect on British tourism and the wider economy.”
Price might be another factor. Many European airlines are offering discounts to people itching for an escape from months of lockdown.
As for corporate travel, the outlook is more of a question mark. According to Davy analyst Stephen Furlong, any revival is likely to lag behind leisure travel as companies increasingly make use of virtual meetings.
As governments across Europe weigh in to help national carriers through the crisis, some analysts worry that the effects of such intervention may contribute to ensnaring inefficiencies rather than ensuring survival.
Credit Suisse Group AG said this month that incompatible state objectives “risk driving dysfunction” at Deutsche Lufthansa AG, whose 9 billion-euro ($10 billion) bailout is to be voted on at an extraordinary general meeting on June 25. Analysts, who on average see about 34% potential downside for the carrier’s shares over the next year, have voiced concern on the effects of the bailout, citing an expected dilution of earnings.
The German airline isn’t the only one getting state support. Scandinavia’s main carrier SAS AB on Monday won state backing to target 12.5 billion kronor ($1.3 billion) in new funds. And last month, Air France-KLM won European Union approval for a 7 billion-euro French aid package, including a state guarantee and a subordinated shareholder loan.
Cash and Balance Sheets
As carriers are being saved, the focus will turn to measures to preserve their cash and balance sheets, with Berenberg analysts saying in a note earlier this month that they need to “pursue drastic action to limit balance-sheet damage and position themselves for recovery.”
EasyJet Plc agreed with Airbus SA on a net deferral of 24 aircraft deliveries, while British Airways parent IAG SA is reviewing its strategy as the airline and several peers have signaled they will need to trim costs drastically to realign operations for a future with fewer passengers.
Any changes to social distancing rules will be crucial to the recovery prospects of bars and restaurants across Europe.
For British pubs, the situation is precarious, illustrated by declines of about 50% in shares of both Marston’s Plc and Mitchells & Butlers Plc this year. The industry has called for the U.K. requirement for people to stay two meters apart to be reduced, in line with World Health Organization guidance. Such a reduction “will be essential in determining whether or not they can reopen profitably,” Goodbody analyst Paul Ruddy wrote in a note on June 8.
Eateries, too, face running at reduced capacity for many months. Restaurant Group Plc, operator of the U.K.’s Frankie & Benny’s chain, plans to close about 125 sites, although the crisis may benefit its competitive position given that it has “the liquidity to survive Covid-19 and emerge much stronger,” Peel Hunt’s Douglas Jack and Ivor Jones wrote June 10.
The recovery path for hoteliers may be a long one, as movement restrictions and mandatory quarantine periods remain in place in several countries.
“If these measures are relaxed or exceptions granted, there may be some relief, but we think lower incomes and financial security will limit consumer spending well into 2021,” Annabel Hay-Jahans, a Berenberg analyst covering Spain’s Melia Hotels International SA wrote June 17. Revenue in 2020 is likely to be less than half of the 2019 figure, she said.
Still, as is the case for bars and restaurants, the pandemic may also provide a competitive opportunity. “We expect there will also be positive repercussions, one of which is increased market share shift to brands,” Bernstein analyst Richard J Clarke wrote June 17.
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