Travel supplies face a new virus threat, but you can get an inexpensive survivor out of jaws from disasters
When it comes to the travel industry, it feels like everything is a gamble – from booking a vacation in what might be the next quarantine hotspot, to investing in an airline that may or may not go bankrupt at any given time.
However, if you want to take a chance to book a two-week break in Alicante, you may also have the risk appetite for a travel supply or two.
Warren Buffett famously said we should be “scared when others are greedy, and only greedy when others are scared” – and after all, many have rarely felt so anxious about a summer vacation.
Risky Business: But if you’re willing to take a chance to book a two-week break in Alicante, you may also have the risk appetite for a travel supply or two
HOW SHARE PRICES SUN BY COVID
For the travel industry, the coronavirus pandemic was the story of one disaster after another, with little to ease the pain.
First came reports of coronavirus on cruise ships, ensuring that this particular form of vacation was seen as little more than a floating Petri dish.
Then there was a total lockdown, which meant that no one could go on vacation.
Just as green shoots are starting to emerge and families are beginning to wonder about a summer vacation, the abrupt quarantine requirement for those traveling to Spain is amid fears of a second Covid wave, raising concerns that the same can happen again to anyone who books a vacation anywhere.
Jason Hollands, general manager of fund broker and advisor Tilney Bestinvest, said, “The travel industry has weathered the end of the Covid-19 crisis and is still experiencing significant headwinds.”
Richard Hunter, the head of the markets at Interactive Investor, agrees, pointing out that two major players were removed from the FTSE 100 in June because their stock prices collapsed as everything around them recovered.
Carnival and easyJet were the two to lose their FTSE 100 crown. The cruise line lost £ 3.5 billion between March and May this year after suspending sailings following serious outbreaks on some of its ships. It now plans to sell six of its ships, although it hopes to resume in a very small way in late summer, starting with the German brand Aida Cruises.
Price drops mean that easyJet was one of the companies that lost its FTSE 100 crown
The shares – down from more than £ 32 six months ago to £ 8.26 last week – reflect the company’s problems.
Budget airline easyJet has had more of a rollercoaster ride, with periods of hope about the travel industry opening up followed by despair. Shares were over £ 15 at the beginning of the year, but closed at £ 4.94 last week, reaching close to £ 9 in early June when it looked like the Spanish summer break could be back.
Other travel companies listed on the British stock exchange have suffered the same disgraceful fate. These include holiday operator Tui, who has done his best to get customers on holiday this summer, but has been forced to cancel Spanish bookings due to the recent government ruling.
The cruise line lost £ 3.5 billion between March and May this year
Shares that were close to £ 10 at the beginning of the year are now close to £ 3 and have fallen from a hopeful £ 5.30 in June.
Then there’s IAG (International Consolidated Airlines Group), which owns British Airways and the Spanish airline Iberia, with shares falling from £ 6.40 in February to less than £ 1.70 this week; and Ryanair, with shares that have fallen from more than € 15 to around € 11 since the beginning of 2020. Finally, Dart, which owns the Jet2 airline, has fallen from almost £ 20 to £ 6.75 since the beginning of this year.
Hunter, at Interactive Investor, says the recent isolated outbreaks of the virus have put further pressure on the travel industry, disrupting hopes for an immediate economic recovery.
“The market hope of a final turnaround has fueled sentiment for IAG and to some extent easyJet, but for Carnival, few investors seem to want to nail their colors to the mast,” he cautions.
WINNERS IN THE BREED TO SURVIVE
For those who want to take a gamble on these bombed-out travel supplies, there are two big questions to ask. The first is, “When do people travel again?”; and the second is, “Which companies can survive until then?”
Brave investors should look to the long term and examine travel stock balances very carefully – and even then there are no guarantees.
On the first question, even Sage of Omaha, Warren Buffett, fears it will take too long for the normal travel pattern to return – he has released his airline portfolio at the beginning of the year.
Hollands, at Bestinvest, says that unless there is a viable vaccine, a recovery in prospects seems ‘far away’. “Ultimately, these companies face enormous uncertainty that can be very painful for shareholders,” he says.
A vaccine can speed things up significantly, but Hollands points out that even if it does, consumer spending will be affected by rising unemployment, meaning expensive travel plans can take an expensive time to recover.
However, not everyone is as pessimistic as this.
Warren Buffett released his airline portfolio at the beginning of the year
Kartik Kumar, co-manager of the Artemis Alpha Trust, which has 9.5 percent of its net asset value in easyJet and Ryanair, says, “Aviation continues. The strongest will survive – and perhaps even thrive. ‘
His strategy is to look at the competitive advantages of different airlines, as well as their balance sheets, before investing.
“We believe that short distance will surpass the long term. For example, that’s because video conferencing is a greater replacement for business travel than staycations for vacation travel, ”adds Kumar. “We express this opinion through investments in Ryanair and easyJet. Both are able to achieve a high return on capital and increase their market share through company-specific competitive advantages. ‘
Ryanair has over € 3.9 billion in cash, he emphasizes, while easyJet also has a strong balance sheet.
Kumar also highlights easyJet’s dominant positions at Gatwick, Geneva and Berlin airports, where capacity is limited, and Ryanair’s low cost base as benefits that will help the two survive.
Darius McDermott, general manager of Chelsea Financial, a broker, also believes that examining accounts is key.
‘Those companies with a stronger balance sheet will survive the most. This is because even if they do have to raise capital, they can because they have less debt. ‘
British Airways owner IAG revealed a £ 4 billion loss on Friday, as well as a long-awaited rights issue backed by major shareholder Qatar Airways.
British Airways owner IAG revealed a £ 4 billion loss last week
Chief executive Willie Walsh said he doesn’t expect recovery until 2023. The rights issue will strengthen the balance, but weaken the value of the current stock, but should give the company firepower to survive the crisis.
Analysts also have a prudent buy rating on easyJet.
Cruise ship company Carnival proves to be particularly difficult for experts to call. Russ Mold, at AJ Bell investment platform, says the cruise industry has some features that will aid its recovery.
“The industry is dominated by three major players: Carnival, Norwegian and Royal Caribbean,” he says. “It’s not really an oligopoly, but this trio is powerful, and they had the brands, state-of-the-art fleets and routes that gave them some level of price strength. If the cruise industry can linger there long enough, the good times can roll again, but it can take a long time. ‘
THE FUNDS FOR TRAVEL OPTIMISTS
You can take a point on travel shares by buying them directly, but many people prefer to spread their risk by buying a fund or mutual fund.
The aforementioned Artemis Alpha is a possibility. Other interests include the online trading group Plus500 and JustEat and it yields 2 percent.
It is up 5.2 percent in three months and down 6.4 percent in three years.
Artemis UK Select is also a fan of airlines. It has 2.47 percent of its investors’ money in IAG and 1.48 percent in Ryanair. It fell by 3.1 percent in three months and by 18.4 percent in three years.
The Man GLG fund owns Ryanair, easyJet and IAG, while the R&M Recovery fund also owns Ryanair.
Those seeking a position in holiday operator Tui will find it more difficult to find an actively managed fund, although Hollands notes at Best-Invest that it is in many trackers.
The Temple Bar Investment Trust counter-fund, which follows a strategy to buy unloved companies, has 1.99 percent of its clients’ investments in Carnival. The fund has had a tough year, however, at 41 percent, so it’s only one for the brave.
Baillie Gifford Strategic Bond Fund owns online travel agency booking.com, which has some diversity as it also benefits from staycation travel.
Prepare for a bumpy ride
They say it is always darkest just before sunrise, and for the travel industry it looks very dark at the moment.
“The longer the crisis lasts, the more existential the threat becomes,” says Hollands.
But just as the arrival of Covid-19 changed things almost overnight, vaccines and effective treatments quickly regained confidence.
With millions of us miserable about the limitations of a Covid summer, the number of bookings can skyrocket if confidence is restored. At the moment, travel supplies are only for those who are indeed hopefully traveling, but these optimists may be just the ones who look good when we arrive.
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