The travel sector started the year off on a slightly downbeat note as mixed consumer sentiment and firm oil prices hung over the industry. For much of 2019, the UK’s planned departure from the EU hurt the business as concerns about disruption to flights and potential visa worries weighed on consumers.
The large General Election victory secured by the Conservative Party boosted sentiment at the end of last year and, to an extent, provided some certainty with respect to Brexit as Prime Minster Johnson ran on a ticket of ‘getting Brexit done.’
Covid-19 batters travel shares
Airlines offering flights to China were the first to suffer when the Covid-19 crisis flared up. When the virus hit Italy, the European travel sector came under fierce pressure. Flights were cancelled en masse, and seeing as the virus was such an unknown, dealers were rushing for the exit.
The lockdowns imposed by government essentially brought airlines to a halt, which was reflected in the horrendous sell-off of travel sector shares.
Government policies such as the furlough scheme and the Covid Corporate Financing Facility helped the painful declines in travel stocks as it was clear that state assistance would remove some of the fear that some companies would go out of business. The groups that entered the crisis in a relatively strong position weathered the storm better than those who were weaker.
Budget airlines hit hard in 2020
Even though government policy was to save as many firms as possible, there was a notable casualty. In the first week of March, Flybe went into administration, two months after the government announced a rescue deal. The group had been hobbling along for several years; it listed on the London Stock Exchange in 2010, but in less than a decade shares lost over 97% of their value, even before the pandemic struck.
Flybe accounted for 40% of all the domestic flights in the UK, and a large portion of those flights would have been business people travelling internally. Given the huge rise in working from home and virtual meetings, the group probably would have needed further financial help despite the spring lifeline.
In contrast, Ryanair (LON:RYA) started 2020 in a fairly good position, but had an extremely tough time from late February onwards. The industry received some relief over the summer as economies reopened, but that was short-lived as renewed health fears in autumn soured sentiment. In November, Ryanair revealed a first-half loss of €197m, which was better than the €244m loss that the company forecasted. The airline posted a first-half pre-tax profit of €1.15bn one year previous, so it goes to show how much pain the pandemic has caused. The second-half loss is expected to be even greater. Even though the situation is bleak, the airline had a cash balance of €4.5bn in November, so it‘s well placed to endure several more quarters of turbulence, and the Ryanair share price has doubled since the March sell-off.
TUI Travel (LON:TUIT) suffered immensely too and last month it posted a €3bn EBIT loss. Customer volume and revenue fell by 62% and 58% respectively. Cash and available credit facilities stood at €2.5bn. In light of the restrictions and the dreadful consumer environment, the company plans to operate at 20% of capacity for the winter season. Looking further into the New Year, TUI seem very optimistic as they are aiming to operate at 80% of summer capacity. TUI has predicted that 2021 will be a year of financial transition and that it hopes to return to profitability by 2022.
The EasyJet (LON:EZJ) share price also had a rough ride on account of the health crisis. Full-year revenue slipped by 52.9% to £3bn, and the annual loss before tax was £835m, down from last year’s profit of £427m, so the violent swing in earnings underlines the mayhem caused by the pandemic. The group now anticipates that capacity will be no more than 20% in the first quarter. Cash burn for the fourth quarter was a better-than-expected £651m, down from £774m in Q3, so it is encouraging to see that easyJet is curtailing its outgoings. With respect to the future trading relationship between the UK and the EU, easyJet confirmed that it is prepared for all outcomes. The low-cost airline is very well-financed at it raised £3.1bn in cash year-to-date (YTD).
In late October, IAG (LON:ICAG), the parent of Iberia, British Airways and Aer Lingus, revealed its nine month figures. Passenger capacity had fallen by over 64% for the period. The operating loss was €3.2bn, a big difference from the €2.52bn profit posted one year ago. The third-quarter numbers are very weak, as passenger capacity dropped by over 78.6%. The figures make for horrendous reading but as of late September, IAG had a cash balance and credit facilities that came to €6.6bn. The airline didn’t issue guidance, not surprisingly, but the extremely strong liquidity level stands out in traders minds when considering the IAG share price.
The Wizz Air (LON:WIZZ) share price has been the standout performer of the group as its shares are up over 18% on a YTD basis. Last month the low-cost airlines that specialises in flights to and from Central and Eastern Europe posted a net loss of €144.9m and that was a big swing from the €368m profit in the previous year. In the six month period, revenue slumped by over 71% to €471.2 million as passenger numbers tumbled over 70%. Like with Ryanair, Wizz registered a solid rise in ancillary revenue as in increased by 28.6%. The group’s cash balance is €1.55bn. Wizz confirmed that the monthly cash burn would be €70m should there be a full grounding of the fleet until the end of the next financial year. The fact the airline has such a healthy cash balance for its size has helped it navigate through the difficult times.
The Carnival (NYSE:CCL) share price was the joint worst performer in the sector along with IAG, as the cruise operator’s stock lost just over 60% in value YTD. Carnival posted an eye watering $5.1bn first-half loss, compared with a $787m profit in the same period the year before. Total revenue was $5.5bn, a 42% fall, and that loss of income did the damage as operating costs only fell by 4.7% in the timeframe. In October, the cruise operator published its third quarter numbers. Net cash position funded from financing activities stood at $13.6bn and that was mostly down to the fact that long term-debt is now $11.4bn and keep in mind the group has a market capitalisation of $22.5bn. $1.6bn of the debt was raised in the ‘junk bond’ market which is an indication of how things are going for the company. The firm has been plagued by the health crisis and cancelling cruises has been all too common for Carnival.
Travel stocks performance 2020
Vaccine news encourages travel sector shares
Travel stocks has been clobbered in 2020, and the crisis is still a big problem for Europe and the US, but Covid-19 vaccinations have begun. Since early November, the mood in the markets has changed greatly because of upbeat vaccine news. Seeing as travel is arguably the most exposed industry to the virus, it has rallied greatly since. Many of the companies mentioned above have had to arrange financing to see through this difficult year but the major groups survived. There is a view in the markets that the rate at which vaccinations will be rolled out will ramp up the further we go into 2021 and that should help lift the travel industry out of its rut.
Uncertainty persists with respect to the UK-EU trading relationship come January 2021, but the picture should become clearer in the near-term. Governments and investors have been keen to support the travel sector, and that should continue into next year.
Sadly the jobless rate is likely to jump in the months ahead as the UK furlough scheme ends in late March, so a certain section of the consumer market will be curtailing its expenditure. On the other hand, some professional types who work from home have broadly seen their savings rise as they have had few opportunities to spend their money, and that section of society are likely to travel when restrictions are lifted.
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