United Kingdom

Travel stocks like easyJet face virus peril but you could snap up a cheap survivor

When it comes to the travel industry, it feels like everything's a gamble – from booking a holiday in what might be the next quarantine hotspot to investing in an airline that may or may not go bankrupt at any moment.

If you're willing to take a chance on booking a two-week break in Alicante, though, you might also have the risk appetite for a travel stock or two. 

Warren Buffett famously said that we should be 'fearful when others are greedy, and greedy only when others are fearful' – and, after all, many have rarely felt so fearful about a summer break.

Risky business: But if you're willing to take a chance on booking a two-week break in Alicante, you might also have the risk appetite for a travel stock or two

HOW SHARE PRICES WERE SUNK BY COVID

For the travel industry, the coronavirus pandemic has been a tale of one disaster after another, with little to mitigate the pain.

First came reports of coronavirus on cruise ships, ensuring that this particular form of vacation came to be viewed as little more than a floating petri dish.

Then came total lockdown, meaning that no one could go anywhere on holiday at all.

Now, just as green shoots start to appear and families begin to wonder about a summer break, comes the abrupt quarantine requirement slapped on those taking a trip to Spain amid fears of a second Covid wave, raising concern that the same could happen again to anyone who books a holiday anywhere at all.

Jason Hollands, managing director of fund broker and adviser Tilney Bestinvest, says: 'The travel sector has been right at the sharp end of the Covid-19 crisis and continues to face considerable headwinds.'

Richard Hunter, the head of markets at Interactive Investor, agrees, pointing out that two big players were ejected from the FTSE 100 in June as their share prices collapsed when all about them recovered.

Carnival and easyJet were the two to lose their FTSE 100 crown. The cruise operator lost £3.5billion between March and May this year, after it suspended sailings following severe outbreaks on some of its ships. It is now planning to sell six of its vessels, although it hopes to resume in a very small way in late summer, starting with its German brand, Aida Cruises.

Share price falls means easyJet was one of the firms to lose its FTSE 100 crown

The shares – down from more than £32 six months ago to close at £8.26 last week – reflect the company's problems.

Budget airline easyJet has faced more of a rollercoaster, with periods of hope about the travel industry opening up being followed by despair. The shares were over £15 at the beginning of the year, but closed at £4.94 last week, having nearly reached £9 in early June when it looked like Spanish summer holidays might be back on.

Other travel companies listed on the UK stock market have suffered similar ignominious fates. They include holiday operator Tui, which has been doing its best to get customers on holiday this summer, but has been forced to cancel Spanish bookings due to the Government's recent pronouncement.

The cruise operator lost £3.5billion between March and May this year

Shares that were close to £10 at the beginning of the year are now nearer £3, having fallen from a hopeful £5.30 in June.

Then there's IAG (International Consolidated Airlines Group), which owns British Airways and Spanish airline Iberia, with shares down from £6.40 in February to under £1.70 this week; and Ryanair, with shares down from over €15 to around €11 since the beginning of 2020. Finally, Dart, which owns airline Jet2, has seen shares tumble from nearly £20 to £6.75 since the beginning of the year.

Hunter, at Interactive Investor, says that recent isolated outbreaks of the virus have put further pressure on the travel industry, dashing any hope of immediate economic recovery.

'Market hopes of an eventual turnaround have buoyed sentiment for IAG, and to some extent easyJet, but for Carnival there seem few investors willing to nail their colours to the mast,' he warns.

WINNERS IN THE RACE TO SURVIVE

For those willing to take a gamble on these bombed-out travel stocks, there are two big questions to ask. The first is, 'When will people travel again?'; and the second is, 'Which companies can survive until then?'

Brave investors need to be looking to the long term, as well as scrutinising the balance sheets of travel stocks very carefully – and even then there are no guarantees.

On the first question, even the Sage of Omaha, Warren Buffett, fears it will take too long to get back to normal travel patterns – he cleared out his portfolio of airlines back at the beginning of the year.

Hollands, at Bestinvest, says unless there is a viable vaccine, a recovery in prospects looks 'a long way off'. 'Ultimately, these businesses face enormous uncertainty which could be very painful for shareholders,' he says.

A vaccine could speed things up considerably, but Hollands points out that, even if that comes along, consumer spending will be impacted by rising unemployment, meaning that expensive travel plans could take a long time to recover.

Not everyone is as pessimistic as this, however.

Warren Buffett cleared out his portfolio of airlines back at the beginning of the year

Kartik Kumar, co-manager of the Artemis Alpha Trust, which has 9.5 per cent of its net asset value in easyJet and Ryanair, says: 'Aviation will go on. The fittest will survive – and perhaps even thrive.'

His strategy is to look at the competitive advantages of various airlines, as well as their balance sheets, before investing.

'Our view is that short-haul will trump long-haul. That's because, for example, video conferencing poses a greater substitute for business travel than staycations do for leisure travel,' Kumar adds. 'We express these views through investments in Ryanair and easyJet. Both are able to achieve high returns on capital and grow their share of the market due to company-specific competitive advantages.'

Ryanair has more than €3.9billion of cash, he points out, while easyJet also has a strong balance sheet.

Kumar also highlights easyJet's dominant positions in Gatwick, Geneva and Berlin airports, where capacity is limited, and Ryanair's low cost base as advantages that will help the two to survive.

Darius McDermott, managing director of Chelsea Financial, a broker, also believes that scrutinising accounts is the key.

'Those companies with stronger balance sheets are going to be the ones most likely to survive. This is because even if they did need to raise capital, they will be able to because they have less debt.'

British Airways owner IAG revealed a £4billion loss on Friday as well as a much anticipated rights issue supported by main shareholder Qatar Airways.

British Airways owner IAG revealed a £4billion loss last week

Chief executive Willie Walsh said he does not anticipate recovery until 2023. The rights issue will shore up its balance sheet, but dilute the value of the current shares but should give the company the firepower to outlast the crisis.

Analysts also have a cautious 'buy' rating on easyJet.

Cruise ship business Carnival is proving particularly hard to call for experts. 

However, Russ Mould, at investment platform AJ Bell, says that the cruise industry has some characteristics that will aid its recovery.

'The industry is dominated by three major players – Carnival, Norwegian and Royal Caribbean,' he says. 'It's not quite an oligopoly but this trio is powerful and they had the brands, state-of-the-art fleets and routes that gave them some degree of pricing power. If the cruise industry can hang in there for long enough, the good times could roll again, but it may take a long time.'

THE FUNDS FOR TRAVEL OPTIMISTS

You could take a punt on travel stocks by buying them direct, but many people prefer to spread their risk by buying a fund or investment trust.

Artemis Alpha, mentioned previously, is one possibility. Other holdings include online trading group Plus500 and JustEat and it yields 2 per cent.

It has risen 5.2 per cent in three months and is down 6.4 per cent over three years.

Artemis UK Select is also an airlines fan. It has 2.47 per cent of its investors' money in IAG and 1.48 per cent in Ryanair. It has fallen 3.1 per cent over three months and fallen 18.4 per cent over three years.

Man GLG fund owns Ryanair, easyJet and IAG, while the R&M Recovery fund also owns Ryanair.

Those wanting a position in holiday operator Tui will find it harder to find an actively managed fund, though Hollands, at Best-Invest, notes that it is in many trackers.

Contrarian fund Temple Bar Investment Trust, which pursues a strategy of buying unloved companies, has 1.99 per cent of its clients' investments in Carnival. The fund has had a rough year, however, down 41 per cent, so it's only one for the brave.

Baillie Gifford Strategic Bond fund owns online travel agency booking.com, which has some diversity in that it benefits from staycation travel as well.

PREPARE FOR A BUMPY RIDE

They say it's always darkest just before the dawn, and for the travel industry things look very dark right now.

'The longer the crisis grinds on, the more existential the threat becomes,' says Hollands.

But just as the advent of Covid-19 changed things almost overnight, vaccines and effective treatments could build confidence again very quickly.

With millions of us miserable about the restrictions of a Covid summer, there could be a huge boom in bookings when confidence is restored. 

At present, travel stocks are only for those who travel very hopefully indeed, but these optimists may just be the ones sitting pretty when we arrive.

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