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More turbulence expected for the travel sector

CMC Markets

As was the case in 2018, the travel sector had many factors holding it back, and 2019 was a tough year for the industry, so much so that a big name went to the wall. Continued uncertainty in relation to Brexit, industrial action, volatile oil prices, as well as a decline in consumer sentiment, are all reasons why the business had a difficult time this year.

At the start of the year, there was a belief in the markets that the US Federal Reserve would hike interest rates three, or possibly four times, which could send the US into a recession. That was the reason why global stock and energy markets started off on a soft note. When sentiment shifted towards a less hawkish outlook from the Fed, recession fears started to wane, hence why we saw a rebound in the oil market. From early January until late April, the oil market rallied roughly 40%, a sizeable move that impacted travel groups.

Brexit dominated the headlines in the UK throughout 2019 as the UK was supposed to leave the bloc in March and October, but the country has yet to leave. The victory of Boris Johnson’s Conservative party at the general election has brought about new uncertainty in relation to Brexit, as the UK could potentially leave the EU after the transition period without a deal.

Michael O’Leary of Ryanair, not everyone’s cup of tea, made himself unpopular with Brexiteers as he was warning that in the event of a no-deal Brexit, flights between the UK and the EU could be grounded. Some said the comments were just scaremongering. That being said, many firms in the travel business said Brexit uncertainty impacted Easter sales. 

Brexit worries have been seeping into consumer sentiment as there is evidence that consumers have been curtailing expenditure on account of the UK's impending exit from the EU. Some UK economic indicators show the UK economy in a positive light. For example, the unemployment rate has dropped to 3.8% - the joint lowest level since the 1970s. Average wages excluding bonuses are growing at 3.5%, which is well above the CPI inflation rate of 1.5%, so workers are in getting a decent increase in real wages. On the other hand, UK retail sales reports, and updates from the Confederation of British Industry, paint a picture of a fragile consumer activity. The lack of clarity surrounding Brexit has encouraged many consumers to save for a rainy day.

Some operators in the travel sector responded to the drop in consumer confidence by cutting prices in a bid to draw in consumers, which put even more pressure on margins. When company has a race to the bottom in terms of price, it is the consumers who win, while shareholders lose out. 

Thomas Cook was a long-standing British brand but the company ceased trading in September. The firm endured a string of profit warnings for over a year. In 2019 the share price tumbled and endured major losses, and it went on to become a penny stock in the final phase of its existence. This year the company lurched from financial crisis to financial crisis. The group made it clear they needed additional cash, but as the year dragged, it seemed they were in need of more and more cash, which clobbered the share price. The funding crisis at the company was similar to the credit crisis in 2008, where banks were receiving rounds of funding, which seemed to be never-ending, and that is why eventually the company went to the wall. 

Flybe was struggling to remain in the air at the back end of last year as the string of profit warnings hammered investor confidence. Even at the back end of last year there were reports the company was up for sale. The group listed on the London Stock Exchange in 2010 and it had a market value that exceeded £200 million, while at the beginning of 2019 the market valuation was in the region of £25 million. In March of this year it was confirmed that Connect Airways – a group consisting of Cyprus Capital, Virgin Atlantic and Stobart Air, acquired the troubled regional airline for £2.2 million. The buyout offer was ‘disappointingly low’ but management cautioned shareholders it was either that offer, or the company would face being wound up.   

Ryanair had its fair share of profit warnings in recent years, and it wasn’t just the broader issues impacting the sector that hurt the company. The pilot strike fiasco of September 2018 was resolved, and some confidence was restored to the brand. In August, the stock price fell to a four-year low, but a rebound followed. In November, the airline said that first-half revenue increased by 11%, as a 16% jump in ancillary revenues helped the bottom line. The Irish air carrier squeezed more money from its customers, which was a shrewd move. Full-year after-tax guidance was €750-€950 million, and it was narrowed to €800-€900 million.

TUI, like its peers, endured some turbulence this year as the group issued two profit warnings.  A weaker consumer climate, and the Boeing 737 Max disaster weighed on the group, and it confirmed the grounding of the aircrafts will cost the firm up to €300 million. In August, the company issued its third-quarter update, and bookings ‘caught up’, but they are still down 1% on the financial year. TUI maintained its full-year outlook, which helped pave the way for a rally through to November. 

The demise of Thomas Cook proved to an opportunity for easyJet as the company declared its intention to re-enter the package holiday market. It is likely to be a short-to-medium term success as Thomas Cook were a big player in that area, but given the overall changes in the sector, the firm might have limited success in the long-run as package holidays have been tapering-off in popularity for years. EasyJet posted a 26% decline in full-year pre-tax profit to £427 million, which was at the top end of forecasts. The group blamed intense competition as well as a more subdued consumer environment for the fall in earnings, but forward bookings are ‘reassuring’.

IAG, the owner of British Airways, Aer Lingus and Iberia has come under pressure too. Savvier consumers have been seeking out the low-cost carriers, and industrial action at the company made matters worse. In September, the firm said it expected full-year operating profit to be €215 million, which would be below last year’s figures. Another downward revision came last month, when the company lowered its capacity and earnings forecast for the next three years.  The firm previously predicted EPS growth of 12%, but now it expects it to be above 10%. The available seat per kilometre capacity growth is now expected to be 3.4% for 2019-2023, lower than the guidance of 6%.

Last month Wizz Air raised the lower end of its annual earnings forecast. The low-cost airline now predicts that full-year earnings will be between €335 million and €350 million, while the previous forecast was €320-€350 million. In the first-half, the company saw an increase in passengers carried of 17.9%, and revenue for the time period increased by 21.7%. Wizz Air has to stay nimble in terms of air fares, but it did see revenue for ancillary services jump by over 38%, which shows it' s getting more from their passengers elsewhere. In terms of share price performance, Wizz Air was the best performer of 2019. The low-cost carrier is clearly appealing to savvy holidaymakers, and its reputation hasn’t been tarnished by poor consumer services or industrial action. 

Wizz Air 2019 share price comparison chart

Source: CMC Markets

Looking ahead to 2020, the travel sector still faces many of the problems that held back the sector in 2019. Fuel costs could be a problem for the companies as oil has hit a three-month high, partially thanks to phase one of the US-China trade deal being agreed upon. Consumer activity in Europe appears to be weak, and that can been seen in retail sales reports and inflation updates – where it is clear that demand is weak. The latest development in the Brexit saga suggests that a no-deal scenario is still a possibility, as it might happen at the end the transition period, which is at the end of 2020. So the UK’s impending departure from the EU might hang over the industry for the next 12 months, which could keep pressure on consumer confidence. Potential holida makers might hold off on making bookings for 2021 if the Brexit situation hasn’t been mapped out.

 

 


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