Summer blues for travel stocks: Business is recovering, but share prices are weakening

The travel industry has had a great summer – and demand for Christmas holidays appears to be high as families seek out the winter sun.

Easyjet’s £203m profit between April and June was a quarterly record, and Ryanair posted record passenger numbers for a fourth consecutive month in August.

Just last week, Tui boss Sebastian Ebel welcomed a “strong end to the summer” and added: “The positive business momentum continues and I am very optimistic for the coming winter and summer seasons.”

Investors may have been hoping this would be cause for celebration in the form of a long-awaited recovery in stock prices following the devastating impact of the pandemic.

But Tui shares plunged to a record low yesterday – down 3.5 percentage points or 15.6 percentage points to 436.8 percentage points – after falling over 3,000 percentage points at the time of the Covid-19 outbreak and just over five years ago around 5600 percentage points were traded.

Tui shares fell to a record low yesterday – down 3.5 percentage points or 15.6 percentage points to 436.8 percentage points

Tui boss Sebastian Ebel (pictured) welcomed “a strong end to the summer”

Although not at record lows, British Airways owners IAG and Easyjet are still down around 66 percent since the start of the coronavirus crisis, while cruise operator Carnival is down more than 70 percent.

“The travel industry has had a strong summer,” said Victoria Scholar, head of investments at Interactive Investor.

“This is thanks to strong demand for international travel during the school holidays, the recovery in travel demand post-pandemic and higher ticket prices helping to offset inflationary pressures.”

“However, this has not been reflected in investor returns.”

“Shares in the sector have had a difficult time, struggling to recover to their pre-Covid levels after lockdowns and travel restrictions severely punished the travel industry.” This is partly because the travel industry is seen as closely linked to the economic cycle.

“The macroeconomic storm clouds of elevated inflation, the long cycle of interest rate hikes and weakening consumer sentiment have created nervousness about the future strength of travel demand.”

Analysts also warned that rising oil prices are taking their toll, driving up fuel costs for airlines and cruise ships while squeezing their customers with higher garage forecourt prices.

Crude oil, while below the $127 a barrel it reached after the invasion of Ukraine, has risen from around $70 to $95 in the past three months and industry experts warn it could top $100 again .

Russ Mold, investment director at broker AJ Bell, said Tui’s problems run deeper, pointing to the three rights issues the company has carried out in the last three years – £475m and £955m in 2021 and more £1.6 billion in 2023 – and a huge mountain of debt.

“As a result, the number of shares has increased from 100 m to over 500 m,” said Mold.

“Dilution is the enemy of the investor and the increased share count could lead to indigestion.”

Mold also pointed out that expected profits of around £870 million this year – after losses in the last three years – cover forecast debt interest of around £390 million by just over two times.

“Two times are considered the minimum required to provide an adequate buffer for a cyclical business like travel should something unexpected go wrong,” Mold said.

“Although there has been plenty of retaliatory activity in 2022 and particularly 2023, markets are concerned about the creeping impact on consumer confidence and spending plans in 2024.”

“Germany is once again being referred to as the ‘sick man of Europe’ – and that is a big market for Tui.”

Profit warnings from American Airlines and Spirit Airlines this month, which followed earlier ones from Southwest and Alaska, have done little to ease the industry’s dire situation.