Is it time to pack the factor-30 and castanets? There has been no shortage of punditry over the state of the tourism industry, specifically whether 2022 will mark something of a renaissance, at least in terms of flying hours and passenger numbers.
The portents are encouraging. Recent quarterly updates from both Ryanair (US:RYAAY) and easyJet (EZJ) point to rising load factors (utilised seating capacity), along with positive noises on the UK government decision to remove all travel testing requirements. The latter carrier’s chief executive, Johan Lundgren, anticipates “a strong summer ahead, with pent up demand that will see easyJet returning to near 2019 levels of capacity with UK beach and leisure routes performing particularly well”. Share prices for the budget airlines have moved in different directions over the past six months, with a respective gain of 2.3 per cent on Nasdaq for Ryanair set against an 11.5 per cent decline in London for easyJet.
Valuations for both companies pulled back sharply as soon as it became clear that vaccination programmes had done little to stem the infection rates and transmissibility associated with the Omicron variant.
Subsequently, however, clinicians have posited that the global spread of Omicron and its initial high reproduction number – the so-called "Rt" number – may have less to do with its inherent evasiveness than the enhanced ability of people’s immune systems to suppress competing variants. If that’s the case, then the spread of Omicron may signal that we may shortly be able to designate SARS-CoV-2 as “endemic”, as the Danes already have. At any rate, the clinical situation is certainly looking much brighter than it did at the beginning of December.
Beyond the impact of the virus, the differing share price trajectories of the two airlines could be partly linked to their fuel hedging arrangements. easyJet is currently c.60 per cent hedged for fuel in the financial year ending on 30 September 2022, while Ryanair is almost fully hedged for Q4 FY22 and 80 per cent hedged for H1 FY23.
The IATA Jet Fuel Price Monitor shows that the price of aviation fuel has increased by 77.8 per cent over the past 12 months, representing an index value of 289 against a base figure of 100 for the year 2000. Crude prices recently hit a seven-year high, and the global supply-side continues to tighten and the extent of inventory drawdowns suggests that the airlines may have to cope with elevated prices for an extended period.
The good news is that passengers are unlikely to be overly worried if the airlines – and the wider tourism industry – keep discounts to a minimum over the next couple of years. It’s a seller's market and various studies have already shown that demand for tourism products is generally price inelastic.
The initial anxiety over the Omicron variant and continued worries over the cost of aviation fuel are also reflected in recent valuations for contracts such as the iShares STOXX Europe 600 Travel & Leisure UCITS ETF (FRA:EXV9) and US Global Jets ETF (US:JETS). Both these derivatives saw their valuations halve in less than a month from midway through February 2020, once it became obvious that travel and tourism were to become early casualties of the virus. A steady retracement duly followed, but the issues we have highlighted reversed some of the earlier gains. Consequently, the respective values for the contracts are now 15 and 31 per cent adrift of where they were prior to the pandemic.
By contrast, Ryanair has more than made up for the initial sell-off and now trades 3 per cent in advance of its 200-day moving average. Other industry players such as InterContinental Hotels (IHG) and Expedia (US:EXPE) have also fared remarkably well, suggesting that broad-based exposure may be the way forward.
Nonetheless, with long-term growth projections on tourist numbers easily outstripping growth rates for nearly every major economy, some stock-pickers might be tempted by Airbnb (US: ABNB), particularly given the platform’s seemingly limitless addressable market. Again, the shares pulled back from mid-November but they are still up on their public debut price in December 2020. Its capital-light business model has been very much in vogue over the past few years, while a price/cashflow multiple of 62x is roughly half that of its historical average rate compiled by FactSet. Still, that’s probably a little rich given the rotation out of growth stocks underway; an effective reassessment of tech multiples. Plus there's the sneaking suspicion that the recovery in travel numbers is already baked into industry valuations.
