FTSE 350: Blue sky thinking

For now, many of the largest companies are showing signs of recovery – albeit from a low baseline. Airlines have delivered notoriously bad returns for decades, and have been pummelled by the pandemic. Shares in easyJet (EZJ) are still worth just half of what they were in February 2020, while International Consolidated Airlines (IAG) – the group which owns British Airways – is trading at less than a third of pre-pandemic levels. 

However, while losses are still eye-wateringly high, many are shrinking. easyJet, for example, said its losses fell for the six months ended 31 March 2022, from £700mn in 2021 to between £535mn and £565mn. Similarly, IAG halved its pre-tax loss in 2021, and had swung back to operating profitability by the year-end.

Rising debt is a big problem for the sector, but many airlines are managing this well, and rights issues are helping with liquidity – if not with shareholder sentiment. In September, for example, easyJet raised £1.2bn from shareholders, bigger than anything expected by the market. As usual, airline bosses are also bullish about summer demand, particularly in relation to inter-European routes. 

Indeed, demand doesn’t seem to be the problem at the moment. Staff shortages have been dominating the headlines, with British Airways and easyJet cancelling flights left, right and centre over the Easter period. Covid-related absences have compounded issues which arose after thousands of jobs were cut in the pandemic. Wage inflation isn’t going to make this issue any less painful. 

But where are holiday-makers staying when they finally touch down? Hotel groups have had an equally torrid 2021, but are recovering faster than airlines. InterContinental Hotels (IHG), for example, has restored dividends, paid down its $2.5bn (£1.95bn) debt pile and returned to profitability. Occupancy rates of its 880,000 hotel rooms rose to 53 per cent in the year to 31 December which – while not tremendous – is certainly an improvement.

Whitbread (WTB) is still making a loss and dividend payments are banned by covenant waiver conditions until 2023, but there are similar signs of progress. Its Premier Inn brand is strong, and continues to outperform the market, and management noted “strong” leisure demand and “recovering” business demand.

Beyond the shoreline, things are somewhat choppier. Cruises faced an existential threat during lockdown – indeed, for many, the pandemic began when Carnival's (US:CCL) Diamond Princess was quarantined off the coast of Japan as coronavirus spread among the passengers. 

Since then, Carnival has been forced to raise billions through bond and equity issues, and its total debt has soared to nearly $34bn. Passenger traffic numbers were still 90 per cent lower than pre-pandemic levels last year. The industry is surprisingly optimistic, however, with Carnival expecting to move back into profit by the second half of this year.

Fuel prices and wider inflationary pressures are now the biggest threats, and have the potential to hit both margins and demand. Whitbread predicts that its sector inflation rate will be between 7 and 8 per cent in 2023, which could impact approximately £1.4bn of its cost base. While blue skies beckon, therefore, the cost-of-living squeeze, expensive fuel, and hefty debt piles could cause more short-term turbulence.