FTSE 350: Shame and disease plague tourism

There’s hope yet for airlines. Airline stocks received an injury-time boost at the end of last year from the demise of Thomas Cook, offering the likes of easyJet (EZJ), International Consolidated Airlines Group (IAG) and Wizz Air (WIZZ) the opportunity to absorb excess capacity. It’s plausible that they could receive another boost with the removal of air passenger duty, should the government deign to level the playing field after handing a temporary lifeline to Flybe by deferring their APD obligations. The benefits of an APD cut could be offset by efforts in Europe, however. A tax of €330 per thousand litres of fuel has been suggested on the continent, which would raise plane ticket prices on average by around 10 per cent.

Then there’s the rolling disaster that is the Boeing 737 Max. Its embattled manufacturer now expects the plane, which was grounded after two crashes that killed 346 people, to return to the skies in the summer. This is subject to regulatory clearance, and later than expected. IAG has a flexible order for 200 Max jets that it can walk away from. Tui (TUI), having ordered 60 Max jets, saw its shares fall 5 per cent after Boeing’s latest update. It told investors in December that the grounding could cost the company as much as €400m (£337m) should the plane not be cleared to fly by the end of 2020, and €130m had it been operational by the end of April. “If it’s not approved, it would be great news for easyJet and Wizz, which are Airbus airlines,” says Peel Hunt transport analyst Alex Paterson. “If it is approved, we may see a sudden surge in capacity.”

InterContinental Hotels Group (IHG), Whitbread (WTB) and PPHE Hotel Group (PPH) will hope to reap the benefits of their own capacity expansions, which they pressed on with last year undeterred by a supposedly weaker consumer backdrop. Indeed, PPHE witnessed the withholding of hotel permits in Amsterdam to prevent overcrowding as tourist demand outstripped supply. These groups would, however, along with cruise operator Carnival (CCL), be vulnerable to a demand shock caused by the spread of the coronavirus. IAG, whose shares dropped after the outbreak of the Sars virus in 2013, is also exposed.

Maybe 2020 will give investors in tourism and travel a tough year, then. Climate change offers quoted operators challenges and opportunities. Airlines are exploring alternative fuel sources, such as battery technologies and biofuels. In addition to extinguishing one’s flugscham, a replacement for jet fuel would help rid these businesses of one of their largest, and most volatile, costs. Long-haul electric flight is not close, although trials are pending. IAG was the first airline in the world to commit to net zero carbon emissions by 2050. Perhaps the first jets to meet soaring sustainability expectations will win the hearts and minds of consumers, and restore their consciences over air travel. In the meantime, this investment will represent yet another onerous cost for airlines.