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Will UK travel shares rally as investors hunt for bargains?

The economic turmoil caused by Covid-19 continues to wreak havoc on global markets, but can the UK travel industry  weather this latest storm?

easyJet Source: Bloomberg

It is clear that the travel industry is shaping up to be one of the hardest hit during the coronavirus pandemic. As national governments close borders and implement social distancing measures, the £655 billion global travel and tourism industry has virtually ground to a halt.

Air passenger traffic has dropped by as much as 95% between 1 March and 1 April in some areas, while some estimates calculate that up to 45% of hotel industry jobs have already been eliminated at the time of writing. Unsurprisingly, this has had a profound and unprecedented impact on the value of the largest travel and tourism companies listed on the FTSE 100.

Shares in Carnival Corporation & PLC (US), the largest cruise operator in the world, dropped from £31.03 on 17 February to just £6.20 a month later. Likewise, airline giant easyJet saw its own share price fall from £15.09 to just £5.95 during the same period.

There is little indication that this industry will bounce back anytime soon, with some market pundits going so far as to claim that many of the major travel companies put on ice by coronavirus will never resume operations again once this is over. Nonetheless, significant numbers of investors are pouring into these beleaguered companies in the hope of snapping up a bargain, causing small but significant rallies in share price.

Bargain hunters boost travel shares

While the factors that have caused the value of FTSE-listed travels companies to sink have not dissipated and show no sign of doing so, a slight rally is underway.

On 8 April, Carnival saw its share price jump by over 30% as investors large and small, including Saudi Arabia's sovereign wealth fund, which took an 8.2% stake in the company, rushed in take advantage of low prices. On 14 April, Carnival CEO Arnold Donald told CNBC that cruise bookings for 2021 were 'strong' and that he was confident the company would bounce back quickly.

Likewise, easyJet saw its share price jump over 30% last week as investors and traders sparked a buying spree, fuelled in part by the company's securing of a £600 million 'coronavirus loan' from the UK government. However, this has been tempered by a large drop when markets opened this morning, which is largely related to easyJet's founder continuing to feud with the leadership team over the details of the company's rescue plans.

Meanwhile, investors have been snapping up huge amounts of shares in IAG, the holding company that owns British Airways, Iberia, and Aer Lingus, helping to drive its price up by around 22% over the course of the past week. All of this suggests that there is a strong consensus among certain investors that now is a good time to buy shares in travel companies.

Experts warn against rushing in

However, just because some investors are rushing into travel stocks does not necessarily mean that it is a good idea. By all measures, the short and long-term outlook for the global travel industry is particularly grim.

Financial experts recently spoke to the BBC about the phenomenon and warned that there was no indication that the travel industry had 'bottomed out' just yet, and that further nosedives are very much within the realm of possibility. In the longer term, it is also likely that some airlines may never actually recover, going bust as a result.

If air traffic continues to remain at current levels for several months, it is difficult to believe that even the largest airlines, which were already operating on thin margins, will have enough liquidity to tide them over. Carnival, as well as smaller UK travel companies like National Express, have completely exhausted all of their remaining credit and are desperately seeking further loans to stay afloat.

In addition, travel companies of the size and stature of easyJet and Carnival will be heavily dependent on government bailouts to see them through, with even easyJet's recent £600 million loan likely not being enough at the moment.

Whether these early investors will be vindicated depends heavily on how different countries and regions manage their response to the coronavirus, and how quickly the travel industry will be able to return to normal.

How to take a position on travel stocks

What do you think to a potential recovery for travel stocks? A long way off on the horizon, or taking off soon? Either way, you could back your judgement by going long or short with IG.

  1. Decide whether to go long (buy) or short (sell) the stock
  2. Create an IG account to trade on the UK’s best platform
  3. Search for the share in the search bar. For example, type ‘easyJet’ or ‘Carnival’
  4. Choose your position size
  5. Confirm your trade

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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