Investability Bulletin 20/04/22: Prepare For Take Off

Travel is set for a major rebound, but not all operators will be ready to take advantage

Photo by Anna Gru

I hope you all had an enjoyable Easter break and managed to avoid the well documented congestion on Britain’s roads and at its airports. The end of travel restrictions and waning fears over Covid have seen a rush of holiday bookings which airlines have struggled to keep up with. Reports of “travel chaos” have occupied a fair few column inches this weekend, as BA, easyJet and others cancelled numerous flights in the run up to the holiday, while long queues formed at various airport security checks, including waits of 90 minutes to get through security at Manchester’s Terminal 2. My decision to spend the weekend pootling around the glorious Suffolk countryside seems to have proved a sensible one.

To be fair, a long-expired passport means my decision was somewhat out of my hands. But that’s not to say that, after two and a half years without setting foot outside the UK, I’m not looking forward to jumping on board a plane and heading somewhere that isn’t here – Suffolk and its winning combination of beach, countryside and great pubs are beautiful, but the sea never gets very warm and there’s only so much fish and chips a person can eat. But I’m happy to wait for the immediate travel excitement to die down and travel operators to eventually restore enough capacity to cope with normal levels of demand, the lack of which explains much of the Easter travel disruption.

Either way, the weekend’s chaos fundamentally supports my long-standing view (one that I’ve almost certainly bored our podcast listeners half to death with) that the post-pandemic reopening trade, in particular the travel sector, could be worth a look. Pub landlords in Suffolk reported a strangely quiet Easter, putting the lull down to the fact that many would-be staycationers have headed overseas instead, now that they can.

Indeed, after many false dawns, things are finally getting better, quickly. 4.2m travellers made their way through Heathrow in March after Covid restrictions were scrapped, a 675% increase on a year earlier but still well below pre-pandemic levels. A blowout summer could finally get the industry back to the position it occupied three years ago, an astonishing industry recession if you think about it.

But as this weekend’s airport chaos has demonstrated, like many other industries the complex travel business can’t simply be switched off and on again; staff numbers have to be rebuilt for one thing, and labour markets are still very tight meaning that competition for the right staff means doing so could prove expensive. BA, for example, cut 10,000 jobs during the pandemic and now needs to rehire 3000 cabin crew alone – it’s offering £1000 welcome bonuses to lure them back as airlines battle to reverse the drastic cuts made when the pandemic struck.

That certainly doesn’t sound bullish for an industry that has struggled to deliver consistent profitability – air travel has often proved a money pit for investors, famously prompting the Warren Buffet quip that “if a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor [sic] by shooting Orville down.” Running airlines profitably requires ruthless operational efficiency that brings an ever-present risk of rubbing passengers up the wrong way, Ryanair style. That risk is arguably greater still now that many experienced staff have left the industry.

Perhaps that’s why Wizz Air is rebounding, and along with Jet2 could be the best way to play the travel trade. Wizz updated the market last week on current trading, and like most international travel operators remains on course to make hefty loss this year – as much as €652m in fact. But it said the recovery in bookings over the last month or so has been better than it previously expected, and that it expected capacity – as measured by ‘available seat miles’ – to be a third higher than the equivalent period in 2019. Like other airlines, Wizz cut staff numbers when the pandemic struck, but seems to have stolen a march on rivals, adding 1,500 staff after cutting 1,000.

Similarly, package holiday operator Jet2 said in its update in early April that seat capacity for this summer would be 14% higher than it was in 2019, and that bookings were accelerating. It’s adding new planes, and with plenty of balance sheet firepower could feasibly add more than the 57 it currently has on firm order. I recently made the case for Jet2 a podcast with Vox Markets, but the short summary is that it’s a quality operator that invests heavily in customer service and supplier relationships, which as the chaos this weekend has shown are all important in the travel industry.

None of this is to say that a recession-shaped cloud might appear in the industry’s path and bring about further turbulence – will householders simply be too cash-strapped to travel? Will rising staff and fuel costs further delay the return to profit? (note: Wizz and Jet2 are both well hedged) Indeed, Netflix’s latest disappointing figures, which saw it shed 200,000 accounts in Q1 and forecast cancellations of 2m in Q2, suggest that consumers are starting to find ways to save money. But the evidence so far suggests that holidays are one of the last discretionary items likely to face the axe, and it could be time to get on board the sector’s higher quality companies.

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