The travel and leisure sector of the FTSE 100 has performed particularly poorly during this broad market sell-off. This is not surprising. Dealing with the outbreak of the novel coronavirus SARS-CoV-2 requires restricting travel within and between countries. Some countries have already done this and more will follow suit.
People will not book holidays as they had planned. For one thing, there is the chance that destinations will become off-limits. For another, previously preferred holiday spots might not look appealing now. Bookings for flights have fallen, routes cancelled, and schedules rearranged. Planes have taken to the skies with no passengers on board to keep take-off and landing slots. Thankfully, authorities are now relaxing the requirements to keep these slots, avoiding the need for this practice.
It is understandable that shares in International Consolidated Airlines Group (LSE: IAG) have collapsed by around 32%. Shareholders in Carnival (LSE: CCL), a cruise line operator, have also witnessed a 45% or more decline in their positions. Bookings for destination cruises have slumped as they have for air travel. Carnival has just cancelled global operations for 60 days. There is another issue for cruise passengers; the potential to be trapped at sea if an outbreak starts on board.
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Shares in both IAG and Carnival can be bought for significantly less now in comparison to just a few weeks ago. While I believe buying IAG shares on the cheap might be worthwhile, I cannot say the same for Carnival.
Cruising along
Both companies ferry people around the world. However, while people fly on planes for business and pleasure trips, cruise passengers sail for pleasure only. While IAG has business customers to support its revenues, Carnival has none.
As things start to return to normal, business air travel will probably pick up first, then pleasure travel and tourism by air. I think cruise bookings will take longer to recover. Fears of being trapped on board a ship suffering a viral outbreak are heightened. They will take a while to disappear, and the idea of cruises may not appeal in future.
IAG and Carnival have both lost revenue. These revenues are not likely to be recovered. It is not reasonable to assume that people will book more flights and cruises tomorrow because they could or did not today or yesterday. Ships and planes still have to be maintained and staffed have to be paid. Earnings are going to fall for IAG and Carnival in 2020.
Debt anchor
The airline and cruise industry do have significant barriers to entry. It costs billions to put fleets together at any scale, and keep the competition away, but a lot of debt is incurred. If either company needs to sell assets to meet shorter-term liabilities, both suffer from having fewer current assets to sell than short-term liabilities to meet. Still, Carnival is in a far worse position than IAG.
Planes are cheaper and can be sold more quickly than giant cruise ships. Airlines can shuffle around planes and routes as the situation changes. Cruise line operators don’t have nearly as much flexibility. IAG looks better positioned to get through this crisis, and Carnival may be lost at sea.
