Europe’s travel shares prepare for more turbulence

<p>European travel and tourism shares slipped on Tuesday in what could be read as a delayed reaction to the Paris terror attacks, but also seemed linked […]</p>

European travel and tourism shares slipped on Tuesday in what could be read as a delayed reaction to the Paris terror attacks, but also seemed linked to Turkey’s shooting down of a Russian fighter Jet.

Another trigger for the travel stock sell-off was a report showing new flight bookings to Paris fell by more than a quarter in the week following the attacks.

Either way, investors were coming to terms with the medium-to-long term impact of increasingly frequent disruptions and raised security levels on the industry.



Turkey, Russia confrontation brings fresh jitters

Some aspects of Tuesday’s incident, from which one of two Russian Air Force SU-24 pilots reportedly escaped alive, remained unclear at time of writing.

President Vladimir Putin called the downing “a stab in the back”, noting the plane had been attacked inside Syria, 1km from the Turkish border and had come down 4km inside Syria.

Turkey said two Turkish F-16s were involved in shooting down the jet after it ignored repeated warnings.

Travel-related stocks proved to be among the most sensitive in the immediate aftermath of the Paris attacks, and their sensitivity to geopolitical turmoil was again evident on Tuesday.

French Hotel operator Accor lost 5.4% and was among the top fallers on the Stoxx Europe 600 index.

It derives 33% of its revenues from France, according to Thomson Reuters data.

Airlines shares were weak across the board: easyJet down 3.3%, International Consolidated Airlines (AKA Iberia and British Airways) down 4.1%, Ryanair down 3.7% and Air France losing 2.8%.

Shares of TUI AG, the largest tourism operator in the world, slid about 2%, as did those of its rival, UK travel No. 1 Thomas Cook.


Travel cools into winter

The report by closely watched travel industry data firm ForwardKeys, showed Global bookings to Paris, one of the world’s most visited cities, were 27% lower in the week 14th-21st November compared to the same week in 2014.

Given that typical booking cancellation periods would have ended during that week, the data suggested a dip in real terms.

This could represent a sustained reduction of travellers from which the industry could take months to recover.

Especially given that bookings to Paris for the Christmas period trailed last year’s level by 13%.

In the week after the attacks on Friday 13th November, cancellations were 21% higher than in the same period last year, but in recent days the level of cancellations had steadied, ForwardKeys said.

Air France reportedly noted a traffic reduction, though the extent that this might continue was not yet clear.

EasyJet said there’d been some “cooling off” of demand for flights to France.



Full-year impact?

Terror attacks on travellers or leisure seekers and air disasters have unfortunately been persistent themes over the past two years.

This has added further volatility to earnings, and, in turn, to the stocks of the travel-related firms named above and others.

Whilst there’s little evidence terrorism has a significant and broad economic impact, the effect on tourism does not appear to have been quantified sufficiently to reassure that lasting sales damage is unlikely.

Investors appear worried that whilst the initial hit to travel companies from the mid-November attacks was moderate, further developments—including the continued hunt for at least one suspect—threaten to damp full-year sector earnings.

The STOXX Europe Travel & Leisure index was down almost 5% for the month at online time.



Low-cost carriers rise on all metrics

Defensive investors are likely to turn more selective in light of recent events, peeling off weaker airlines and travel companies from the stronger.

Currently, Ryanair looks like it could benefit from a more careful evaluation in view of its current leadership of the group named above on free cash flow.

Its shares, however, appear to have been relatively unscathed from recent selling in the sector.

Its stock’s deviation from 5-year median intrinsic value soars above the group named in this article.

That’s important in an industry which pivots on relatively conservative margins, and where discounts are seen as an investment.

However, easyJet is never a pushover for the Dublin-based No.1 carrier in Europe.

Luton-based easyJet has maintained its lead on the crucial load factor metric over its rival for all but their most recently reported quarters.

Even so, on their last full-year’s operating margin, Ryanair (18.4%) still trumps easyJet (14.7%), whilst both lead the group.

Elsewhere, TUI AG’s 4.1% yield could prove more defensive than returns from the cut-price pair.

Effective yields of 3.9% (EZJ) and 2.1% (RYA)—neither has a formal dividends policy—will make TUI the more attractive value proposition whilst the Hannover-based group continues to reorient itself following its merger of UK and German businesses last year.

At the weaker end of the scale, Air France’s free cash flow deficit is €19m, whilst ICAG’s year-end balance was minus €760m (following acquisition of Aer Lingus).

Air France is expected to bounce into net cash of €62m in a year,  whilst ICAG is also forecast to turn net cash positive, by almost €1bn.

Air France will continue to share the bottom rungs of the operating margin ladder with German rival Lufthansa and Thomas Cook, respectively at 3%, 2.5% and 0.3%.

This suggests the trio’s operations face relatively deeper challenges in the year ahead than the rest of our group, in any event.



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