How bad is the coronavirus fallout for the travel and leisure industry? Historically bad. But some industry sectors are better positioned than others.
Airlines and lodging have the best prospects of recovery, after enduring intense pain. Cruise lines, however, will remain very shaky.
Their ability to survive this epic downturn hinges on how much cash they have and their ability to borrow more. Also, on how hardy their business models are.
They’ve taken a drubbing in the stock market, which serves as a ranking of their prospects. The major airlines have lost an average of 48% this year, and hotels plummeted 53%. The worst are the cruise lines, falling 74%. The S&P 500 has dipped much less, 26%.
For travel and leisure, “it’s definitely going to get a lot harder for them to recover,” says Noah Hamman, CEO of investment manager AdvisorShares.
Surely, the companies will do a lot of belt-tightening, like axing capital spending and laying off workers. But a key unknown is how long these rough water and turbulent skies will last. How long will they have to scramble for funds they no longer can earn from customers? Two months? A year?
Here’s the outlook for the leading sectors in the travel-leisure realm.
Airlines
President Donald Trump pledged on Monday to “back the airlines 100%,” although he didn’t specify how much aid he had in mind. Airlines for America, the sector’s trade group, called for $50 billion in bailout money. Vast numbers of passengers have cancelled bookings, and the companies have slashed their flight schedules. Given air travel’s enormous fixed costs, that translates into big holes in company finances.
That said, the airlines are coming off a string of very profitable years after staging a major turnaround. In contrast to their days as frequent fliers in bankruptcy court, the companies have consolidated, improved load management, and imposed a cascade of fees.
Passenger aviation in North America (the world’s largest market, accounting for half of all earnings) booked an estimated 6% net profit margin in 2019. In December, U.S. airlines flew a record 79 million passengers, a huge 13.3% increase from just three years before.
That was then. The carriers’ total lost passenger revenue this year may total $21.3 billion because of the pandemic, estimates the International Air Transport Association—a sum that threatens to wipe out all their profits, and then some.
No wonder their stocks have been trashed, with Delta Air Lines down 40% in 2019, United Airline Holdings off 60%, and American Airlines Group falling 43%. The pain is felt globally. Norwegian Air is grounding most of its fleet. British carrier Flybe declared bankruptcy March 5.
On the bright side, all those years in the black leave most of them better fortified than elsewhere in travel and leisure. The short-term impact will be wrenching, says Nancy Prial, co-CEO of Essex Investment Management, yet “they have a lot of cash.”
A sizable cash position is the first line of defense in an economic debacle. Delta has $2.8 billion in cash, which makes up 60% of its 2019 earnings. Even better off are United, with $4.9 billion (163% of earnings), and American, $3.8 billion (more than three times 2019 profits). What’s more, they have revolving loan facilities in place that can double the cash, not to mention assets like planes that they can borrow against. One other advantage that airlines have is that jet fuel prices have sunk 43% this year, to $1.12 per gallon.
In announcing at a conference last week that its domestic bookings have sagged by 70%, United’s president and incoming chief executive, Scott Kirby, said of the future that “we don’t think it actually will be that bad.” While that may prove to be graveyard-whistling, the airlines’ situation has the distinction of being less horrible than others.
Cruise ships
Celebrated as getaways filled with fun and adventure, cruise lines have held a special place in vacationers’ hearts. They hosted 30 million passengers last year, around half of them North Americans. The cruise line margins were in the mid- to high-teens in 2019. Royal Caribbean, for instance, last year delivered a sterling 17.1% margin.
Now, though, cruise ships are viewed as the incubators of disease. Two Princess vessels, owned by parent Carnival Corp., had outbreaks of the virus. The financial status is bleak.
Carnival, Royal Caribbean Cruises Ltd., Norwegian Cruise Line Holdings Ltd., and their ilk have either cut back voyages or suspended operations altogether. The U.S. State Department has warned Americans, particularly those in questionable health, not to get aboard a cruise ship. Small wonder the companies’ stocks are in Davy Jones’s locker.
Their position is dire. While passenger airplanes are still flying, albeit fewer of them, cruise ships are scarce in the ocean. “Recovery is a long, long way away for cruises,” said James Hardiman, an analyst at Wedbush Securities.
In terms of cash, the cruise operators aren’t as well-fixed as airlines. Carnival’s cash is one-sixth of its 2019 earnings, Royal Caribbean’s is one-eighth, and Norwegian’s is a quarter. They, of course, have borrowing power to help get them through.
Royal Caribbean, for example, has $1.3 billion available that it can tap from a credit facility. And company spokeswoman Melissa Charbonneau says all its vessels on order have committed financing. Norwegian has taken out a loan against a ship to generate $675 million in credit from JPMorgan Chase. Carnival and Norwegian didn’t responded to requests for comment.
Up until now, the companies’ leverage ratios—debt versus earnings before interest, taxes, depreciation, and amortization, or Ebitda—have been pretty good: 1.8 for Carnival, 2.0 for Royal Caribbean, and 3.5 for Norwegian. The ratios measure how they can manage paying interest on their debt. With earnings set to sink beneath the waves, however, that would make debt service much, much harder.
President Trump has said his administration is “working very, very closely with the cruise industry” to get the companies through this crisis. Whether that would mean a government bailout is open to doubt. The political optics aren’t good. Airlines are part of the nation’s economic circulatory system, while cruise operators are purely recreational.
Hotels
Cancelled room reservations, scrubbed conferences, called-off banquets. This is the sorry lot these days of the lodging industry, which had been doing a buoyant business amid America’s booming economy. The business trips and tourism of yore, however, are a memory.
The hotel sector’s margin was a robust 8.5% last year, and odds are that’s bound for zero in 2020. Occupancy rates for March’s first week slid 7.3%. Revenue per available room, or RevPAR, the key performance metric for hotels, skidded 11.6%.
Hilton Worldwide Holdings Inc. has borrowed from its $1.75 billion credit facility and withdrawn its 2020 earnings guidance. It happens to have a decent balance sheet already, with cash equal to more than half of last year’s net income.
Some Wall Street strategists make the argument that once the virus threat is gone, hotels will bounce back sooner than others in the travel-leisure arena. Why? Lodging is divided between owners of the properties and operators like Hilton, who run the hotels, take care of the reservation systems, lend their brand names, and the like. “Airlines own a lot of their jets, while many hotels are franchised out,” said Michael Bellisario, senior research analyst at asset manager Baird. In other words, the pain is diluted, spread over lodging operators and owners.
The owners are often real estate investment trusts, or REITs, publicly traded pools of properties that make their money by taking a cut of the proceeds. Example: Park Hotels & Resorts Inc., whose stock has gotten creamed along with everybody else’s. Nevertheless, its earnings almost match its cash on hand.
“Someday, people will go back to work, go back to school, go back to traveling,” said Wedbush’s Hardiman. The longer away that day is, the more spare dollars it will take for airlines, cruise operators, and hotels to survive.
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