The Covid-19 pandemic has hit two sectors particularly hard. These are the airline and cruise industries. We can see evidence of this in the recently completed first-quarter investing results. The two worst performing stocks from the FTSE 100 were Carnival (a cruise liner operator) and IAG (who own British Airways, Air Lingus, etc.).
When we say these firms have been hit hard, we mean it. The share price for the two firms was down 72% and 61% respectively in the first quarter. Given that both firms are large FTSE 100 constituents, this is a staggering plummet.
Why have these sectors been hit?
The issue with these two industries is both are involved in the more generalized ‘travel’ sector. This involves high level of physical interaction, often in close proximity, with people from various countries. Unfortunately, these are all red flags as far as spreading Covid-19 is concerned.
The problem has been compounded by government intervention. Lockdowns across the globe mean very few consumers can actually use the services of a cruise ship or airplane, even if they wanted to. The bottom line is a complete dry up in revenue for both industries, with no immediate end in sight.
How bad is it?
It appears that airlines may be faring slightly better than cruiser liners at present. For example, although IAG have cut capacity by 75%, the firm has good liquidity. As of last month it was noted to have around £6.44bn in cash or near cash equivalents, along with a sizable fleet of physical airplanes (non-current assets).
While I cannot find an official number for Carnival’s cash reserves, unofficial sources claim it to be around £400m. This is likely one reason why last week the firm announced a large £4.8bn cash drive, via a bond issuance and share raising scheme.
Should I invest now?
From the above comparison, it seems airlines would be the preference for investors over cruise line operators financially. Another reason why I would prefer airlines is due to the elasticity of service. Elasticity of demand measures how sensitive consumers are to wanting your products/services depending on necessity, price, and a variety of other factors.
Airlines logically have a lower elasticity than cruise ships. This is because airlines facilitate a lot more travel made out of necessity than cruise liners do. Most of cruise ship travellers book out of want, not out of need. This should help airlines to bounce back quicker than cruise line operators.
As an income play, neither sectors look that attractive for investment. Both have announced dividend cuts. So the investment argument, such as it is, is purely for capital appreciation in the longer term.
Given fairly robust financials and the lower elasticity of demand for air travel, I am positive on investing in some airline operators. I think investing in airline stocks could pay large long-term rewards. However, I would suggest investing in tranches. Going all in at such a volatile time period is not smart.
As for the cruise line industry, I would not go anywhere near it!
