We expect travel firms to suffer in an economic downturn. But the coronavirus pandemic has had an unprecedented impact on airlines and cruise ship operators.
A near-global lockdown means that no one is flying or sailing anywhere. It could be the perfect opportunity to buy bargain shares in travel firms. But can these companies survive and return to profitability? Let’s take a look.
Will easyJet go bust?
For easyJet, I think the risk of failure is pretty low. Founder Sir Stelios Haji-Ioannou is making a lot of noise at the moment about the group’s £4.5bn order for new aircraft from Airbus. But many airlines have such orders. I suspect many of them will be cancelled or postponed over the next year.
Of more concern to me is the airline’s liquidity situation – does easyJet have enough cash to survive lockdown and restart its operations? After securing additional borrowing, the group now has around £2.3bn of cash on hand. Assuming the lockdown doesn’t extend beyond this summer, I think easyJet can survive and return to its previous profitable state.
What about Carnival?
For Carnival, the situation looks more serious. The entire global cruise industry has been shut down for weeks. But as recently as last week, cruise ships with sick passengers were still struggling to find ports that would allow them to dock and disembark. Images of these ships have been plastered across the world’s media.
I don’t want to lose sight of the human tragedy behind these events. But shareholders – including me – will need to decide whether to continue holding their shares.
Carnival has avoided an immediate collapse by raising $6bn of expensive debt, plus $500m from issuing new shares. But as far as I can see, all that this cash will do is allow the group to meet its immediate liabilities. These are likely to include refunding some of the $4.7bn cash paid upfront by future passengers whose cruises have now been cancelled.
On the other hand, Carnival has a fleet of ships which were valued at $38bn at the end of last year. Even after subtracting all of the group’s debts, this suggests to me that the group’s net asset value could be as much as 2,000p – double the current share price.
I suspect Carnival will survive. But unlike easyJet, I think there’s a real risk that shareholders will be asked to pony up more cash in order to reduce the company’s debt burden.
Should you buy Carnival or easyJet shares?
I suspect people will be keen to travel again once the coronavirus pandemic is under control. Although I think that Carnival and easyJet may both shrink their fleets, I think these businesses will survive.
I own Carnival shares and I have no plans to sell. As a long-term investor I’m willing to wait and see what happens. I would probably contribute to a rights issue, if I had cash available.
I don’t own easyJet stock, but I feel strongly that the business will recover. At under 700p, I think the shares probably offer decent long-term value.
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Roland Head owns shares of Carnival. The Motley Fool UK has recommended Carnival. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.