Transport companies: How the 'banks of 2008' will cope
Airlines hardest hit by coronavirus outbreak
Transport companies globally will require "system-wide" government bailouts as the banks did in 2008, but it is still unclear how this will be achieved, according to managers and analysts.
The travel sector has been one of the hardest hit industries in the coronavirus market sell-off, as countries continue to close their borders and ban all non-essential travel.
The FTSE 350 Travel & Leisure sector index has fallen by 57% between 20 February and 18 March, according to FE fundinfo data.
Airlines have cut routes, reduced costs and slashed dividend payments, with further measures imminent.
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Cruise ship operator Carnival, meanwhile, has suspended operations across multiple brands and is likely to also cut its dividend.
US airlines have gone so far as to call for a $50bn rescue package, while the UK's transport secretary Grant Shapps said he would consider temporarily nationalising transport firms.
Last week, Virgin Atlanic bosses urged Prime Minister Boris Johnson to sanction a £7.5bn airline bailout.
Over the weekend, the UK Government suspended its rail franchise system for a minimum of six months, effectively nationalising losses suffered by firms as passenger numbers slump.
Such measures would be controversial, but Robin Byde, industrials and transport analyst at Cantor Fitzgerald Europe, told Investment Week there "needs to be a system-wide solution", likening the situation to the part or full nationalisation of banks at the height of the Global Financial Crisis.
"The big issue here is no government globally can afford these carriers or the airport network system to fail," Byde said.
"What you need to do is just reset the whole aviation industry globally back to where it was pre-Covid-19."
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Others are sceptical on the merits of nationalisation, with Jim Wright, manager of the LF Miton Global Infrastructure fund, calling it "an incredibly blunt tool", preferring instead "a system of targeted subsidies".
"Many of these companies [including portfolio constituents National Express and Ferrovial, part-owner of Heathrow Airport] provide vital infrastructure and have been historically very good operators," Wright explained.
"A programme of state subsidy rather than nationalisation will, in our view, see the optimum outcome."
Meanwhile, AJ Bell's investment director Russ Mould claimed IAG, for instance, "would now look a bit foolish if it had to turn to the Government for a hand out" considering it has "lavished €4.4bn in the form of dividends and share buybacks upon its shareholders since 2015".
The larger airline firms, meanwhile, have healthy cash positions, with Mould noting IAG has €6bn in cash on its balance sheet with further banking facilities available.
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UBS analyst Jarrod Castle added Ryanair, easyJet and Wizz Air have €2.5bn, £500m and €1.4bn in cash respectively. The former two also have "a large owned fleet that can be used to raise liquidity".
Byde pointed out complications for some of the larger groups, which own airline brands in different countries. IAG, for instance, operates the UK's British Airways, Spain's Iberia and Ireland's AerLingus.
He added Covid-19 is the latest in a long list of troubles for the airline industry, with a number of failures in recent years including Flybe, Monarch and XL Airways.
Longer-term issues
Meanwhile, Jason Pidcock, manager of the Jupiter Asian Income fund, thinks growing environmental concerns will pose an even bigger threat to airlines.
"The behaviours of young people in particular were already starting to change, with movements like ‘flight-shaming' discouraging people from taking flights in order to lower carbon emissions," Pidcock said.
"It is likely that from here on in the trajectory of growth will see a permanent shift, particularly when it comes to aviation.
"When it comes to methods of travel such as cruises, for example, it is possible that people might be too spooked to try it again."
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Others believe the airline industry will survive, but Neil Veitch, manager of the SVM UK Opportunity fund, thinks current events "will accelerate the pace of industry failure and also industry consolidation".
However, he added his fund's three airline holdings - Ryanair, Wizz and IAG - "will be long-term winners in a consolidating European airline market", noting they, along with Air France/KLM, Lufthansa and easyJet, account for around 96% of all operating profits generated by European airlines in 2019.
Veitch added: "Once the current panic subsides and investors realise the impact on 2020 earnings should be assigned a P/E ratio of 1x, we expect focus to shift towards the long-term winners in the sector.
"Ryanair, Wizz Air and IAG will be at the head of that list."
Hotels are also vulnerable to travel disruption, with Intercontinental Hotels Group's (IHG) shares down 55%. But Andrew Evans, manager of the Sanlam Active UK Equity fund, said the current weakness could be seen "as an opportunity to buy more, rather than panicking and trying to trade out of a position".
Evans explained IHG earns returns on tangible capital of over 100%, "because the capital of putting up a new hotel is put up by the franchisee, and IHG just collects cash royalties from each guest per night sold".
"We think the opportunities to grow and provide exceptional returns to investors in the next 15 years are just as exciting as the past 15," he reasoned.
Meanwhile, Louis Jamieson, global equity analyst in Sanlam's global high quality team, thinks online travel agents (OTAs) such as Booking.com will return to pre-virus behaviours once the spread is contained.
Further, Jamieson added, OTAs tend to take market share during downturns, "because travel providers become more desperate for custom and lean more heavily on the aggregators", providing "a semblance of downside protection".
On how quickly travel and leisure stocks could bounce back after the virus, AJ Bell's Mould noted the sector suffered badly during both the SARS outbreak in 2002 and after the 9/11 terror attacks, "but rebounded quickly".
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