Travel businesses bounces back but share prices languish

• Shares in travel group Tui crashed to a record low yesterday 
• But the travel industry enjoyed a profitable summer this year
• Easyjet’s £203m profit haul between April and June was a quarterly record

The travel industry has enjoyed a bumper summer – and there appears to be no shortage of demand for holidays this Christmas as families hunt for winter sun.

Easyjet’s £203m profit haul between April and June was a quarterly record and Ryanair racked up its fourth-straight month of record passenger numbers in August.

Just last week, Tui chief executive Sebastian Ebel hailed ‘a strong close to the summer’ before adding: ‘The positive trading momentum is continuing, and I am very optimistic for the coming winter and summer seasons.’

Investors may have hoped that this would be cause for celebration in the form of a long-awaited recovery in share prices following the devastation of the pandemic.

But shares in Tui crashed to a record low yesterday – down 3.5pc, or 15.6p, to 436.8p – having been trading above 3000p when Covid-19 struck and at around 5600p a little over five years ago.

While not at record lows, British Airways owner IAG and Easyjet are still down around 66pc since the start of the coronavirus crisis while cruise operator Carnival is more than 70pc lower.

‘The travel industry has enjoyed a strong summer,’ said Victoria Scholar, head of investment at Interactive Investor.

‘This is thanks to strong demand for international travel over the school holidays, the rebound in demand for travel post pandemic and higher ticket prices helping to offset inflationary pressures.

‘However this hasn’t translated into investor returns.

‘Shares in the sector have had a tough time, struggling to restore their pre-Covid levels after lockdowns and travel restrictions heavily punished the travel industry. Part of this is because the travel industry is seen as being closely correlated to the economic cycle.

‘The macroeconomic storm clouds with elevated inflation, the lengthy rate-hiking cycle and a softening consumer have sparked nervousness about the strength of travel demand going forward.’

Analysts also warned that the rising oil price is taking a toll, pushing up the cost of fuel for airlines and cruise liners at the same time as squeezing their customers through higher prices on garage forecourts.

While crude oil is below the $127 a barrel it reached after the invasion of Ukraine, it has risen from around $70 to $95 over the past three months, with industry experts warning it could top $100 once again.

Russ Mould, investment director at broker AJ Bell, said that the problems at Tui run even deeper, pointing to the three rights issues the firm has conducted in the past three years – of £475m and £955m in 2021 and a further £1.6bn in 2023 – and a hefty debt pile. 

‘The share count has shot up from 100m to over 500m as a result,’ said Mould.

‘Dilution is the enemy of the investor and the increased share count could be causing some indigestion.’

Mould also pointed out that expected profits of around £870m this year – following losses in each of the past three – cover the forecast debt interest bill of £390m by just over two times.

‘Two times is seen as the minimum needed to provide a suitable buffer for a cyclical business like travel, should anything unexpected go wrong,’ said Mould. 

‘Although 2022 and particularly 2023 have seen a lot of revenge travel, markets are worrying about the creeping impact upon consumer confidence and spending plans in 2024.

‘Germany is again being dubbed the “sick man of Europe” – and that’s a big market for Tui.’

Profit warnings from American Airlines and Spirit Airlines this month, following earlier ones from Southwest and Alaska, have done little to lift the gloom hanging over the sector.