A window of opportunity for travel and tourism
The big news last week was that we can finally travel for leisure without having to isolate on return to over 40 amber listed companies. This was the news that most people were looking for, considering TUI announced late last week that bookings for holidays to France, Italy, Spain, Greece and Portugal had soared some 400%. The news was greeted by large gains for airlines and package holiday firms, the question now is will there be further upside in the near to medium term?
What Jet2 can tell us about the wider travel sector
To help answer this question it is worth looking at Jet2’s recent results, it announced results for the year to the end of March, which, unsurprisingly, saw a very large decline of £395mn thanks to the devastating impact of pandemic restrictions. Things were so bad at Jet2 that all 500 plus staff were made redundant at one point.
The CEO lamented the UK government’s confusing traffic light system and said that while bookings for summer 2021 had seen a large upsurge, bookings were slowing into Q3 and Q4, as visibility about the future of international travel in the face of rising infection rates and new Covid variants weighed on consumer sentiment. While Jet2 remains cautious for 2021 as a whole, even with the recent changes to the travel guidelines for this summer, he remains more optimistic about summer 2022, which he expects to be a huge improvement on summer 2020 and summer 2021.
Why IAG can’t maintain positive momentum
The sentiments expressed by Jet2 can be extrapolated to the wider travel sector and helps to explain the performance of some of the larger stocks this week. For example, IAG had looked like it was on the road to a strong recovery in Q1 and early Q2, however, that recovery had faltered in recent months.
Although its share price rose to a 3-week high on the back of the government announcement last week to boost leisure travel, IAG’s share price gave back some earlier gains before rising nearly 2% on Friday on the back of the broader recovery in risk appetite. However, we remain concerned by the lack of follow through on some of these positive moves for the larger airlines. For example, although IAG had a strong rally from October 2020 through to June 2021, it never quite managed to break above the 38.2% Fib retracement level, which highlights how much value has been lost in the airlines, and also how much their stock prices have left to recover to get back to pre-pandemic levels.
Thus, although travel is coming back this summer, will we have to pay for it by being locked down later in the year when the effect of vaccines wears off? That is the risk that we are facing right now, which is why stocks linked to the travel and tourism sector have solid ceilings that are proving hard to break in the long term.
Business travel hinders IAG upside, for now
The technical picture for Jet2 is less supportive than it is for IAG, based on most indicators. However, we think that the fundamental picture is far rosier for Jet2 in the near term compared to an airline giant like IAG, largely because IAG is still hampered by the slow pick up in business travel. This is one reason why Jet 2’s share price rose by nearly 4% on Friday, nearly double that of IAG’s gain.
Further gains for Jet2 depend on two things: 1, overall market sentiment picking up after last week’s sell off, 2, for travel to go smoothly this summer – for example, no last-minute changes to the government travel rules and no intolerably long queues at airports for returning British tourists. If this can happen, then we believe that Jet2 has the possibility to rally to back to 1,400p. For those who prefer to trade a blue-chip stock, then we believe IAG has the potential to rally back towards 210p, the June high, in the short to medium term.
Our short to medium term view on the travel sector
To conclude, airlines and the travel sector in general still face an uphill battle to return to pre-Covid highs, however, there is a window of opportunity for share price repair if we get 1, decent market conditions that support the reflation trade, 2, no last-minute changes to the travel rules and 3, smooth global travel without hassle and long queues at airports that could put people off traveling this year. It’s been a long hard road for the travel and tourism sector during this pandemic, recovery is ahead, however, it will still take some time to get there. In other news, don’t forget to look at yesterday’s note to get our preview on the US banking results due later this week.