BEACH stranded
Yes the Leisure and Travel sectors, collectively summarised and euphemistically referred to as BEACH (Bookings-Entertainment-Airlines-Cruises-Hospitality) industries have been hit hardest by the Covid-19 induced travel restrictions. According to Peter Lynch, 7 of 10 of the most depressed share price stocks are related to the Travel industry. Furthermore, the secondary and tertiary effects on other sectors have not been factored-in; nor the interdependence with the Oil sector. BEACH accounts for 60% of oil demand. Airframe and engine manufacturer will be sucked into the whirlpool as well as infrastructure and service providers, restauranteurs and retailers. Boeing – the jewel of US manufacturing has been, ‘de facto’, nationalised. Airbus – your move next!
Stranded
The primary effects are well tracked.
Bookings: share prices are down 35%
Entertainment: Annual revenue declines are down at about the 75% level.
Airlines: With over 10 million direct employees worldwide and 12m passenger per day it represents USD2.7 trillion of economic activity. It is the facilitating sector for business, industry and pleasure.
Cruise: Share prices have declined by as much as 70%
Hotels: Occupancy rates are depressed. At levels of 40% for a sustained period at least 4m jobs could be at risk in the US alone.
In addition to the detrimental effects on the BEACH set, Investors may be tempted back into the market in the hope of acquiring solid assets at distress prices. When and How to participate? Is this BEACH play better risk/return than alternatives?
Shrewd timing or exuberant, ill-considered investing on a fragile recovery? For example on April 8 the European Stoxx 600 rose 1.7%, but the Travel and Leisure sectors increased by 6% that day. Caveat emptor! The Sage of Omaha has already voted with his wallet, stomaching losses on his Covid exits from several airlines. IAG’s share price continues to tumble; at a 70% decline its fall is more precipitous than its peers. Is it justified?
For those companies that recover, the path may be through (much needed) aggressive restructuring and even re-nationalisation. The Airline industry in particular.
N-cubed
‘National interest, natural monopolies and nationalisation’ have tended to be a triptych during bad times.
The Airline industry has always flirted with these N-forces. Already national European governments are flaunting competition rules as well as economic directives. Just as they did during the Credit Crunch, then to save banks; now it is the airlines that are the recipients of taxpayer largesse. Germany is already stepping in to save Lufthansa; and France to save its moniker – Air France. The Market Purists will cry “foul”. An interesting debate will be over IAG (BA, Iberia and others) with its web of British, Spanish and Qatari shareholder interests. For US carriers, Chapter 11 is an old friend. Certain marginal providers will go bust. The situation in China (domestically and internationally) is more pressing.
The Airline industry was ripe for a transition even pre-Covid. In populist times. travel is seen as right not a hard earned sojourn for citizens, a modern civil liberty. The globalised economy relies on productive and orderly Transport and Hospitality sectors. Analysts would like to see a much needed rationalisation of the Airline industry. The sensible “Twin Peaks” proposed merger in 2003 of American Airlines and British Airways was ruled anti-competitive at the time. It would have been the right move then and certainly for the now. The next round of consolidation must surely be at hand,
Importance of Tourism
At a broader BEACH level, just for England the importance of international tourism is clear. There are over 34m international visitors who generate at least UK£ 21 billion to the national economy. In England alone there are 2.6m people employed in 208,880 firms engaged in tourism sectors (including accommodation, food and drink, transport, travel agencies, cultural activities and more).
The margins for these visitors is higher than for domestic travellers. So ‘staycations’ will help bolster, but nor replace, vital points of margin. Also, in a post BrExit world; with Britain supposedly Open-to-Business-to-the-World, continued lockdown, or messy relaxations from it will exacerbate the damage already caused.
Return to ‘Normal?’
It may well be the case that individual countries take a more practical perspective on the post-crisis Covid 19 world, seeking to re-establish normal ties. This will encourage bilateral links or “bubbles”. Australia and New Zealand have created theirs. Both Germany and the US may create their own airbridge. The Greater Nordics are already there. Economics and Recovery will follow the path of least resistance/greatest remuneration and favour those companies at the forefront.
Current social distancing regulations will need to be relaxed to near normal levels as the related physical impediments will prevent a return to necessary survival formulas of demand and operating capacities for the airlines by September 2020.
Is it safe?
Investors interested in BEACH will need to assure themselves of the prospects for recovery and growth by understanding each company’s situation and resilience, as well as market dynamics: capacity, demand and government action (Covid-19 relaxing and economic). Only then may it be safe to enter the waters of BEACH stocks.