Climb aboard these three travel stocks

Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Garry White, chief investment commentator, Charles Stanley.

The Ebola threat has battered airline and travel-related shares as investors panic about a global outbreak. Is this a buying opportunity?

The Ebola crisis is a serious problem – but it is one that health-care professionals believe they can contain. Fear has driven investors to dump travel stocks, but the performance of the sector following the Sars crisis in 2002 and 2003 shows that airline shares tend to recover once a disease is contained. Fewer global flights start in Africa than in Asia, where Sars was centred.

Shares in British Airways owner International Consolidated Airlines Group (LSE: IAG) and easyJet (LSE: EZJ) have fallen hard, while cruise operator Carnival (LSE: CCL) has seen its shares plunge too. Yet all three should benefit from expectations that oil prices will stay subdued. So are these falls overcooked?

A glut of oil around the world and falling demand has caused the price of Brent crude to enter a bear market.

Next year, the International Energy Agency expects global oil demand to expand at its slowest rate since 2009. Prices are expected to stay low too, as Saudi Arabia has cut its price for Asian customers in what is being seen as an attempt to grab market share. The fact that lower oil prices make some alternative energy sources uneconomic is also a likely factor (see last week’s cover story).

But falling demand is a sign of a stuttering global economy – and demand for air travel is linked to the flow of global commerce. Airlines are also notoriously hard to run profitably. Figures compiled by the International Air Transport Association show why. In 2013, airlines made a collective profit of $12.9bn (£7.8bn) on revenues of $708bn (£427bn). That is a 1.8% net profit margin.

To put it another way, airlines made a profit on average of just $4.13 (£2.49) for each passenger they carried. The industry is also grappling with overcapacity, competition from rival upstarts, and a slowdown in passenger numbers.

That said, recent statements from the UK’s airlines have been pretty good. This month easyJet raised its full-year guidance after a strong finish to the summer, helped by strikes at Air France.

It also proposed an increase in its dividend payment as a proportion of post-tax profits, to 40% from 33%, which was more good news for investors over the longer run. As for IAG, west African routes are not a major source of revenue.

Africa, Middle East and south Asian routes account for about 15% of its total capacity. IAG’s Iberia unit may be exposed if there is a downturn in the Spanish travel market following cases in Madrid.

However, this is unlikely unless the situation deteriorates. IAG also has an accident of geography in its favour – the aforementioned upstart Gulf airlines are unable to compete on British Airways’ key transatlantic routes.

At the end of September, cruise operator Carnival reported better-than-expected quarterly profits and raised its full-year guidance, citing higher demand from Chinese holiday makers and higher prices. That said, the shares remain highly rated by the market on an earnings multiple of near 20, which discounts a lot of growth already.

So, with little exposure to markets at the core of the outbreak, IAG looks like the most interesting buy – although just now appears to be a good entry point into all three.



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