For much of the first half of this year, consumers stuck at home as the coronavirus circled the globe. Many people only dreamed of taking off to faraway lands or cruising across oceans and seas to exotic locales, while the industry that provided those services saw its own dreams turn into nightmares.
Domestic travel spending in the U.S. is on track to crash some 40% year-over-year to $583 billion from $972 billion last year, according to a recent U.S. Travel Association-commissioned report. That comes as domestic trips taken by U.S. residents dip to 1.6 billion, a 30% drop from last year and logging the lowest figure since 1991—another recession year—the group noted.
And that doesn’t include the pandemic-induced fallout from the international side. “International inbound spending is expected to freefall a whopping 75%,” landing at about $39 billion from $155 billion a year ago, according to the research by Tourism Economics, an Oxford Economics arm.
The forecast is so grim that the Travel Association is calling it The Great Travel Depression. It’s a slump that pulls down hotels such as Hilton Worldwide Holdings, Inc. (NYSE: HLT) and Marriot International, Inc. (NASDAQ: MAR), The Walt Disney Company (NYSE: DIS) resorts and theme parks, Norwegian Cruise Lines holdings, Ltd. (NYSE: NCLH), Royal Caribbean Cruise Lines, Ltd. (NYSE: RCL), and Carnival Corp. & PLC (NYSE: CCL) cruise lines and all airlines including United Airline Holdings, Inc. (NASDAQ: UAL), American Airlines Group, Inc. (NASDAQ: AAL), and Southwest Airlines Co. (NYSE: LUV). Making matters worse, they’re all sectors that feed off each other while also feeding the hundreds of thousands of workers who depend on them for paychecks.
Moody’s and other ratings agencies have taken to downgrading travel companies such as TripAdvisor, inc. (NASDAQ: TRIP) and Expedia Group, Inc. (NASDAQ: EXPE), for example, based on that dismal outlook. “Moody’s expects that global travel volume will be depressed over at least the next several months,” the ratings agency said.
“There are further downside risks in the event travel demand remains weak beyond 2020 in a scenario in which COVID-19 is not contained or travelers continue to maintain some degree of social distancing practices,” Moody’s added.
Some of the S&P 500’s Worst Performers
Hotels, restaurants and leisure fall under the S&P 500’s Consumer Discretionary sector, expected to be the second-worst performing sector of the 11 official S&P sectors (Energy being the laggard). FactSet expects the entire sector to suffer a 119% decline in earnings. Hotels, restaurants and leisure companies are forecast to wipe out earnings and then some—at a 192% rate.
A similar tale is being told within the airline industry, which is part of S&P’s Industrials sector. That sector is expected to see its cumulative earnings fall 89%, the third deepest drop among the 11 sectors, led by a massive 351% plunge in airlines’ earnings, according to FactSet.
“The airlines industry is also expected to be the largest contributor to the year-over-year decline in earnings for the sector,” John Butters, FactSet’s senior earnings analyst, said in the Q2 report. “If the five companies in this industry were excluded, the estimated earnings decline for the sector would improve to -45.0% from -89.0%.”
It’s no wonder then that analysts are bracing for Q2 earnings that might make the Great Recession look much smaller compared to the possible damage from COVID-19.
But as earnings season kicks off, the question on many investors’ minds is how much of this downturn in travel is reflected in equity prices (see figure 1 below).
FIGURE 1: GROUNDED AND STAYING HOME. Through the S&P 500 Index (SPX—candlestick) has mostly recovered from the initial COVID-19 selloff, the Dow Jones Transportation Index ($DJT—blue line) and the Dow Jones Travel & Leisure Index ($DJUSCG—purple line) fell harder and have since been lagging the recovery. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
The Not-So-High-flying Airlines
To say that the airline industry has been in dire straits is an understatement of high-flying proportions. Industry leaders were displaying a big dose of confidence as they entered the new decade with 10 straight years of profitability under their wings.
When the coronavirus pandemic began its fateful tour of the U.S., everything changed, and the result has been devastating to the travel industry.
“Never before has our airline, or our industry, faced such a significant challenge,” Doug Parker, AAL’s chief executive, said in the carrier’s Q1 earnings release.
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The challenge is still in full force, according to many analysts. Revenues continue to nosedive while debt takes off and the rising trend of new COVID-19 cases keeps flyers grounded. Making matters more difficult at the moment, some states have initiated 14-day quarantines on others where the virus is more prevalent. Just a few weeks ago, airlines were talking about adding more flights and bookings picking up. Now many people don’t want to travel if it means they might face being stuck in a hotel room or in someone’s house for 14 days once they arrive.
AAL projected that ticket, baggage and other ancillary sales would collapse to $20 billion from $45.7 billion last year—and that’s assuming the flying public starts to go back to it in the second half of the year. At that rate, AAL could lose $4.4 billion in cash flow operations as total debt reaches a mind-blowing $44.6 billion by year’s end.
By year end, analyst consensus is projecting AAL’s losses to reach $16.76 a share for the year, according to FactSet.
UAL is in much the same position, according to FactSet, with this year’s losses estimated at $20.66 per share while LUV is expected to see its annual earnings fall to $4.77 a share.
AAL, UAL and LUV were among the nine airlines that have signed letters of intent in recent days to the terms of some $25 billion in loans the Treasury Department is issuing for U.S. carriers as part of the $2.2 trillion CARES Act, passed in March.
Upcoming Earnings Data
|Company (Ticker)||Release Date (U = Unconfirmed)||Consensus Earnings (Loss) per Share||Consensus Revenue|
|United Airlines (UAL)||Jul-21||-$9.03||$121 bln|
|Hilton Worldwide (HLT)||Jul-22 (U)||-$0.28||$911 mln|
|American Airlines (AAL)||Jul-23 (U)||-$7.27||$1.35 bln|
|Southwest Airlines (LUV)||Jul-23||-$2.67||$746.6 mln|
|Royal Caribbean (RCL)||Jul-23 (U)||-$4.65||$73.2 mln|
|Marriott (MAR)||Aug-3 (U)||-$0.41||$1.65 bln|
|Walt Disney (DIS)||Aug-4||-$0.63||$12.49 bln|
|Carnival (CCL)||Sep-24 (U)||-$2.26||
“The major U.S. airlines play a vital role in our economy and are critical to domestic and international travel and commerce,” the Treasury Department said. “These airlines are among the companies most heavily affected by the disruptions to social and economic activity caused by the pandemic.”
Carriers also have received chunks of the $25 billion in federal payroll grants that came with the caveat that no employees would be laid off or their salaries cut before Sept. 30.
But UAL recently warned employees that unfortunately the clock is ticking and—if there’s not a significant pickup in air travel— it could be forced to shed nearly 45% of its workforce, or 36,000 employees, as the hoped-for recovery is losing momentum. Calling the move “a last resort,” executives told reporters July 8 it could no longer count on government aid to support staff.
AAL also has said recently that its workforce is 20,000 too many to handle its fall schedule, a harbinger of what might lie ahead.
That’s a lot of cargo for investors to be thinking about as UAL, AAL and LUV open what analysts predict will be a blur of red-covered books for Q2. And here’s another thought to noodle: Do people even want to get on a plane? Maybe.
LikeFolio, a company that monitors consumer sentiment, sees long-distance travel unappealing as social media mentions about taking or booking a flight fell off 16% in the last 30 days compared with the same period a year ago. Mentions of taking a road trip are up 31% while 36% of consumers are talking about taking a vacation close to home.
No Smooth Sailing Ahead
COVID-19 has been dreadful for cruise ship operators, many of which kept their jam-packed ships at sea even after the coronavirus was first detected on a cruise ship off the coast of Japan, according to a Washington Post report.
A Post review, reported in late April, found that COVID-19 “infected passengers and crew on at least 55 ships that sailed in the waters off nearly every continent, about a fifth of the total global fleet,” the story said.
Well aware of the hazards so many people eating, drinking and dancing so close together on a confined vessel presented, the Centers for Disease Control and Prevention issued a no-sail order for cruise ships on March 14 that it has since extended to July 24. The CDC’s message is to avoid a cruise and if you do go, quarantine yourself for 14 days afterward.
It looks like the cruising public might be taking note. LikeFolio’s tracking of booking-a-cruise mentions are pacing 63% lower than before COVID-19 became a pandemic (see figure 2).
FIGURE 2: NO-SAIL, NO SIR. Social mentions on cruise bookings initially jumped, but as the pandemic dragged on, sentiment fell hard. Data source: LikeFolio. For illustrative purposes only. Past performance does not guarantee future results. The social data discovery, filtering and analysis are provided by SwanPowers, LLC’s LikeFolio. SwanPowers and TD Ameritrade are separate and unaffiliated firms.
That presents a daunting challenge for cruise ship operators who have to convince customers as well as regulators that they can create a safe environment by putting well-being measures in place while also keeping the fun quotient high.
Is that even doable? The major cruise lines think so. NCHL and RCL have joined forces to create a panel of public health professionals to guide them. The panel includes former Food and Drug Administration Commissioner Dr. Scott Gottlieb—who’s become a familiar face among the COVID-19 talking heads experts.
“We’re looking to establish protocols that protect the health of our guests and crew and do so without undermining what makes the cruising so special,” RCLl Chief Executive Richard Fain said on CNBC. “It will be different.”
Stay tuned to what insights operators may have into future travel and to changes cruise lovers might expect. Does that much-adored food buffet have to go?
Disney’s Theme Park Troubles
There are many layers to what makes the Mouse House the success it has been in recent years: theme parks, resorts, cruise lines, movies, movie paraphernalia, games and toys.
There’s also its newest division to the playground, Disney+, the streaming video business that’s been a huge hit in the age of Covid. After only six months in the marketplace, the service rallied 54.5 million global followers to subscribe.
Nice, right? But not nearly enough to make up for the lost revenues tied to all those theme parks, resorts, cruise lines and even movie theaters that went dark when the pandemic spread and stay-at-home mandates were put in place.
“Disney’s streaming business is performing at an all-time high but the company is being held back by its physical assets as a consequence of COVID-19,” GlobalData analyst Danyaal Rashid said in a report.
“There is not a lot that Disney can do at the moment but keep up its strong presence in the streaming market and wait for the effects of COVID-19 to lessen so that it can re-open its parks,” Rashid added. “The company needs to weather the storm as best it can until a time when it can regain its physical assets—only this time with a boosted streaming empire.”
DIS Chief Executive Bob Chapek, speaking for the first time during Q1 earnings as the new chief of the empire after Bob Iger’s retirement, thinks the company will spring back into action as the pandemic recedes.
“Disney has repeatedly shown that it is exceptionally resilient, bolstered by the quality of our storytelling and the strong affinity consumers have for our brands, which is evident in the extraordinary response to Disney+ since its launch last November,” he added.
That was before a flurry of fresh Covid-19 cases cropped up in some of DIS’ biggest playgrounds in California and Florida, forcing DIS to postpone opening some parks and resorts until later this summer.
Still many analysts tend to agree with Chapek’s May comments. But when earnings are released they said they will be listening to the early results of consumer demand at parks and resorts that have yet to open as well as those that have reopened across Asia and Europe and what it thinks about getting cruise lines up and running again.
On a positive note, according to last week’s employment report, the leisure and hospitality category added a whopping 2.1 million jobs in June, which might indicate that the industry is ramping back up toward the “new normal.” The upcoming earnings season will certainly be one to watch.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
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