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Corona sledgehammer hits travel sector - part 1

With airlines, airports and travel companies hammered, is value emerging in the hard hit sector?

Capital raisings, job cuts, grounded fleets and empty airports is the new norm in the travel industry. Alex Gluyas looks into COVID-19’s impact on ASX travel companies, airlines and airports, how they’re dealing with it and why some are still offering value.

Synonymous with the idea of investing in the airline industry is Warren Buffett’s quote from 2013 – “it’s been a death trap for investors.”

Fast forward to the present and perhaps hypocritically, Buffett’s Berkshire Hathaway owns between 8 and 11 per cent of the big four US airlines – American Airlines, Delta Air Lines, Southwest Airlines and United Airlines.

The change of heart reflects the difficultly of investing in a highly cyclical sector vulnerable to economic uncertainty.

The current market volatility inflicted by COVID-19 needs no introduction and nor does the international and domestic travel bans placed throughout Australia and around the world.

As millions of people have gone into isolation and airlines have been forced to ground a large portion of their fleets, it’s now become a rare sight to see aeroplanes flying above. Consequently, the number of flights leaving Australia’s three busiest airports plummeted throughout March.


As the graph indicates, two weeks ago saw the most dramatic fall, with aircraft departures across Sydney and Melbourne airports down 85 per cent on March 30 compared to normal schedules, according to a report released by Credit Suisse.

The report’s research was undertaken by investment banking firm Jarden, which also updated its forecast for international passengers to drop 70 per cent (previously 50 per cent) and domestic passengers to fall 58 per cent (previously 35 per cent) in 2020.

The main issue for companies in the travel industry is that the longer the COVID-19 pandemic continues, the more costly it will be to restart operations, particularly for airlines.

Planes will need to be checked, staff will need to be re-trained, new measures may need to be implemented post COVID-19 – the costs will be significant.

Then there is time – how long will it take for passengers to be confident enough to travel not only domestically, but also internationally, once travel bans are lifted?

Credit Suisse, analysing the impact on Sydney Airport, initially forecast passenger traffic to return to 2019 levels by 2022. It’s now pushed out passenger recovery to 2023 for domestic travel and 2024 for international travel.

A fortnight ago, the International Air Transport Association (IATA) released global passenger traffic data for February showing that demand (measured in total revenue passenger kilometres) fell 14.1 per cent compared to February 2019 – the steepest decline in traffic since 9/11.

More relevant for Australia was the damning statistic that for carriers in Asia-Pacific, the drop was 41 per cent. If this was February, just imagine what the figures are going to look like for March and then April.

IATA’s CEO Alexandre de Juniac said, “the airlines were hit by a sledgehammer called COVID-19 in February… without a doubt this is the biggest crisis that the industry has ever faced.”

The result has been an abundance of cost-saving measures by every travel company on the ASX given the huge loss in revenue that has already been experienced and will continue to for the duration of the pandemic.

The overwhelming plan for those in the industry seems to be, get through the next year of lost revenue and debt, and pray things get back to normal as soon as possible.

 

TRAVEL BOOKING COMPANIES 
 

Webjet (WEB:ASX)

One of the hardest companies hit by the COVID-19 crisis has been Webjet. The travel booking group at the start of this year was worth $2 billion but as of March 19, when it entered into a trading halt, its share price had dived 70 per cent.

The combination of global travel demand plummeting, brand damage from unhappy customers and issues with collecting debt, forced the company to stop trading as it went to the market to raise capital.

Webjet’s debtor issues can be traced back to last year, with the collapse of its partner travel company, Thomas Cook, leaving Webjet with a $43.7 million loss.

As announced two weeks ago, Webjet is now expecting to raise a total of $346 million, including a $115 million institutional placement and a fully underwritten non-renounceable 1-for-1 rights issue for $231m.

The sacrifice being made for the cash, however, is that the funds are being raised at $1.70 a share - a 54 per cent discount to the pre-trading halt price.

To get an idea of just how far the company’s share price has fallen, it was trading as high as $14.44 in January this year.

Notably, private equity giant Bain Capital is participating in the equity raising, having been allocated $25 million of shares or 6 per cent of shares post completion. It also has sub-underwriting agreements to potentially get up to 16 per cent of shares.

Alongside the capital raising, Webjet has also announced major cost reductions including 60 per cent pay cuts for board and executives, over 440 redundancies and deferral of its $12.2 million half-year dividend payment to name a few. The cuts are expected to save Webjet around $13 million a month.

The capital raising has breathed life back into the company, which was fighting for its life and is expected to cover operating costs and capital expenditure to the end of 2020. It’s also set to provide additional liquidity in the anticipation of potential debtor defaults in the current environment.

Just a day after its equity raising announcement, Credit Suisse upgraded Webjet to outperform commenting that it was satisfied “with near-term liquidity addressed.”

J.P Morgan also jumped on the bandwagon, increasing its price target for December this year from $3.50 a share to $3.80.

Morgan Stanley moved its rating on Webjet to equal-weight from under-weight due to the improved liquidity, noting however, risks definitely still remain.

It moved its equal-weight price target to $2.50, commenting it “doesn’t have the conviction in earnings to have a strong view on valuation,” but expects the market to look through FY20 and FY21 earnings.

Morgan Stanley’s main concern is a forecast 90 per cent decline in business-to-business and business-to-consumer international volumes and 80 per cent fall in domestic volume for the remainder of FY20.

It also noted liquidity risks still remain if conditions worsen, citing debtor risk and a high monthly cash burn, which could see Webjet back in a similar case to now, in seven or eight months.

 

Flight Centre (FLT:ASX)

It’s been a very similar story for fellow travel booking company Flight Centre, which has also seen its share price plummet from a high of $44.66 in last January to now sit at $11.56 (at time of writing).

Like Webjet, Flight Centre has gone to the market for a cash injection as it deals with major hits to revenue caused by travel bans, border closures and the forced shutdown of outlets.

Its capital raising was upsized last Monday from $500 million to $700 million and was completed the day after, raising approximately $562 million under a fully underwritten placement and institutional entitlement offer and a further $138 million retail entitlement offer.

The deal was offered to investors at $7.20 a share – a 27.3 per cent discount on the company’s previous trading price of $9.91.

The equity raising is set to be enhanced by a commitment from lenders to provide short-term covenant relief by waiving testing across its facilities for the June and December periods this year.

This coincides with the company also negotiating $200 million in debt from its existing lenders and $60 million from the pending sale of the company’s Melbourne property.

It comes as part of Flight Centre’s plan to increase liquidity and reduce costs having cut 6000 jobs from its global workforce, closing 250 stores in Australia and half of its global shops.

The investment banks were impressed by Flight Centre’s recapitalisation, with Citi commenting on Tuesday that balance sheet risk had been removed through the $960 million of fresh capital.

Citi said the increased liquidity allowed investors to look through the near-term cash burn, with its $2.3 billion in available funds providing cover for working capital needs, one-off costs, liquidity buffers and debtor impairments. It retained its buy rating on Flight Centre and moved its target price down from $22.70 to $12.50.

Morgan Stanley agreed, saying that Flight Centre’s liquidity position had “appreciably improved” as it prepares for its total transaction value (TTV: a measure of travel services sold by $) to drop further.

With March TTV around 70-80 per cent below normal, Morgan Stanley is expecting April to be 90 per cent lower, however thanks to its improved liquidity position, monthly cash costs are expected to be $65 million by July, down from around $220 million.

There seems to be real confidence in Flight Centre’s ability to bounce back once the pandemic is over based on its historic emergence from crises.

Bell Potter used the graph above to highlight why it upgraded its recommendation for Flight Centre from ‘hold’ to ‘buy’, given a track record of growth and profitability, even after major events such as 9/11, SARS and the GFC. It also updated its 12-month price target on the company to $11.50.

 

See part 2 for further discussion of ASX-listed travel companies.