Although positive coronavirus vaccine news has given the travel sector new wings, the many challenges ahead mean stocks remain lowly valued.
The London-listed blue chips “most exposed to a possible vaccine” are almost all related to the travel industry: Ryanair (LON:RYA), International Consolidated Airlines Group (LON:IAG), Carnival PLC (LON:CCL), Whitbread Group PLC (LON:WTB), InterContinental Hotels PLC (LON:IHG), plus engineers and suppliers to the airline industry Rolls-Royce Holdings PLC (LON:RR.) and Melrose Industries PLC (LON:MRO), plus mining engineer Weir Group PLC (LON:WEIR), out of a list of 30 European stocks put together by UBS.
Prior to Monday’s vaccine news, easyJet (LON:EZJ) was one of the biggest fallers, down 63% in the year to date, versus Ryanair down just 9% and Wizz Air (LON:WIZZ) down 6%, as the latter pair’s lower cash burn amid the crisis and lower costs manage the recovery provided more comfort for investors.
“Holidays can’t be zoomed”, they said, adding that there is a probability of a “super cycle” for the sector because of the improved capital discipline the companies have been forced to make.
Credit Suisse lifted its target price for easyJet to 840p from 729p, Ryanair to €17.23 from €15.16 and Wizz to 4,889p from 4377p.
The vaccine news “encapsulated the stark difference between sentiment and fundamentals”, was the view of the airline followers at Citigroup, who reckon sentiment is likely to win out over fundamentals “for at least the next few weeks and possibly months…but the volatility is probably not over just yet in the more medium term for the European airline sector”.
Airport testing and new air bridges
The Citi view was that it is “simply too late” to be bearish on European airlines and there are a number of potential silver bullets for sentiment on the horizon, including other vaccines in Pfizer‘s chasing pack, a travel traffic light system, air bridges to the North Atlantic and more widespread testing.
“These will likely all leave investors gravitating towards the names that have exposure to three core areas (that have ironically been the most fundamentally challenged of late): corporate, long haul and transfer markets.”
Indeed, even before any vaccine is fully launched, UBS was also mooting better testing and safety measures as the more immediate prospect of reviving the industry, which coincided with an optimistic announcement from the government on the back of trials of rapid-turnaround coronavirus tests in Liverpool.
Airline analysts at UBS said that point to the lack of a vaccine during SARS, Swine and Avian flu outbreak, where airlines were able to achieve new traffic highs.
“While the pandemic has adversely impacted travel and a vaccine is the only long term solution, we believe testing and safety protocols can materially aid the industry remobilisation until there is a widely vaccinated population,” they said.