Covid-19 Pandemic and the Travel Industry

Although science has miraculously provided us with vaccines within a year of the Covid-19 outbreak, there are variants of the virus appearing as mutations. At a certain level, there will be a race to get vaccines into people’s arms before mutations create new strains that require new vaccines. Our assessment of when travel stocks will recover is based on the assumption that the current vaccines will continue to work and that vaccination will progress as fast as or faster than we have seen so far.

Airline Stock Prices

As an example, United Airlines Holdings (UAL) fell from $85 a share to $21 a share at the onset of the pandemic. The stock has come back to the $43 range but in the fourth quarter of 2020 UAL reported a loss of $1.9 billion instead of the $641 profit they reported in the same quarter in 2019. They are paying on debt and not flying enough planes full of people. According to an article in Forbes, United Airlines says they need 70% occupancy in order to break even. They are nowhere near that at this time so the recovery in stock price is a measure of investor optimism instead of a response to improving financials.

Herd Immunity and Full Airplanes

KHN reports that the US could reach herd immunity by summer. “Herd immunity” is when more than 70% of the population has been immunized or already had the disease and recovered. The experts at Moderna say they expect Pfizer and Moderna vaccines to be administered to enough people by mid-summer to significantly reduce the spread of the disease. Their prediction does not appear to include the Johnson & Johnson vaccine expected to be available in February or any other vaccines that may become available.

It is worrisome that the new Biden administration reports that their predecessors did not have a plan for vaccine rollout and that they are starting “from scratch.” Nevertheless, it would appear that the mid-summer prediction is solid. That situation will lead us to full airplanes, renewed profits, and a cascade of economic improvements.

Investments for a Recovering Travel Industry

Airlines like Delta, United, and Southwest are likely to recover to pre-pandemic levels when we reach herd immunity and they can fill all of their planes again, probably before the end of the year. Orders will pick up at Boeing. Cruise lines like Carnival will resume operations with full boats at least by next winter. Hilton, Marriott, and others will start filling their hotels again, and companies like Expedia will resume their normal level of activity connecting passengers with travel opportunities.

There will be two key factors in this recovery. Companies are burning through their cash and many will be severely damaged by the time they could have resumed normal operations. Those with healthier reserves will probably become dominant in their sectors as others struggle to compete, are taken over, or simply go out of business. The other issue is how companies will adapt to the post-Covid-19 world. Unless the Biden administration is able to stimulate the economy, there will be less money for travel. And, companies have learned that work from home and teleconferencing work just fine, thank you. This, by itself, could reduce some of the volume of business travel which will affect airlines, hotels, restaurants, etc.  Those that more-successfully adapt will do better over the longer term. And, eventually, share prices will be determined by quarterly financials and not the expectation of recovery.

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