Travel on the Stock Market

Travel on the Stock Market

The World Travel and Tourism Council (WTTC) estimates that there are currently around 230 million people employed within the Travel & Tourism industry - or 8.7% of the total global workforce. And this is expected to rise to 279 million over the next 10 years.

The WTTC expects tourism-related spending to rise by 4% in the next 10 years whilst business-travel expenditure is estimated to increase by 6% over the same period. The travel industry is now catering for an ever-more diverse clientele - the 55-75 age group is enjoying more freedom to travel, whilst many of the new economies in Eastern Europe and the Far East are enjoying mass tourism for the first time.

These trends and developments make this a dynamic and interesting market for investors.

The UK Travel Industry

For the purposes of this article, we are going to look at the 'travel industry' using the FTSE Travel & Leisure sector as our starting point. The FTSE Industry Classification Benchmark (ICB) defines the Travel & Leisure Sector to be made up of the following sub-sectors: Airlines; Hotels; Travel & Tourism; Gambling; Recreational Services and Restaurants & Bars.

We have included the following three ICB sub-sectors in this article on the Travel Industry:

·               Airlines. Providers of passenger air transport, excluding airports. Many carriers also provide auxiliary services such as airport parking, travel shops and travel insurance.

·               Hotels. Companies operating and managing hotels and related venues such as lodges, resorts, spas and campgrounds.

·               Travel & Tourism. Companies providing 'pure' tourism services - such as travel agents - and companies providing passenger transportation - such as buses and passenger rail services.

We have excluded Gambling, Recreational Services and Restaurants & Bars. With the explosion of online gaming, nobody needs to 'travel' to place a bet. We have also omitted Recreational Services (which encompasses cinemas, fitness centres and football clubs) and Restaurants & Bars for the same reason.

Current Market Factors

Every industry sector has its own unique set of risks and factors that affect the performance of the individual shares. The Travel Industry is no different:

·               High Fuel Prices. The spiralling price of oil has increased the operating costs of airlines and bus and train operators. Many airlines have instituted an extra fee for passengers - this fuel surcharge conflicts with the trend towards ever-cheaper air travel.

·               Environmental Pressures. The threat of global warming has lead to mounting pressures to curb carbon emissions and reverse the explosion in low-cost air travel. The aviation industry has expressed concern over the European Parliament's adoption of the Lucas Report, which recommends battling climate change by introducing new taxes and regulation on air carriers.

·               Terrorism and Natural Catastrophes. Many tourist destinations have been rattled by violence in the past few years. Bali in Indonesia and the Egyptian resort of Dahab were both hit by terrorist bombs, whilst large tracts of the Asian coastline were ravaged by the tsunami in December 2004 and the Mexican resort town of Cancun was devastated by Hurricane Wilma last year.

·               Protectionism. Many governments still seek to shield their national industries from market forces - making it difficult for the airlines to merge, rationalise and expand their operations. The EU has declared its intention to negotiate an ‘Open Aviation Area’ with the US, but agreement remains elusive.

Travel across the Indices

The UK Travel Industry is well represented on the London Stock Exchange - from the FTSE 100 giants to the specialist minnows of the Alternative Investment Market.

There are just over 40 of these travel related companies listed on the London market.

Over a quarter of these companies have their primary listings overseas, although we have included them for the sake of the UK investors who can still trade shares of these companies.

The Travel Industry Top 10

There are just 3 Travel companies with a market capitalisation in excess of £1 billion - British Airways, Ryanair and Intercontinental Hotels.

Source: LSE 30/06/2006

Share prices in British Airways (BA), the largest company in this sector, rose a solid 12.9% in July on the strength of some impressive first quarter figures. Pre-tax profits were up 57% to £195 million for the three months to 30 June 2006 - which BA has attributed to its new low fares for selected short haul destinations, extensive investment in new services and increased flights (news release: 04/08/2006). The market's positive reaction to this news came despite worries over BA's £2.1 billion pension deficit, spiralling fuel bills and restricted access to US routes (news release: 25/06/2006).

Dublin-based Ryanair is Europe's largest low fares airline. Having started life in 1985 with just one 15-seater aircraft flying between Waterford and Gatwick, Ryanair expanded quickly and recently reached a new milestone with its plans to offer flights to Morocco (news release: 25/05/2006).

The Group listed on the Dublin Stock Exchange and NASDAQ in 1997 and on the LSE in 1998 (making it an overseas-listed share which is not included in the FTSE indices).

Ryanair carried 35 million passengers in the 12 months to March 31 2006, up 26% over the preceding 12 months - and announced record profits after-tax of €302 million, despite a 74% increase in fuel costs (news release: 06/06/2006).

Ryanair's share price rose 9.73% in July.

InterContinental Hotels Group (IHG) is the world's largest hotel group, with over 537,500 rooms in 3,600 hotels across 100 countries. IHG's share price fell 8.4% in July following the news that it was selling off seven hotels on the continent to Morgan Stanley Real Estate Fund and it is also understood to have appointed agents to find a buyer for the Crowne Plaza hotel in London, in which it has a 33% holding.

Tokyo-based airline All Nippon Airways (ANA) reported strong first quarter figures for the three months to June 30 2006. Revenue was up 32.8% to ¥345.2 billion, which ANA attributed to a recovering Japanese economy and increased travel to China and the Pacific (news release: 31/07/2006).

Budget airline Easyjet was only established in 1995 by Sir Stelios Haji-Ioannou, but already operates 258 routes across 72 European airports. The share price increased by an impressive 15.34% in July, following smaller than expected pre-tax losses and a 10.1% increase in passenger numbers. Easyjet has also upgraded its full year outlook and expects 2006 pre-tax profits to grow by 10-15% over 2005 (news release: 03/05/2006).

First Choice is the sole high street travel agent in our ‘top ten’. The company began life as Owners Abroad in 1973, acquiring its current name in 1994. The Group reported operating losses of £69 million for the half year ended 30 April 2006 - an increase over the £65 million lost in the same period last year. These continued losses were attributed to a number of factors, including Hurricane Wilma and terrorism in Egypt (news release: 13/06/2006). These troubles have been reflected in an 8.30% drop in First Choice's share price between January and July this year.

All of which goes to show, once again, just how varied the UK travel industry is.