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Coronavirus: Going where others fear to tread helps in travel investing

Simon French
A woman wearing a facemask on the London Underground: PA

It’s cold outside and according to the Met Office the UK is on track to have its wettest February for 30 years. These represent awful conditions for many consumer-facing businesses as shops, restaurants, cinemas and theme parks suffer from low footfall. But there is one type of business that relishes bad weather at this time of the year — travel companies. One of the best triggers for Britons booking a holiday is getting drenched on a cold, dark and windy commute.

This should make it boomtime for the UK travel industry. The problem with Boeing’s 737 Max plane has enabled many operators to push up prices as flight capacity has fallen. With domestic politics also becoming a little clearer and a stronger pound, it meant there were high hopes for the industry heading into 2020.

Then along came coronavirus. Nothing undermines appetite for an ocean-going cruise like a mandatory 14-day quarantine period. The image of passengers talking to news presenters while imprisoned in their cabin doesn’t scream “fun”.

Airlines have been cancelling flights to affected regions and increased mask wearing damages the confidence to travel in confined spaces. The share prices of easyjet and British Airways’ owner, IAG, have fallen 20% and 11% this week as investors have accepted that the coronavirus disruption is not going to be confined to China.

Carnival, the global cruises operator, has seen its share price plummet 28% since the start of the year. These share prices are bellwethers of fear. Firstly the anticipation of lower profits this year, and secondly the long-term damage to consumers’ appetite for travel.

It is during moments like these that professional investors, those tasked with growing our pensions and savings, earn their fees. They face the hardest of challenges in financial markets, “to be greedy when others are fearful”. The author of this quote, the legendary US investor Warren Buffett, was hitting the airwaves again this week offering just this advice. Now into his 90th year, age is no impediment to Buffett telling it how it is.

So how do investors scarred by Thomas Cook’s recent collapse and scared by coronavirus take advantage of the fear that is stalking the travel industry. Sitting it out is of course an entirely reasonable option. But that is quite a risk in a sector where UK consumers spend almost 7% of their disposable income, a share that has continued to grow in recent years.

Speaking with investors in recent days, including those invested in public and private markets, there are three trends that stand out. These are trends innovative UK companies are using to capture market share even as investors struggle to quantify the impact of coronavirus.

The first of these, almost inevitably, is disruptive technology. Growth companies are tapping into consumer trends such as a preference to compare multiple operators at the same time. Platforms such as Skyscanner and Hostelworld stand out as examples of aggregators that give consumers an increasingly efficient focal point to their travel search.

Secondly, companies like Dart Group, owner of Jet2 holidays, are also benefiting from the environment where travellers prefer packaged holidays, with a trusted brand, in order to secure protection from events outside their control. It is the unappealing prospect of having to deal with a large number of providers in the event of cancellation that favour these wraparound businesses.

Finally, there is the great British staycation. Having spiked in popularity in the aftermath of the Brexit vote, there are reports that operators like Center Parcs and Sykes have again seen a surge in bookings as the prospect of getting stuck overseas moves into the forefront of travellers’ thinking.

There is also evidence that greater awareness of the carbon footprint of air travel is beginning to change the plans of eco-conscious travellers. A domestic pivot in travel plans, and the positive impact this has on the UK economy, is the oft-ignored upside from fears over international travel.

One problem with events like this week’s large sell-off in financial markets is that the headlines generate much heat, but provide little illumination. This does little to help investors and can damage the flow of long-term finance that good quality travel businesses rely on.

So anyone who sounds too confident on how coronavirus will hit the world economy should probably be listened to with a fair degree of scepticism. Masquerading as an amateur virologist has taken over from amateur trade expert as the best red flag for UK investors.

In the travel industry, where so much innovative disruption is going on, fear of the unknowable can be turned to your advantage. This is what the smartest investors are doing right now.

Simon French is chief economist at Panmure Gordon