Investors Shouldn’t Rush to Book a Sunny European Vacation
Richer countries have an interest in giving priority to vaccinations over the summer tourist economy
For many European airlines—and some entire economies—much is riding on the hope that vaccination campaigns save the summer season. Too much, in fact, for investors’ comfort.
Just a few weeks ago, financial markets were feeling optimistic about the tourism industry, carriers in particular. Airport passenger numbers in the U.S. have jumped. Global booking data tracked by analysts point to a big revenue improvement in May, driven by online travel agents.
This seems to confirm theories that there is a lot of pent-up demand. In the U.K., airlines reported a surge in bookings to southern Europe right after Prime Minister Boris Johnson said international trips might resume on May 17. A survey by Swiss bank UBS shows that 39% of people would be comfortable traveling now, compared with only 29% a month ago.
Over the past week, however, U.K. officials have discouraged Britons from booking overseas vacations, given severe vaccine-supply problems in Europe and the spread of new coronavirus variants. Investors should be similarly cautious.
Weekly Covid-19 cases in Europe are rising again, as are travel curbs. A full 86% of flight routes involving top nations in the Group of 20 are restricted in some way, according to UBS data. The world is undoubtedly heading to a better place, but it isn’t impossible that many tourism companies will have a worse summer season than in 2020.
While nations like Spain and Greece are already preparing to reopen for the summer, and the EU is looking to roll out “vaccine passports” to accommodate them, southern Europe may soon find that individual countries in the richer North are unwilling to risk loosening restrictions much at a time when vaccination campaigns could finally start to bear fruit.
Meanwhile, scheduled airline capacity for the three summer months is only 15% below 2019 levels, versus a 53% drop last year, according to Oliver Wyman’s PlaneStats database. This is despite the fact that many restrictions were temporarily eased across Europe between June and September of 2020.
Of course, nowadays capacity is heavily revised closer to departure dates. But markets don’t seem alert enough either. European airline stocks are up 17% since the beginning of February and are no longer cheap bets on the recovery. With some exceptions, valuations are at 2019 levels or higher even when using post-Covid earnings forecasts. Europe’s top airline Ryanair now has an enterprise value of 6.4 times 2023 profit forecasts. Before the pandemic, it traded at 5.7 times 2019 earnings.
The risks facing Europe’s more leisure-focused airlines also apply to its more tourist-dependent economies. The consensus view among analysts is that European economic growth will quickly recover to pre-Covid trends, which is driving money managers to look to the continent for extra returns. Recent data for industrial northern countries is indeed encouraging. In Italy and Spain, though, another lost summer would be a huge blow. Tourism represents 13% and 14% of their output, respectively, compared with 9% in Germany and the U.S., the World Travel & Tourism Council estimates.
The European Union’s underwhelming fiscal stimulus plans won’t offer weaker nations nearly enough of the help they need. The bloc’s support package pales in comparison to the Biden administration’s $1.9 trillion stimulus bill, and has been saddled by delays.
For tourists and investors alike, Europe’s lopsided economy could be a bigger problem than they realize.