European travel is at loggerheads with recession fears
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| Photo by Pascal Meier on Unsplash |
European travel companies will be hoping demand continues to remain solid, ensuring strong enough pricing can offset cost inflation and boost margin as capacity and occupancy are restored, with recession trends not yet much in evidence as passengers catch up on experiences missed during the pandemic.
Conroy Gaynor, Consumer Industry Analyst, Bloomberg Intelligence, said: “Budget airlines Ryanair and EasyJet have upbeat bookings, but consumers trading down could soften the yields of legacy rivals due to report 4Q earnings and issue outlooks. Full-service carriers rely on long-haul travel, with Lufthansa among those benefitting from market power on some routes. The price of jet fuel is 28% lower since June but still up 45% vs 2019 and strike disruption and salary increases remain 2023 headwinds. Some hotel chains, including Accor, have been raising room rates for higher energy and wage bills.”
European legacy airlines’ share price outperformance has generally improved, along with earnings expectations, since the last reporting season. Pent-up demand remains robust and macroeconomic headwinds have eased, including those related to energy and currency. IAG and Lufthansa benefit from Trans-Atlantic flights and some Asian reopening prospects, but Air France-KLM’s operational recovery is overshadowed by concerns at Amsterdam Schiphol airport and balance sheet complications.
IAG benefits as travellers splash out on long haul
The resilience of the travel market augers well for IAG’s premium leisure performance, despite a more gradual recovery in corporate passengers. Pricing power on Trans-Atlantic routes and pent-up demand are driving yields. Yet cost inflation needs offsetting, including high fuel prices, wages and airport fees, and this may be challenging as consumers are squeezed. Hiring efforts raise unit costs but it’s crucial operations are well-resourced by summer. Iberia’s capacity was planned at 95% of the 2019 level for 4Q and Aer Lingus is set to be fully restored. British Airways was only viewed at 80% and set to lag behind in 1Q as well, despite London Heathrow airport running somewhat smoother.
Low-cost airlines outlook
Optimistic reports in January from Ryanair and EasyJet suggest Easter and Summer bookings may drive up profit as yields look solid and pent-up demand shows endurance. If consumers trade down and unit costs are contained, then these could serve as additional catalysts for budget airlines. Still, fuel prices remain high and labour is disruptive.
Hotels and resorts preview
Accor and IHG are among hotels and resorts companies that we expect to report continued pent-up demand, which is leading consumers to pay up for experiences despite a budget squeeze. Nonetheless, cost-inflation and tight labour markets might need to be navigated through 2023, straining on margins.