- Trans-Tasman bubble between Australia and New Zealand is likely to mark a quantum leap forward in bringing the travel industry back to its pre-pandemic shape.
- Travel stocks – Qantas and Flight Centre - outperformed the broader Australian benchmark index in recovering from March 2020 crash.
- Moody’s expects Qantas to realise a swift earnings recovery from the pandemic than most of other airlines, backed by a potential trans-Tasman travel bubble and Australia’s dependence on domestic air travel.
- Flight Centre is likely to observe a slow recovery post pandemic, with a pickup in domestic travel, which significantly depends on easing of interstate restrictions.
Australia has been making headlines in effectively eliminating the deadly COVID-19 in some parts of the country, inducing PM’s push to reopen internal borders. Marking crucial success over virus containment, Tasmania is expected to reopen its border to mainland Australia by July end.
Next under the lens is battered Australian travel and tourism industry, drumming up efforts to stand back on its feet. Potential establishment of a trans-Tasman bubble between Australia and New Zealand is a crucial step to this fore. Meanwhile, lifting its curfew on 15 June, Thailand is expected to enter into discussions for a potential travel bubble with Australia, along with other nations such as NZ, South Korea and Japan.
With COVID-19 throwing multi-billion-dollar travel industry out of order, high hopes are attached to this travel bubble, that is likely to mark a quantum leap forward in bringing the industry back to its pre-pandemic shape.
In addition to revitalizing tourism sector, travel bubble is expected to rekindle trade ties between NZ and Australia, serving as major international visitor markets for each other, as evident from travel statistics for February 2020 (prior to severe pandemic hit).
Though COVID-19 brought travel industry to a stand-still while extending losses in sector-centric stocks, some travel stocks outperformed the broader Australian benchmark index in recovering from March 2020 crash.
Two such stocks are Qantas Airways Limited (ASX:QAN) and Flight Centre Travel Group Limited (ASX:FLT), which delivered considerably high returns in comparison to ASX 200 since market crash on 23rd March 2020.
In the above chart, returns have been calculated up till 12th June 2020. What’s worth noting is that Flight Centre’s shares were suspended from trading on 19th March 2020 on Company’s request, post which trading resumed on 7th April 2020.
Let us now discuss how these stocks are placed in broader travel sector:
Qantas Prepares for a Comeback, Lifting Domestic Capacity on the Cards
Australia’s largest airline by fleet size, Qantas Airways Limited (ASX:QAN) lately outlined its plans to boost domestic capacity from 5 per cent to up to 40 per cent of pre-pandemic capacity by July 2020 end.
Flag carrier considered increasing domestic capacity on the back of mushrooming travel demand and a spike in number of customers inquiring and booking flights for the months ahead. However, a surge in domestic capacity would largely depend on easing of state border restrictions.
It’s a known fact that aviation sector bore the maximum brunt of COVID-induced travel bans, inducing massive job losses in airline companies. Qantas too stood down about two-third of its workforce in March, with its Senior Group Management Executives, the Board, Chairman and Group CEO going for 100 per cent salary reductions until at least the end of this financial year.
The Company lately notified that the impact of standing down its workforce has been greatly softened by government’s JobKeeper program, which it started paying several weeks prior to the official payment start date.
Moreover, the airline continued to strengthen its ability to cope up with short-term and projected long-term impacts of the coronavirus crisis. To strengthen its position while managing through COVID-19 outbreak, it secured $1.05 billion in additional liquidity during March in a new round of debt funding, followed by a further $550 million in debt funding in May this year.
Though Qantas believes international travel demand (except New Zealand) could take years to return to its previous level, it expects domestic travel to pick up steam with a gradual recovery in demand.
According to credit rating agency Moody’s, Qantas is likely to realise a swift earnings recovery from the pandemic than most of the other airlines, backed by a potential trans-Tasman travel bubble and Australia’s dependence on domestic air travel.
FLT Wins New Corporate Accounts During Lockdown Period
Travel agency entity, Flight Centre Travel Group Limited (ASX:FLT) surprisingly won new corporate accounts in April despite shutdown period, with a slight uptick in bookings in countries like China amidst easing trading and travel restrictions.
The Company has made substantial progress towards reducing its global cost base as part of its cost reduction strategies unveiled in April this year. The Company’s Total transaction value (TTV) levels were at 5-10 per cent of normal levels in April owing to stringent restrictions and lockdowns.
FLT is presently tracking towards $65million target per month cost base, with smaller one-off implementation costs (less than $210million) than initially projected. The Company’s cash flow saving initiatives have been targeted towards lowering costs by more than $1.9bn on an annualised basis (approximately $65 million per month), driven by:
- Network: Closure of more than 50% of leisure shops globally (800 in total) and ongoing lease negotiations
- Workforce: ~6,000 support and sales roles stood down temporarily (in some instances, made redundant) from a workforce of 20,000
- Sales and marketing: Media expenditure paused ($18m per month)
- Capex: Elimination of all other non-essential capital expenditure
To strengthen its balance sheet and liquidity position and place it for future growth, the Company unveiled a ~$700m fully underwritten equity raising, comprising: ~$282m Institutional Placement and ~$419m Entitlement Offer in April 2020.
FLT’s Managing Director, Mr Graham Turner anticipates a slow recovery post pandemic, with a pickup in domestic travel, which significantly depends on easing of interstate restrictions. Besides, he is hopeful of trans-Tasman travel bubble, which is expected to open with NZ, followed by Pacific Islands.
Inter-State Restrictions Remain a Hindrance
We cannot deny that trans-Tasman travel bubble is anticipated to fill some gap that missing international tourism created in the Australian economy, wiping out billions of dollars from country’s GDP. However, a lot depends on lifting of inter-state border restrictions!
Reconnecting coronavirus-torn countries, travel bubble is expected to ease worries of hard-hit tourism sector, paving the road to recovery.
Though lobbyist group IATA has raised concerns over selective opening of international borders, several countries including Singapore, China, Macau and Hong Kong are pondering on imitating NZ and Australia’s travel bubble approach.
While COVID-19 driven restrictions left travel industry in doldrums, optimistic trends, including committed fiscal push, burgeoning domestic travel demand to begin with and potential resumption of international travel are likely to give a leg up to the battered sector. However, only time will tell if reopening of international travel curbs would grease the wheels of Australian travel industry or invite a can of worms with a fresh wave of infections.