Business Updates of Two Blue-Chip Travel and Leisure Stocks: IHG and IAG

The United Kingdom market surged with the opening bell (on 7^th May 2020, before the market close) since investors are optimistic over encouraging China’s exports data in April despite the gloomy earning reports. Inevitably, the lockdown and travel restrictions imposed by the Coronavirus infection had a devastating impact on the global travel and airline sectors. However, Companies in hotels and airlines domain are combatting unprecedented mayhem by securing revolving credit facilities and seeking UK's Coronavirus Corporate Finance Facility, while taking a toll on their occupancy and capacity. Today, we are going to discuss two FTSE-100 listed stocks from ‘Travel & Leisure’ industry – InterContinental Hotels Group PLC (LON:IHG) and International Consolidated Airlines Group SA (LON:IAG) as both the Companies have released their first-quarter trading updates. Following the business updates, the stock price of IHG slight rose over 1.30 per cent, while IAG dipped around 4 per cent (at the time of writing, GMT 9:50 AM). Let’s walk through their operational and financial positions to gauge the magnitude of the first-quarter update amid the current market sentiments.

InterContinental Hotels Group PLC (LON:IHG) - Adopting cash preservatives to combat the unprecedented uncertainties.

InterContinental Hotels Group PLC is a FTSE 100-listed hotel company. It has a network of around 5,895 hotels in more than 100 countries, which is served with a workforce of over 400,000 people. It delivers value and operates hotels by managing, franchising owning and leasing the properties. The group has 283,043 rooms under 1,918 hotels in its pipeline.

(Source: Annual Report, Company Website)

Strategic Developments in 2019

• The IHG added two more brands to its portfolio - Six Senses Hotels Resorts Spas and Atwell Suites.
• Net system size surged to 5.6% in 2019 from 3.1% in 2016.
• More than 200 hotels were added under franchise agreements in Greater China.

Key Regulatory Updates of 2020 – Reflecting a Change in Portfolio and Board

• 13^th April 2020: The IHG announced the signing of the agreement for its brand, Regent Hotels & Resorts with 21st Century Hotel.
• 6^th April 2020: The Company disposed of its leasehold interest in Holiday Inn Melbourne Airport, as a part of the asset-light strategy.
• 18^th February 2020: Sharon Rothstein announced to join the board of IHG from 1^st June 2020, as an Independent Non-Executive Director.

First Quarter of 2020 (as on 7^th May 2020) – Reflecting Conservative Balance Sheet Approach, with Plans to Reduce Costs, Strengthen the Liquidity, and Preserve Cash

• For the first quarter of 2020, the Group comparable RevPAR decreased by 24.9%, driven by the most substantial challenge which the IHG and the industry have ever faced. Most of the RevPAR was down in March 2020 of 55%.
• On a YoY basis, 4.6 per cent net system size growth to 882 thousand rooms was reported. During the Q1 period, IHG has opened 6 thousand rooms, including 1 thousand rooms in March 2020.
• In the current quarter, the company has signed 14 thousand rooms (104 hotels), including 4 thousand in March. Moreover, the Group has taken the pipeline to 288 thousand rooms.
• Intercontinental hotels group has implemented several measures to reduce costs and preserve cash across the business:

1. Planning for the Reduction in Salary and Incentives,
2. Expecting a reduction of up to $150 million in the Fee Business costs,
3. Anticipate gross capital expenditure of approximately $150 million for 2020, a saving of around $100 million against the previous year (2019), and
4. Offered a temporary discount to owners, including other revenues such as training fees.

• As per the liquidity point of view, approximately $2 billion of liquidity available; £600 million (approximately $740 million) of CCFF (Covid Corporate Financing Facility funding) issued; extension secured on $1.275b billion syndicated RCF (Revolving Credit Facilities) until 18 months to September 2023 in addition to the waiver of existing covenants already in place.

Share Price Performance

Daily Chart as of May 7th, 2020, before the market close (Source: EODHD/Others, Thomson Reuters)

IHG’s shares were trading at GBX 3,470.00 on 7^th May 2020 (before the market close at 8:58 AM GMT+1). Stock's 52 weeks High is GBX 5,770.00 and Low is GBX 2,161.00.

Near Term Scenario

The Group RevPAR expected to be down around 80% in April 2020. 15% (approximately 1,000 hotels) closures of hotels are placed as at the end of April: ~50% (~560 hotels) in EMEAA, ~10% (~440 hotels) in the Americas, and ~2% (10 hotels) in Greater China. The company has witnessed its strongest growth in over a decade in net system size. Trading condition is improving in Greater China but facing a tough market in the United States and EMEAA, due to the closure of hotels. Further, the group Hong Kong market has now closed ahead of a wide refurbishment which will perceive it re-open as Regent Hong Kong in 2022. In January and February, the group’s Chinese operations were impacted, followed by global operations in March and are expected to continue further. From the perspective of the market, the entire region, including Australia, has been impacted by this economic slowdown. The hotel industry is facing challenges, driven by the Coronavirus outbreak.

International Consolidated Airlines Group SA (LON:IAG) – Operating with around 90 per cent below capacity (compared to the previous year), while boosting up liquidity and financial position.

International Consolidated Airlines Group SA is a FTSE 100 listed airline company with over 598 aircraft, catering to around 279 destinations and serving around 118 million passengers every year. The Company’s portfolio consists of Aer Lingus, Iberia, Level, The British Airways and The Vueling.

Segment Structure

• Operationally, the Company differentiates its revenue into Passenger, Cargo and Other revenue while passenger revenue represented around 88% of the total revenue in FY2019.
• Geographically, the Group segments its revenue into the four major countries or regions, namely the UK, Spain, USA and Rest of World.

(Source: Annual Report, Company Website)

Operational Key Performing Indicators in 2019 against the Strategic Priorities

• Net Promoter Score increased by 9.5 points against 2018 and stood at 25.8 in 2019, reflecting improved customer sentiments during the year.
• While maintaining a leadership position in the home markets, the Group increased capacity by 1.4 per cent and 1.7 per cent in North America and Europe, respectively.

(Source: Annual Report, Company Website)

Key Developments – Reflecting a C-level executive

• 7^th May 2020: The IAG announced that Luis Gallego would hold the position of Group chief executive from 24^th September 2020 since Willie Walsh decided to step down as CEO and retire from his position.
• 1^st May 2020: Vueling and Iberia signed a syndicated financing agreement for EUR 260 million and EUR 750 million, respectively.
• 2^nd April 2020: The Group decided to reduce capacity by around 90 per cent during April and May (compared to the same period the previous year). Further, it had adopted the UK's COVID-19 Job Retention Scheme for furloughing UK employees.

Q1 Update for the Three Months to March 31, 2020 (as on 7^th May 2020) - Devastating Impact on the IAG performance and International Airline and Travel Sectors

• The current quarter was only impacted by the outbreak of Coronavirus worldwide, ensuing in lockdowns, travel restrictions and advisories, mainly from the end of February 2020 onwards. Passenger capacity has been decreased by 94% from late March 2020.
• Some key highlights to focus in Q1: capacity operated tumbled 10.5%, operating loss before exceptional items increased to €535 million (2019: operating profit of €135 million), the exceptional charge was €1,325 million, and loss after tax before exceptional items stood at €556 million.
• For the current quarter, the net impact of foreign exchange transaction and translation for IAG was stated at EUR 68 million adverse.
• Despite the crisis, the group delivered a strong balance sheet and liquidity, with cash of €6,945 million (up €262 million) at March 31, 2020, and €9.5 billion of undrawn facilities at 31st March 2020. On 30^th April 2020, the undrawn facilities increased to €10.0 billion.
• The company has also taken several actions to boost liquidity such as extending British Airways’ RCF and accessing Spain’s Instituto de Crédito Oficial (‘ICO’) facility and the UK’s Coronavirus Corporate Finance Facility (CCFF).

Share Price Performance

Daily Chart as of May 7th, 2020, before the market close (Source: EODHD/Others, Thomson Reuters)

IAG’s shares were trading at GBX 195 on 7^th May 2020 (before the market close at 9:00 AM GMT+1). Stock's 52 weeks High is GBX 684.00 and Low is GBX 192.00.

Outlook – Reflecting a Slight Downturn in the Second Quarter

The normal run-rate cash operating costs for April 2020 and May 2020 have been abridged to €200 million per week from €440 million per week. For 2020, capital spending has been decreased by €1.2 billion. The company expect that it would return to service in July 2020, but these scenarios are highly uncertain and subject to the travel restrictions and easing of lockdowns. IAG anticipates that its second quarter of 2020 will be significantly worse than the Q1 FY20. Before 2023, the company does not expect any recovery, as seen in 2019. The group is taking initiatives to improve its cash flows and reduce operating costs.