Europe’s Travel Stocks Hit Bumps as Summer Plans Lose Fizz

(Bloomberg) -- After rallying to a record on bets of a summer filled with long hoped-for holidays, Europe's travel stocks are hitting a rocky patch.

The emergence of a more contagious coronavirus strain and constantly changing restrictions on international travel are weighing on airlines and hotels, even as vaccinations gain pace. The Stoxx 600 Travel and Leisure Index is down 7% since its April peak, making it one of the worst-performing sectors of the past three months.

“Although the travel sector looks like it will get some semblance of a season, there isn't an immediate end to the turbulence in sight,” Susannah Streeter, investment analyst at Hargreaves Lansdown, said by email. “A relaxation of the rules by one country, is swiftly followed by a tightening in another, leaving travelers at risk of being left isolated in a hotel overseas with only a TV remote control for company.”

While European travel companies are seeing an uptick in demand compared with last year, when countries were still reeling under the initial impact of the pandemic, they're hardly living up to investor hopes of a summer boom. That's in stark contrast with the U.S., where a faster-than-expected surge in demand has left airlines scrambling for enough staff.

Ryanair Holdings Plc Chief Executive Officer Michael O'Leary this week said that bookings were recovering strongly between European countries, but were lagging in the U.K. and Ireland, where uncertainty lingered about the duration of restrictions. As of June 20, Europe's flight activity was still only about half of 2019 levels, and international net sales were 77% lower, according to Bank of America Corp.'s Sky Tracker.

“It's hard to say whether the vaccines will protect the travel sector from sliding into a new depression, but the news flow forces investors to scale back their recovery expectations,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank, in an interview.

Tightening rules on travel between the U.K. and Europe, a key source of tourism revenue, are a particular concern for investors. Portugal and Spain are among the latest to impose restrictions on U.K. visitors, which may drag on holiday bookings.

“The summer season is dwindling away for airlines, and the constant gyrations in regulations over quarantines and testing does little to embolden would-be travelers to plan with confidence,” Josh Mahony, senior market analyst at IG Group, said by email.

Holiday Home

One bright spot in the industry comes from stocks linked to domestic holidays. Shares of Dometic Group AB, which provides equipment for outdoor breaks, and Trigano SA, which makes mobile homes and caravans, have both surged more than 30% this year.

Companies geared toward recreational activities have also thrived. U.K. cycling retailer Halfords Group Plc and Barcelona-based swimming pool-maker Fluidra SA have each rallied more than 60% this year. Hotel chains such as Whitbread Plc, which has about 15% exposure to U.K. coastal towns, may also benefit from the staycation trend, said Streeter from Hargreaves Lansdown.

Meanwhile, airlines may struggle even beyond the summer, as they face structural headwinds such as higher environmental costs. According to Citigroup Inc. analysts, the expected capacity levels in 2025 will still be below pre-pandemic levels. They see Ryanair and Wizz Air Holdings Plc as market-share winners, while expecting legacy companies Deutsche Lufthansa AG and Air France-KLM to lose out.

In the shorter term, concern around the delta variant has prompted BofA strategists to reduce their overweight position on cyclicals including airlines.

“A sharp uptick in cases could lead to further delays, potentially threatening the summer tourism season, which our economists see as a key support factor for euro-area growth over the coming quarter,” they wrote on Friday.