The Flight Centre Travel Group Ltd (ASX: FLT) and other travel-related shares have soared in recent weeks. Many investors may think these shares have raced past fair value given current travel restrictions and recession woes. I believe the forward-looking nature of the markets, combined with the unprecedented stimulus, could see the Flight Centre share price and other S&P/ASX 200 Index (ASX: XJO) and All Ordinaries (ASX: XAO) travel shares push higher.
Lean and cashed-up businesses
The likes of Flight Centre, Webjet Limited (ASX: WEB) and Corporate Travel Management Ltd (ASX: CTD) reacted quickly to COVID-19. The companies promptly scaled-back capital expenditure, reduced headcount and raised capital to keep business alive.
Corporate Travel Management has a very capital-light model. Over 70% of its costs are people-related and 50% of the remaining costs are variable. It has a small physical footprint and has the flexibility to hibernate its business. Its pre-COVID-19 business conditions also saw domestic travel account for approximately 60% of group revenues. This may allow the business to benefit from reopening domestic borders.
Webjet has implemented a broad range of interim business initiatives. These have included the deferral of its $12.2 million dividend payment for 1H20, over 440 redundancies and 4-day working weeks for the majority of its remaining staff. It recently raised a total of $275 million from an institutional placement and entitlement offer. This lifts the company’s cash and cash equivalents position from $58 million to $333 million.
Likewise, Flight Centre opted to raise $700 million, a significant amount relative to its ~$1.5 billion market capitalisation back in April. But instead of the share price continuing to slump post-capital raise, Flight Centre is not far off doubling from its March lows and it’s up more than 28% in June alone.
A slow recovery on the cards
Webjet commented on China’s early signs of normalisation with hotel bookings leading into March surging 40% from the previous week. Peak daily bookings for domestic flights also soared 230% from the lowest level recorded in February.
The Sydney Morning Herald reported that Qantas Airways Limited (ASX: QAN) “is preparing to scale up its domestic flying from its current 5 per cent of pre-pandemic levels to 40 per cent by the end of July, pending the reopening of state borders.”
Qantas CEO, Alan Joyce has also suggested there is pent-up demand for travel and the airline had already experienced a surge in intrastate bookings.
This all spells good news for the Flight Centre share price and travel-related cohorts. I believe the market has largely priced-in the negative economic impact of the coronavirus. The travel industry recovery is imminent and consumers are eager for more than just crowded shopping centres and long queues.
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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Webjet Ltd. The Motley Fool Australia has recommended Flight Centre Travel Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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