If there is going to be a sector affected by the economic crisis caused by the expansion of the coronavirus, that is none other than tourism. It is the most affected and the one that will later recover, as many financial analysts are showing. Not in vain, the tourist flow worldwide it is going to be reduced to levels not seen in recent decades. And as a consequence of this trend, it will be reflected in the valuation of companies listed on the equity markets. Hotels, air lines, reservation centers or businesses linked to leisure will be some of the worst offenders in this new scenario that has reached the financial markets.
In any case, from the consulting firm Deloitte they are more optimistic, although they estimate that there will be a total recovery of the tourism sector by 2021. When verifying that it is expected that from the second half of May, travel and hotels will catch up , while the isolation is ending. In any case, this is the sector on the stock market that has devalued the most since the first week of March, when around 50% on average in all the companies that make up the continuous market of our country. By reaching prices that seemed unimaginable just a few weeks ago. In some cases with more than half of the share price at the end of 2019.
There have been no exceptions to these falls so vertical in equity markets. Neither in domestic markets nor outside our borders. The damn virus has taken over everything. Despite the fact that a certain stabilization in the price of its shares is already beginning to be noticed. But that at any moment it can reverse this situation and go back to historical lows from the current levels. It is a sector that has been very touched in this violent crisis that it has not yet said its last word. Not much less, of course. Because in effect, it will be necessary to be aware of the evolution of the financial markets from now on.
IAG in the two euros
One of the reasons for concern on the part of small and medium investors is what may happen from now on with IAG. Because it cannot be ruled out that even the company was nationalized and in which case the effects on stock market users would be even greater. To the point that it cannot be ruled out that it ceased to be listed on the stock markets. For this reason it is not surprising that strong selling pressure that is occurring in relation to purchases. Although it shows a very competitive stock market valuation at the current price level. By leaving six euros for each share along the way and being in the range of two euros. A price that has certainly not been seen for many, many years.
While on the other hand, you cannot forget that your activity is frozen right now. With the reduction and suspension of several routes, both national and international. And that in the end it will affect your income statement, at least as regards the second and third quarters of this year. With the anticipation of margins that can be disastrous for the sector and that therefore can open the way to new and powerful falls in the equity markets. In a week, as is the Santa, which will be largely non-operational for this airline. Beyond another series of considerations from the business point of view.
Low minimum hotels
The accommodations have had to hang the “closed” sign in these hard days when it was a very propitious period to prop up their income statements. Both in terms of the business segment, the vacation or sun and beach segment. In both cases, they are in a very delicate situation that will be reflected even more in the valuation of their prices. With regard to the equities of our country, they are values such as Sol Meliá or NH Hotels that are being seen under strong selling pressure and where there is hardly any interest to make one-off purchases. Not only because of the expansion of the coronavirus but because of what will come later. Being one of the sectors to avoid in these delicate days for all investors.
Another aspect to consider within the tourism sector is the fact that it is a segment closely linked to economic cycles. And therefore, its behavior is worse in recessionary scenarios since investors are looking for more defensive sectors that offer shelter to make your capital available on the stock market profitable. As well as the option of targeting other safer financial assets, such as some of the most relevant raw materials at this time. Where it is about protecting the money over another series of much more aggressive strategies. Not surprisingly, we cannot forget that we are facing unexplored terrain for all investors.
With this scenario, the logical thing is to be absent from these values because there is very little that we can earn at this precise moment, and on the contrary, leave us many euros for the cat flap. There will be time to change your mind and perhaps find ourselves with prices much tighter than those quoted at the moment.
Reduction in routes
The rapid spread of COVID-19, and associated government warnings and travel restrictions, are having a significant and increasingly negative impact on global air traffic demand on nearly all routes operated by IAG airlines. To date, IAG has suspended its flights to China, reduced capacity on the routes to Asia, canceled all its operations to, from and within Italy, in addition to making various adjustments to our network.
The US presidential announcement restricting the entry of foreign nationals who have been to Schengen countries, the UK and Ireland, has increased uncertainty on North Atlantic routes. In turn, many other countries have banned or are restricting travel to these destinations including Argentina, Chile, India and Peru. Spain has also been the subject of travel advisories, for example from the UK's Foreign and Commonwealth Office (FCO).
IAG is implementing additional initiatives in response to this challenging market environment. Capacity, in terms of available seat kilometers, in the first quarter of 2020 is expected to decrease by around 7,5% compared to last year. For April and May, the Group plans to reduce capacity by at least 75% compared to the same period in 2019.
Less operating expenses
IAG is also taking steps to reduce operating expenses and improve cash flow. These include grounding excess aircraft, reducing and deferring investments, cutting non-essential IT expenses as well as costs not related to the cybersecurity program, freezing recruitment and discretionary spending, implementing unpaid voluntary vacation options, temporarily suspending employment contracts and reduce working hours. Given the continuing uncertainty regarding the potential impact and duration of COVID-19, it is not yet possible to provide an accurate indication of the benefit outlook for 2020.
The Group has a solid liquidity position with cash, equivalent liquid assets and remunerated deposits of 7.350 million euros as of March 12, 2020. In addition, the general and committed credit lines guaranteed by aircraft amount to 1.900 million euros, which is which results in a total liquidity of 9.300 billion euros. Willie Walsh, CEO of IAG, said: “We have seen a substantial decline in bookings across our airlines and global network in recent weeks and we expect demand to remain weak well into the summer. Therefore, we are making significant reductions in our flight schedules. We will continue to monitor demand levels and have the flexibility to make further cuts if necessary. We are also taking steps to reduce operating expenses and improve cash flow at each of our airlines. IAG is resilient with a strong balance sheet and substantial cash liquidity.
In light of the exceptional circumstances facing the aviation industry due to COVID-19, and in particular the evolution of the situation in Spain, it has been decided that Luis Gallego will continue in his position as CEO of Iberia for the next months to lead the response in Spain. In turn, Willie Walsh will continue in his position as CEO of the Group and Javier Sánchez Prieto will remain in the position of CEO of Vueling.