Comment: Investors in two minds on rates as confidence returns

Comment: Investors in two minds on rates as confidence returns

City Insider - FT journalist David Stevenson on the travel industry

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City Insider David Stevenson considers the impact of the election and sees positive signs for travel, with cruise in a sweet spot

The UK General Election has guzzled up so much attention over the last few months that many investors might well have missed some really rather important signals.

These seem to be telling us that business confidence has finally begun to stabilise after a wobbly few months at the start of the year.

There is plenty that could and probably will go wrong in the next few months, especially involving our friends in Greece, but it is slowly becoming apparent that we’re mid-way through a growth ‘scare’ before a bounce back rather than at the start of a new global recession.

Unfortunately, none of this should blind us to the likelihood that the financial markets will still have another fairly torrid summer.

Expectations have got too far ahead of valuations and investors don’t quite know whether they want to see interest rates rise as a validation that the economy is on the mend, or want interest rates to stay where they are so that the recovery remains intact.

A number of recent statements within the travel sector confirm some big trends worth watching – most of them positive.

In no particular order, I would suggest that the recovery in the euro zone is picking up speed, that global spending on cruise holidays is set for a multi-year boom, and that internationally diversified travel giants such as IAG will outperform their smaller, more regionally focused peers, especially as they benefit from a determined push by China to rekindle growth rates and spur on domestic consumers.

In simple terms, selling into Germany, China and the US remains the best strategy for growth.

However, there are some potential headwinds not least in Europe where those better macro-economic numbers are likely to spark a nasty price war among low-cost airlines.

As for the UK, everything seems to be sweetness and light among investors after the Conservative win, but I’d wager the new government will be very keen to front end the pain, throw the kitchen sink at a bunch of problems (not least Heathrow) and get the interest rate rise out of the way as soon as possible – although the Bank of England may not oblige.

On this domestic theme, the decision not to enforce cabinet responsibility on Boris Johnson is a clear signal that a decision in favour of Heathrow expansion is on the cards (the City is absolutely convinced of this), helped by a determined move to decentralise power to the countries and regions.

This last development has huge implications for the travel industry as the governments in Scotland and Northern Ireland deploy differential tax rates to encourage inward investment.

It’s against the background of this big picture that we have had some good news in the travel sector, mostly emanating from the likes of Tui and Carnival.

The Anglo-German travel behemoth released another typically confident set of numbers last week, none of which came as a surprise.

Overall there was a 14% improvement in Tui’s operating result, with good numbers on the way for summer 2015 trading.

The business seems confident of delivering growth of 10% to 15% in full-year underlying operating profit in 2014-15, while the post-merger integration seems well underway, moving at “a faster pace”.

Given how pleasingly boring these numbers were, most investors’ attention focused on the potential rebrand from Thomson to Tui, which seems an eminently sensible idea but one that could go horribly wrong if botched.

The numbers coming out of Carnival were also a surprise to the upside, pleasing many on Wall Street.

We all expected some strong numbers for the cruise giant, especially following the collapse in the oil price, but a net income of $159 million for the first quarter of 2015 was welcomed by most analysts – substantially beating guidance.

Many investors will be particularly pleased by on-board revenue initiatives which helped drive yields up by more than 8%.

The Carnival Cruise Lines brand also continued to outperform, while Costa Asia looks like it is powering ahead.

Looking forward, Carnival suggested “cumulative advance bookings for the remainder of 2015 are ahead of the prior year at higher prices.

This reinforces my broader observation that the cruise industry is in a sweet spot at the moment, benefitting not only from lower energy prices but also a structural shift towards floating all-inclusive holidays for all the family (helped by rather large and capacious new ships).

China will also prove to be an absolute gold mine once the big operators can work out how to reorient their product offering  around local ‘sensitivities/challenges’ such as the need for luxury standards, extensive gambling and shopping trips.

But Europe will also continue to be a big growth market. It is noteworthy that even Tui looks like it’s making progress with the launch of Mein Schiff 4 this June and improved fleet performance by Hapag-Lloyd Kreuzfahrten.

Carnival and Tui can use their globally diversified customer base to play lots of different trends, not least intensified competition in key markets as spending recovers.


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