Almost immediately following the World Health Organization's announcement on March 11 that COVID-19, the disease caused by the coronavirus, was a pandemic, the Dow Jones Industrial Average plunged into bear market territory for the first time in 11 years.
President Donald Trump's announcement on March 12 that travel between the United States and Europe had been severely restricted sent markets plunging even further, taking every sector down with them. But even as the broader market is battered, some companies are more exposed to coronavirus than others, particularly companies in the cruise, airline and hospitality industries.
It should come as no surprise to anyone that the travel industry has borne the brunt of the coronavirus panic. The U.S. Department of State has advised U.S. citizens to reconsider travel abroad, while the Centers for Disease Control and Prevention has recommended avoiding nonessential travel to China, Iran and "most of Europe."
Suffice to say it has not been a good couple of weeks for companies in the travel industry, an industry that as of 2018 contributed $8.8 trillion to the global economy and accounted for 319 million jobs.
The epicenter of the industry's woes is also the epicenter of the coronavirus: China. Ironically, China has also been the largest source of international travelers in the world since 2012, with around 150 million outbound trips taken from the country in 2018. But that number isn't going to be nearly as high by the end of 2020, and one of the industries that will take the biggest beating is the cruise industry. China is the cruise industry's second-largest market after the U.S., and investors are already planning to stay in port.
So far this year, the S&P 500 Hotels Resorts & Cruise Lines Sub-Industry Index is down by about 70% year-to-date, a precipitous decline led by the cruise industry. With the spread of the coronavirus, cruise lines have become the focus of intense passenger trepidation, which is best illustrated by the U.S. State Department's warning that U.S. citizens should not travel by cruise ship.
It's no wonder people are heeding that warning, considering the disastrous story of the Diamond Princess' quarantine in Yokohama, Japan, which resulted in more than 700 passengers and crew coming down with coronavirus. Then Princess Cruises' parent company Carnival Corp. ( CCL) which accounts for over 40% of the global cruise market, recently announced that it is suspending operations of all 18 of its ships for the next two months. All of this has combined to send shares of Carnival down over 80% year-to-date.
Andrew Coggins, a clinical professor at Pace University, has focused on the hospitality industry for years, but he's never seen anything like this.
"The cruise industry is in uncharted waters. During SARS, ships could be relocated, disinfected en-route, and the voyage could serve as crew quarantine. During 9/11, people didn't want to fly so the ships moved to ports where people could drive to the ship, but the ship was still considered safe. This is worse than 9/11 and SARS. The recent incidents, where a baseline could not be established due to nonavailability of test kits and testing capability, has shaken the public's confidence in cruising as a safe means of vacation," Coggins says.
Carnival hasn't been the only cruise line to take a beating from coronavirus woes -- shares of Royal Caribbean Cruises ( RCL), which accounts for about 21% of the cruise industry, are down over 80% year-to-date, while Norwegian Cruise Line Holdings ( NCLH), accounting for roughly 13% of the market, is down about more than 80% as well.
It's unlikely that any of these companies will recover miraculously in the short term. Royal Caribbean, Carnival and Norwegian Cruise Lines will be dealing with thousands of refunds for ticket sales, not to mention losing all the high-margin purchases that passengers make while on board.
As for what the future holds, all three cruise lines have begun offering steeply discounted rates for passengers willing to risk booking a cruise, which will also hurt upcoming quarterly earnings. For now, only the bravest of value investors will be paying attention to cruise lines any time soon.
Meanwhile, airline companies with routes to and from China are preparing investors for the damage being done to their bottom lines. While travel to the Pacific region only accounted for 6% of Delta's ( DAL) total fiscal year 2019 revenue, the company has suspended all flights between the U.S. and China through the end of April and expects a 65% decline in its capacity in the region. United Airlines ( UAL) has reported an "approximately 100% decline" in demand for flights to China, which account for 5% of the company's flight capacity, and it has suspended all flights between the U.S. and several Chinese airports, as well as Hong Kong, through April 24. Even Southwest ( LUV), which doesn't fly routes to China or Europe, told investors that its first-quarter revenue will be between $200 and $300 million lower than expected, and the company's CEO announced he will take a 10% pay cut to reduce costs.
The combination of a severe traffic decline and mass refunds will continue to take a serious toll on the airline industry in the months to come. The International Air Transport Authority believes that global revenue for airlines could decline as much as $113 billion this year, and that was before travel restrictions with Europe. The S&P's Airline Sub-Industry Index is now down over 55% year-to-date -- and given that airline companies just asked the government for a roughly $50 billion coronavirus aid package, investors shouldn't expect it to head much higher any time soon.
Hospitality and Tourism
The coronavirus domino effect started with the travel industry, but hospitality isn't far behind. With travelers unwilling or unable to travel for risk of infection, hotels and resorts are seeing fewer bookings. The combination of lower bookings and waiving cancellation fees for guests unwilling to travel at this time will weigh on hotels' earnings, but John Niser, the director of the International School of Hospitality and Tourism at Fairleigh Dickinson University, says there are other risks as well.
"The key is to look at the assets these companies have to carry during the downturn. Those asset-light companies who can pass on the losses to the owners will do fine," Niser says. "I think that the smaller hotel management companies that have leveraged their existing assets in a period of unprecedented growth to expand their portfolio will be the worst off if some form of debt relief (or deferment) is not put in place."
Most hotel companies have only just begun to grapple with the effects of coronavirus on their business. Hilton Worldwide Holdings ( HLT) announced that it is completely withdrawing its first-quarter and full-year outlook for 2020, citing the "evolving impact of the novel coronavirus on the global economy." In some of its released guidance, Hilton CEO Christopher Nassetta said that 150 Hilton hotels in China were closed and that investors could expect a $25 to $50 million hit on the company's full-year adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) -- but now it's anyone's guess what those numbers will look like by the end of the year.
Marriott International ( MAR) has closed around 90 hotel properties in China. The company experienced a nearly 90% year-over-year decline in its revenue per available room, known as revpar, at hotels in China during February, while it was hit with a 50% decline in revpar in the Asia Pacific region. China and the Asia Pacific regions combined account for about 16% of Marriott's total room count, a not-insubstantial amount, and the company has told investors to be prepared for $25 million less in fee revenue per month going forward. This bleak guidance came before the European travel ban was put in place.
The takeaway: As the effects of coronavirus continue to make themselves known to hotels, airlines, cruise lines and their shareholders, investors would be wise to stay home and be cautious of these sectors.
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