A golden age of travel
By Steve Davies, member of Jupiter’s UK equities team
I am no oil forecasting guru, but .The original golden age of travel dates back to the 1950s, when airlines such as PanAm and BOAC began to offer non-stop transatlantic flights using jetliners such as the Boeing 707 and the Douglas DC-8. Today, a combination of much lower jet fuel prices and the rapid growth in Chinese and tourism is ushering in a new golden age and creating some exciting opportunities for stock market investors.
I am no oil forecasting guru, but it seems likely to me, given the current supply glut and the rapid productivity improvements being made by the US shale industry, that the oil price could be stuck below $60-65 for some years to come. Although it is now more than a year since the oil price started to collapse, the hedging programmes of airlines and travel companies take some time to unwind so we are just starting to see the benefits of lower fuel prices coming through.
Thomas Cook, for example, spent about £900m a year on jet fuel in FY14, paying just under $1,000 per tonne. That figure has dropped to $917 for the year to September 2015, but the really sharp improvement should come in FY16 where they are now almost 90% hedged at $707 per tonne according to their Q3 trading update.
With forward prices now well below $600, I estimate that the company could ultimately reduce its fuel bill by as much as 45% by 2017 in dollar terms, albeit the sterling saving will be lower given the stronger dollar.
Some of this may get passed on to consumers in the form of lower prices, which should boost demand. Nevertheless, it should provide a significant tailwind for a company whose total profit this year is forecast to be a shade over £300m (source: Bloomberg).
The maths are similarly exciting for IAG, owner of British Airways, Iberia, Vueling and now Aer Lingus. The company’s latest guidance at its Q2 results in July was for a total fuel bill of €6.0bn for 2015. Given commodity and currency movements since then, my own calculations suggest that the figure for 2016 could be as much as €1bn lower.
This is before factoring in the benefits of new and more fuel-efficient aircraft reducing the volume of fuel needed as they come into service.
If some of these fuel savings are passed on to consumers in the form of lower prices, we should expect passenger numbers to go up. WH Smith might not seem the most obvious beneficiary of this, but the reality is that its travel business now accounts for nearly 60% of group trading profit and its airport shops are a very substantial part of this.
The first signs of improvement were apparent in WH Smith’s FY15 results last week, with the travel division delivering positive life-for-like (LFL) sales growth for the first time since 2008. Indeed, the momentum has improved through the course of the year, with first half LFL growth of 3%, accelerating to around 6% in the final quarter by my estimates.
China on the move
Every year I go on a research trip to China and, when I visited Beijing a few months ago, I was struck by how many commentators referred to the very rapid growth in Chinese tourism (both domestic and international) over the last couple of years.
Many expected the rate of growth to accelerate further from here and the choice of destinations are also evolving, becoming less dominated by Hong Kong and the gambling tables of Macau, with more interest in Europe, Japan and Australia.
Merlin Entertainments (Merlin) is one company that should be well placed to benefit from this trend. It already operates a wide range of attractions (such as Madame Tussauds, SeaWorld, Legoland) in the UK, Europe, Australia and North America that could see increases in visitor numbers from China. I also see a huge opportunity for the company to develop Legoland theme parks across Asia over the next decade.