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Travel Sector Faces Uncertain Summer

31-May-2016
31-May-2016 14:13
in Aviation and Travel
by Admin

The events of Thursday, 19 May, highlight the continuing difficulties the travel sector faces. We woke up to the news of the loss of EgyptAir flight MS804 and this was shortly followed by Thomas Cook’s unrelated announcement to the market that its profit forecast was reduced for the coming year, prompting its share value to tumble by nearly 20%.

Thomas Cook’s difficulties stem largely from significantly reduced demand (down 5% compared to last year) for its holidays to Turkey, Tunisia and Egypt as a consequence of terrorist atrocities (http://seekingalpha.com/article/3976330-thomas-cooks-tckgf-ceo-peter-fankhauser-half-year-2016-results-earnings-call-transcript). Whether the EgyptAir incident is found to have been caused by accident, mechanical failure, or terrorist attack, the result will be similar; fewer passengers will be willing to travel and in particular to those destinations which have already suffered terrorist attacks in recent times.

This is particularly bad news for Thomas Cook as Turkey was its second most popular destination in 2015. However, Thomas Cook also announced that bookings for other destinations such as the Spanish mainland and the Balearic Islands had increased slightly while demand for trips to USA remained strong. Consumers appear to be prepared to travel to ‘safer’ destinations.

Thomas Cook was not alone in losing value, but it was by far the worst hit as its rival TUI (the owner of the Thomson brand) and the companies behind British Airways, EasyJet, Lufthansa and Air France all saw value wiped off their share capital as the market reacted to a further loss of confidence following the EgyptAir tragedy.

Passenger numbers had already been notably down this year compared to last year as consumer confidence had weakened following the terrorist attacks first in Paris and more recently at Brussels airport and the headline-grabbing fatal incidents of recent years (the disappearance of Malaysian Airlines Flight MH370, the downing of Malaysian Airlines Flight MH17 over eastern Ukraine, the shooting down of Metro Jet Flight 9268 over Sinai), and the hijacking of EgyptAir Flight MS181 earlier this year.

That the most likely cause of the most recent EgyptAir disaster is terrorism, is further bad news for the aviation industry (https://www.washingtonpost.com/world/europe/what-caused-egyptair-plane-crash-a-look-at-likely-scenarios/2016/05/20/6a59b4c8-1ea9-11e6-82c2-a7dcb313287d_story.html). This incident will only serve to further dampen the public appetite for flying, particularly as it occurred on a flight out of Paris rather than, for example, Sharm el-Sheikh. The fact that it possibly discloses a chink in the armour of passenger security at a major European airport will have a greater impact than incidents taking place further afield from airports from which British passengers might expect there to be lower safety and security standards.

It will be a long and difficult process to recover consumer confidence. One imagines the contradicting reports surrounding the latest incident from the Greek and Egyptian authorities are doing little to reassure a concerned marketplace (http://www.bbc.co.uk/news/world-middle-east-36365256). The sooner the problem and, more pertinently, the solution are discovered and the latter implemented, the better. Should this not be the case, it may be that passengers, instead of choosing to fly to Western Europe and the USA as opposed to Turkey and Egypt, choose not to fly at all, or less frequently through fear.

The one saving grace for airlines is that the price of fuel continues to fall which is going some way to ease the pressure caused by diminishing demand. Reducing overheads at this time is certainly a prudent step but as the consequences of the reduced consumer confidence are felt over the summer, more drastic measures may be necessary. RyanAir has announced it will be slashing prices. It appears that the first shots in a price war with rival EasyJet have been fired. How other operators in this troubled industry respond remains to be seen.

 

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