In association with Travelport
If anyone needs a metaphor for what 2013 possibly holds in store for the travel sector, look no further than Carnival Corporation’s numbers from just before Christmas.
Rather like the travel sector at large, most analysts were expecting risible fourth quarter numbers from the cruising giant, but it managed to surprise to the upside – although not extravagantly so.
True, revenue yields were down marginally, and even Carnival seems to be struggling to keep up with its legendary reputation for constantly lowering the cost base – underlying costs rose marginally excluding its unhedged fuel bill.
Europe was weak – as everyone expected it to be – but overall Carnival stills seems to be on plan with a relatively solid balance sheet.
At the cash level Carnival is still churning out enough greenbacks (north of $3 billion) to afford to maintain its huge new capex programme as well as returning cash to the shareholders.
Carnival’s numbers tell us that the travel sector is neither in terminal decline (buffeted by those fabled chill winds of the internet) nor devoid of growth – Asia is clearly Carnival’s ace in the hole, but even in Europe the cruise giant is managing to convince customers to splash out on a summer treat.
It’s a similar story over at Tui Travel and even at Thomas Cook. There’s every sign that 2013 in fact could be one of the better years for a family holiday as Britons decide to brighten up their slightly Spartan existence with a dash of sunshine over the summer with an all-inclusive package.
The financial markets are certainly expecting a much more positive 2013. The key driver will probably be the US economy which is – politicians permitting – in much better shape than anyone dared hope.
Most economists I talk wouldn’t be surprised if US 2013 GDP increases by at least 2.25% to 2.5% in 2013, with Q4 annualised GDP quite possibly over +3.5%. Expect the real improvement in the US economy to come through in the second half of this year.
If the US does hit these numbers, we should expect the rest of the world to be on the receiving end of a big bounce.
Much of this optimism is being powered by the US housing sector which has clearly turned a corner. It’s worth dwelling for just a moment on those positive US housing numbers.
The most recent numbers from the benchmark S&P Case-Shiller index suggest that 95% of all US housing markets increased in value during the summer of last year, at an annualised rate of 2% per annum. Encouragingly, previously basket case local markets such as Detroit, Phoenix and Atlanta showed the strongest increases.
But this index may in fact be under-estimating the recovery in US housing. The Federal Housing Finance Agency’s Home Price Index has increased by 4.9% pa, while another survey from Corelogic put that increase at 5%.
Other key indicators are also flashing green. Construction of new housing grew to an annualised rate of 872,000 properties in September, the highest level in nearly four years, whilst building permits rose to 894,000.
Sales of existing homes increased in October helped in part by growing international interest in US houses – total sales volume to international clients grew to $82.5 billion (for the 12 months through to March 2012), up from $66 billion the previous year.
Crucially, data from the Joint Center for Housing Studies at Harvard University back in the summer revealed that new home inventories are at record lows, although the absolute number of empty homes in the US remains worryingly high.
The bottom line? A better housing market is a key driver for an improvement in the US economy and thus our economy
I think there’ll even be some good news in Europe, especially as the Eurozone decides to relax its insanely austere debt programme. A certain Mrs Merkel faces a general election in September which she is expected to win, and she won’t want any trouble in the Eurozone to get in the way.
The German domestic economy will, I think, be a tale of two halves, with the first half of 2013 a particularly difficult period – with inevitable knock-on effects on both Tui Travel and Thomas Cook.
The German economy will sharply contract in Q4 2012 and Q1 2013 but German industries are busily refocusing their exports away from the Eurozone and towards emerging markets, whilst exports to the US are rising.
It’s also true that German domestic consumption remains remarkably robust – unemployment may creep up in 2013 Q1/H1, but should then stabilise and improve in H2.
The Chinese economy will also, I think, surprise to the upside in 2013 and that optimism should even bubble through to other emerging markets.
And the UK? The stock market has bounced back very strongly and most investors I talk to expect a strong first half to the year for blue chip UK stocks, which should be good news for the likes of Tui Travel.
The UK economy will clearly be buffeted by deeper government spending cuts, but it’s hard to argue with the unprecedented monetary intervention currently being pursued by the Bank of England.
The Chancellor may not have a coherent plan for long-term growth, but the central bankers will probably ride to his rescue in 2013.
I’d even be moderately optimistic about inflation prospects globally. My sense is that food and most commodity prices will remain subdued, with the real possibility of some quite sharp drops in food prices later in 2013 (weather permitting).
That should mean that there will be relatively little pressure to increase wages and salaries, although consumers will feel a bit more positive as a result of those lower food prices and a general slow improvement in the economy.
This general mood of optimism augers well for the travel sector, and especially Thomas Cook which needs a steady 2013 to help rebuild its balance sheet – but there are some very big risks lurking on the horizon.
My big question mark is over France which looks to be getting ever deeper into trouble.
The City is busy shorting (selling) French government bonds and buying German bunds (government bonds). The general consensus of absolutely everyone I talk to is that President Hollande is digging an ever-deeper hole for the local economy.
The Debt to GDP level is already around 90% and the Socialist government is very unlikely to meet its 3% budget deficit target this year. France is a mess, and if bond investors decide its troubles are terminal, watch out. My guess is that a real crisis amongst our Gallic cousins will be averted until 2014, at which point we should all run for cover.
I’d also be keeping a wary eye on oil prices. Saudi Arabia has cut production and a number of other countries are facing lower production levels.
There are undoubtedly new production sources coming on line but I’ve been struck by how resilient oil prices have become, trading around US$110 in recent months. I’d bet big time that as the global economy steadies in the first half of 2013, we could see oil prices rise steadily towards $115 or even $120.
My other big concern is with the currency markets. The incoming Japanese government has declared that it will do virtually everything in its power to force the Yen down and the markets have taken note.
This is, on balance, an unwelcome development and every government now seems to be betting on further currency depreciation.
Weakening sterling won’t necessarily help us long term , but I’d bet the bank on stealthy attempts in 2013 and 2014 to weaken our currency against the Euro and the dollar – which will push UK inflation rates up again to possibly as much as 4% by the end of the year. That’s bad news for consumer spending in 2014.
And therein lies the real risk for the latter part of the year. As government budgets are reined back in the US and the UK , investors will also start anticipating interest rates to start slowly moving up in 2014.
These trends, combined with rising prices towards the latter half of the year could snuff out any determined bounce in the global economy, making 2014 in particular a very tough year.
Welcome to a stop-start new normal where the growth phase of the business cycle lasts for just a few years before shuddering to a halt.
One last honourable mention for companies to watch out for in 2013 would be the Dart Group, owner of the Jet2.com and Jet2.com Holidays as well as fresh food distribution company Fowler Welsh.
The group’s results from back in November were hugely impressive – numbers up across the board with the holidays business the strongest performer – and investors like the fact that cash is flooding on to a balance sheet which is almost debt free.
Note to finance directors throughout the travel and aviation sector – investors absolutely hate companies where debt seems to be heading in the wrong direction.
Investors have also at long last taken note; the share price has perked up from a trading range of between 70p to 80p for much of the first half of 2012 up to 120p in recent days.
Yet even after this rally shares in Dart are only trading at 5.5 times profits which many investors I talk to regard as a steal.
The group is also ramping up its holidays business – which means recruiting more on-location ground staff – and proving that regional flying can be a fundamentally profitable business (take note FlyBe with its scheduled business).
Many of you will remember that not long ago a certain Mr O’Leary from Ryanair predicted that regional airlines would be toast. Jet2.com is clearly bucking the trend.