Carlson Travel Inc (CWT) – Short vs Medium Term
All,
Please refer to our unchanged analysis here.
Relative to our model, the latest US business travel data and comments lend themselves to only a minor improvement of our forecast, extending the company’s solvency by no more than one month. In modelling CWT, we had already built in the US bias of the business and had assumed of a quicker recovery in the US over Europe. However, we do believe that there is upside to our medium-term projections on the basis that agents allocating traffic should be disproportionately important to Airlines during the recovery.
US Business Travel:
- The US is expecting a return of business travel faster than Europe. American Airlines claimed that 47 of its 50 biggest accounts have announced a full return to business travel by the end of 2021. One stumbling block has been differing guidance from different domestic agencies in the US and yet further different rules abroad. The return of US business travel is welcome news. However, the US Travel Association has said that it does not expect full recovery until at least 2024.
- The most recent Global Business Travel Association (GBTA) Covid 19 poll (June) showed 40% of respondents had resumed non-essential business travel (up from 34% in the previous month). A further third of companies have finalised or are working towards finalising a date. Whilst this encouraging, airlines also report that corporate trips remain 70% beneath pre-pandemic levels.
European and International Business Travel:
- The outlook for international travel is less certain. 62% of respondents say their companies are “waiting to see” or are “not sure” about resuming non-essential international travel. European travel is expected to recover more slowly than the US. The GBTA estimate was that European business travel fell 58% in 2020 and will recover 18.5% in 2021. This equates to a near halving of travel over 2019 levels. Europe is expected to see an acceleration of recovery at the back end of 2021, but the GBTA only expects it to reach 76% of 2019 levels by 2024.
Impact on CWT:- March-21 quarter bookings were 79% down on Mar-19. Our model already assumes a recovery to -46% by September-21 and to -35% by December. We currently forecast 8m transactions in September and 9m in December. If we adjust each up by 1m to reflect a more rapid recovery in the US, we have an improvement of USD22m in the net cash position (USD33m more in EBITDA vs USD11m in working capital outflows. - On the basis that air travel is still 70% down as we enter the end of the first half, we see a significant improvement in run rate as the year progresses, but from low levels and not yet amounting to a sufficient recovery in total volumes. As per above, Europe is in a similar position, but lagging the US. We expect an acceleration in the pace of recovery into the end of 2021. However overall volumes will only really begin to cover costs in 2022.
Upside in the medium-Term:- In line with market, we model a rise in prices before a recovery in volumes as business demand is likely to be more stable for the bigger tickets. But demand is only half the equation. - The drop in travel demand will be met with a drop in ticket prices. Following September 11 nobody was ever going to fly again, but it only took 18 months or so for volumes to go through the roof. To labour an economics 101 “favourite”: the Price Elasticity of Demand in the airline industry is extreme. Even if that is less true for the business segment, the sheer magnitude of marginally efficient capacity sloshing around will need to be filled with business urgently - from September.- Lessors ultimately want to see their aircraft flying and leases of any but the youngest aircraft will absorb significant cost reductions.- A lot of Aircraft have been retired in the last year. But most have not yet been scrapped for spares. Prices for ageing aircraft have collapsed. A marginal A320 (wide body) may have gone for E5m in 2019, but will only fetch E2m now - if that. Most aircraft are just being stored for a small E50k fee, including basic maintenance. The sheer long interest in these “call options” should guide the market.- Competition among airlines will surely be intense, but that’s where traffic brokers like CWT are earning their commissions. Flight management companies and OTAs should recover more quickly than airlines.
Positioning- Given the level of debt outstanding, our thesis is that there is a potential opportunity in the Third Lien notes subject to them being part of a holdout group big enough to have a blocking stake, willing to provide fresh cash, and be equitised as part of returning CWT to a sustainable capital structure.
We are looking forward to exchanging any ideas on CWT with you.
Aengus
Links
Coronavirus: US vaccine drive reaches 175m people — as it happened | Financial Times (ft.com)
Business Travel Is Coming Back - WSJ
European business travel recovery will lag behind other markets | Travel Weekly
Companies Make Summer Plans to Resume Domestic Business Travel – GBTA | Blog
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E: amcmahon@sarria.co.uk
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