Shares of travel stocks, including airlines and cruise operators, plunged Monday following news over the weekend that the coronavirus is spreading rapidly in countries such as South Korea and Italy. Among airlines, American Airlines Group (AAL 3.04%), Delta Air Lines (DAL 3.34%), and Spirit Airlines (SAVE 0.78%) were hit particularly hard, as were cruise operators Carnival (CCL 3.40%) and Royal Caribbean (RCL 6.67%).
Marriott International (MAR 2.45%) also fell nearly 5% on worries about what the outbreak will mean for travel and vacation demand.
The cruise business has been one of the consumer-focused industries hardest-hit by the coronavirus outbreak, with the Carnival-owned Diamond Princess cruise ship quarantined for two weeks in Japan after more than 600 people tested positive for the virus. Those are the sort of headlines and images that can weigh on the minds of travelers planning summer vacations.
The cruise operators have already cancelled a number of voyages due to the outbreak and have warned the virus will have a material impact on results. The worry now is that with the outbreak spreading to new markets, additional cruises will have to be cancelled in new areas, including the lucrative summer Mediterranean tourism area.
Airline stocks also were down, continuing a turbulent start to the year for the sector. The industry was hit hard in late January as the coronavirus outbreak worsened, but had made back much of that decline in the early part of February.
About 5% of Delta's total revenue and 9% of total capacity is exposed to Asia, and the airline also owns a stake in one of China's largest airlines. American has less exposure to the region, at just 3% of revenue and 6% of capacity, but the airline has the highest debt burden among major U.S. carriers and is seen as most vulnerable to a prolonged slowdown in travel demand.
Shares of United Holdings and Hawaiian Airlines, the two U.S. carriers with the most exposure to the Asia Pacific region, were also down on Monday.
Spirit has no exposure to Asia, but the discount carrier has a large hub in Fort Lauderdale and is popular with vacation travelers booking cruises out of south Florida and the Caribbean. The airline's summer growth plans could fail to materialize if virus fears lead to a slowdown in vacation travel, or tourists looking elsewhere instead of booking cruises.
Quarterly results for the hotel industry were already threatened by the coronavirus prior to the weekend escalation, with China revenue estimates slashed in half for the first quarter. Marriott and other hoteliers were down on Monday on fears that with the virus spreading rapidly in new markets, it could cut into demand outside of China.
There is a definite logic to the sell-off, as the coronavirus is a serious threat to the travel industry that seems likely to cut into travel demand, and earnings, during the first half of 2020 if not longer. The talk of a potential global pandemic is unsettling; for investors who don't have the stomach for such uncertainty, it is understandable to want to head to the sidelines.
However, the stocks impacted represent strong businesses with the wherewithal to survive a temporary slowdown and thrive when the outbreak is finally over.
Among travel companies, cruise operators seem to have the most risk right now, as the outbreak is a fresh reminder of the public health risks associated with being in close quarters with hundreds of other people. But the industry has proven to be resilient in the past, such as when norovirus concerns dominated the headlines.
The airlines and hotel companies can weather a bad summer travel season, and investors would be well served to analyze the companies not just on what is going on right now due to the coronavirus, but also based on longer-term trends. It's a tough time to be invested in travel stocks, but for those able to hold on through the turbulence, I believe there will be clear skies ahead.