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Why Travel Stocks Plunged Again Today

By Travis Hoium – Feb 27, 2020 at 5:40PM

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Wall Street expects the widening COVID-19 outbreak will lead to a decline in vacation trips.

What happened 

Coronavirus fears have hit the travel industry again: Some of the biggest names in the sector have been down by at least 5% at some point during Thursday trading. Shares of Royal Caribbean Cruises (RCL 16.65%) were off by 6%, Carnival (CCL 13.29%) shares dropped 4%, and Expedia Group (EXPE 8.16%) sank by 2.5%. 

All three stocks recovered some of their losses as the day went on, but this period of volatility for these travel stocks may just be getting started. 

Cruise liner docked in a large bay.

Image source: Getty Images.

So what

Royal Caribbean said earlier this week that it has canceled 30 cruises in Southeast Asia, and expects SARS-CoV-2 to sap $0.90 per share from its earnings this year. 

An MSC Cruise was also denied access to offload passengers at three Caribbean spots this week, showing that fears of the coronavirus in cruise hotbeds are starting to impact operations. 

Flights are also being suspended to some countries in Southeast Asia, including South Korea. That will hurt overall travel bookings for a company like Expedia. 

The market's reaction to fear-inducing events like this COVID-19 outbreak can be unpredictable, but at this point, what is predictable is that operations for travel companies will be heavily impacted this year.

Now what

We can have no idea how far or fast the coronavirus is going to proliferate, nor how long this outbreak could last. But experts are cautioning people to expect it to become widespread. 

Investors should be cautious with the stocks of travel companies that have high fixed costs -- for example, cruise lines -- and a lot of operating leverage. The discretionary nature of most travel spending puts those companies at extra risk.

The biggest problem for Wall Street is that coronavirus already appears to be spreading well beyond Southeast Asia into Europe and North America. Those are much larger markets for these travel companies, and could have a much bigger impact on their earnings in 2020. Don't be surprised if more of them come out with profit warnings and report disappointing results for the first quarter. 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Expedia, Inc. Stock Quote
Expedia, Inc.
EXPE
$102.10 (8.16%) $7.70
Royal Caribbean Cruises Ltd. Stock Quote
Royal Caribbean Cruises Ltd.
RCL
$43.85 (16.65%) $6.26
Carnival Corporation Stock Quote
Carnival Corporation
CCL
$7.76 (13.29%) $0.91

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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