When Russian President Vladimir Putin made good on his threat to invade Ukraine, it’s quite possible that most western leaders were hoping for a quick resolution to the conflict. Cynically, Europe had grown dependent on Russian energy inflows and thus open warfare would hurt all players economically. But now that the cat’s out of the bag, among the first stock market victims may be travel stocks.
From their perspective, the invasion represents a tragedy upon a tragedy. To be sure, Putin eschewed the diplomatic route for warfare so he clearly does not have global sympathies. But for the companies undergirding various travel stocks, they had no choice in the matter. After inching their way forward from the destruction of the coronavirus pandemic, they now face a new threat to their viability.
While Russia isn’t exactly the top destination spot for Americans and westerners, it still commands significant interest, as does Ukraine. Now, both destinations are off limits for safety reasons as well as the closure of airspace. Because travel stocks were already knee deep in the smelly stuff, the loss of any revenue channel is contextually more painful than it would have been pre-pandemic.
In addition, let’s not forget that Russia itself is a major economic power, ranking just outside the top 10 in terms of global gross domestic product (GDP) using 2020 data. Therefore, Russian tourists command substantive purchasing power. As well, many in the country want to move somewhere else. While a Gallup poll indicates that Germany is the top desired destination choice, the U.S. comes in second. Now, that’s out the window, hurting travel stocks.
Finally, there’s always a possibility that violence could spread out to other regions which are top destination spots. Therefore, investors should keep a close eye on these travel stocks.
- Delta Air Lines (NYSE:DAL)
- Carnival (NYSE:CCL)
- Lufthansa (OTCMKTS:DLAKY)
- Booking Holdings (NASDAQ:BKNG)
- JetBlue Airways (NASDAQ:JBLU)
- Hertz (NASDAQ:HTZ)
- Duolingo (NASDAQ:DUOL)
Rather than posting ideas about buying or selling particular equities, this is merely an analysis of travel stocks that could be greatly affected by the conflict in Ukraine. Whatever the case, investors should adopt a cautious approach anyways since this unprecedented circumstance could go in multiple unexpected directions.
Tripped Up Travel Stocks: Delta Air Lines (DAL)
When assessing which travel stocks could feel a sizable impact from the geopolitical flashpoint, Delta Air Lines came immediately to mind. One of our biggest carriers, Delta enjoyed significant business to both Ukraine and Russia. It also had a partnership with the latter’s Aeroflot, which allowed customers to book seats on each other’s flights.
Well, once Putin gave the greenlight to invade Ukraine, that partnership was no more. Immediately, Delta withdrew its codeshare services with Aeroflot, a decision that drew praise for its swiftness and steadfastness. However, this show of support will no doubt expose how dependent certain travel stocks are to stability in the heart of Europe.
Like other airliners, Delta suffered a severe decline in revenue in 2020 to $17 billion from $47 billion in 2019. Though 2021 represented a sizable sales recovery from the doldrums — nearly $30 billion — the tally was still a far cry from pre-pandemic norms.
In any other circumstance, losing flights to Ukraine and Russia might not seem like such a big deal. But with travel stocks absorbing the brunt of the damage of the Covid-19 pandemic, Delta faces a trying challenge ahead.
While virtually all travel stocks suffered damages during the initial onslaught of Covid-19, Carnival was essentially the posterchild of the terrible crisis that was headed our way. With the stricken Diamond Princess suffering from a horrifying outbreak — caused by one carrier apparently — neither Carnival nor other cruise lines could escape the reputational damage that was about to be unleashed.
Sadly, after weathering an unprecedented storm for the industry, Carnival and others looked forward to 2022 being a decisive recovery year. Those plans have likely changed for the worse. Amid the outrage against Russia’s attack on Ukraine, Carnival dropped calls into St. Petersburg.
Unequivocally, the measure was a strong demonstration of solidarity. But it’s also a demonstration that will cost Carnival. Take away the present animosity for a moment — St. Petersburg is an absolutely gorgeous city, one of the crown jewels of Europe. Naturally, it’s a popular destination spot for Carnival and other travel stocks.
While the loss of Russian business might not by itself sink CCL stock, the reality is that Carnival is struggling. Therefore, any loss of revenue will be felt exponentially.
Tripped Up Travel Stocks: Lufthansa (DLAKY)
Among the rising number of sanctions that the U.S. and western allies imposed on Russia, the closure of air space must have been a dagger to the heart of all internationally connected travel stocks. Inevitably, the Russians retaliated in kind, leaving large swathes of the world inaccessible to tourists and frequent flyers.
According to a Reuters report, Lufthansa CEO Carsten Spohr stated that routing flights to avoid Russian airspace will increase costs for the carrier to the tune of single-digit million euros per month. When many countries are suffering from the impact of soaring consumer inflation — particularly the rising cost of fuel that will probably only worsen — the net aftershock is almost guaranteed to not be insignificant.
To be sure, executives of travel stocks are putting on a brave face. However, I think it’s important to be a little skeptical of any rah-rah moments from corporate leadership teams. You don’t expect to get objective advice about a vehicle that a used-car dealership is selling. You should have the same level of incredulity with the travel industry, considering the potential of this conflict to spill over to other regions.
Booking Holdings (BKNG)
While the general concept of acquiring travel stocks seems risky because of the geopolitical paradigm shift, one person isn’t giving into pessimism: Booking Holdings CEO Glenn Fogel. In an interview with Yahoo Finance Live, Fogel remarked that the war in Ukraine isn’t going to make a big difference in his industry.
“To be perfectly honest with you, people want to travel right now around the world,” Fogel remarked, noting that the crisis probably won’t stop the American who wants to travel for a summer holiday. That’s a fair point. Certainly, travel stocks that cater to domestic routes will suffer less of an impact than those levered heavily to international destinations.
As well, the conflict is in Eastern Europe, not western. There’s enough of a buffer zone that may provide confidence to tourists.
At the same time, soaring energy bills do have an impact on travel stocks irrespective of their geographic focus. And since tourism is a discretionary industry, I’m not entirely sure that BKNG won’t be affected. Also, keep in mind that if the conflict escalates to say nuclear disaster, that might take down everything.
Tripped Up Travel Stocks: JetBlue Airways (JBLU)
On the surface, JetBlue Airways doesn’t seem to be a relevant choice for travel stocks to be cautious about. Mainly focusing on domestic routes, JetBlue is about as far away from the Ukraine crisis as you can get. However, because we’re in an interconnected world, very few things occur inside a bubble.
As I mentioned earlier, the geopolitical flashpoint is already having a comprehensively negative effect due to the rising cost of energy. With Russia exporting five million barrels of crude oil a day, representing about 12% of global trade, any loss of business from this source will be felt the world over.
But the other factor to consider is that once tourists from Russia and Ukraine arrive in the U.S. — typically in New York City or Los Angeles — they may not just stay in those cities. As well, many tourists take connecting flights, say from the East Coast to the west. Those will often be serviced by low-cost carriers like JetBlue.
However, now that there’s a war going on, JetBlue will lose revenue streams that it absolutely did not need to lose.
Along the same lines as other travel stocks, the cost of vacationing outside your home will likely have an impact on rental car services like Hertz. One of the biggest victims of the Covid-19 pandemic, Hertz made waves when it filed for bankruptcy during the initial onslaught of Covid-19. With airports turning into ghost towns, the company had little choice in the matter.
The sad part of course is that just as circumstances were finally turning in the sector’s favor, another outbreak occurred; this time, the violent variety. Now, it’s fair to point out that the geopolitical flashpoint is thousands of miles away, which should insulate HTZ stock. However, its unlikely to be completely insulated.
Although few tourist demographics compare to the spending power of Chinese travelers, Russian tourists hold their own. In fact, one data source suggests that they “spend on average $1676 per person per foreign holiday, more than their European counterparts who spend $1174.” If so, that’s a ton of money that travel stocks like Hertz won’t have access to.
Tripped Up Travel Stocks: Duolingo (DUOL)
Technically, Duolingo is not a tourism-based investment though it does have some connection to travel stocks. Assuming you’re flying out to a non-English-speaking country, you should at least learn some basic words and phrases. Duolingo provides an excellent bite-sized platform for people to learn at their leisure.
Unfortunately, as the Washington Post reported, anti-Russian sentiment has exploded, which has led to vandalization of Russian restaurants and Russian children experiencing bullying at school. These and likely more incidents are despicable because everyday Russians themselves are protesting Putin’s reckless actions.
After the shameful scapegoating that occurred because of the Covid-19 pandemic, you’d think that people would learn to be a little bit more tolerant and less reactionary. I guess I was wrong.
Because of the widespread ignorance, though, it’s possible (thought not a guarantee) that companies like Duolingo could suffer from revenue loss. For one thing, some folks might not want to learn Russian, which again is ignorant, but ignorance is rampant these days. Second, travel to many Russian-speaking countries is out for now, which may eliminate a revenue stream for a popular language choice.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.