Co-founder & Partner at North Ridge Partners, Peter Hynd, gives his take on the influence pandemics have on travel sector share prices.

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The rapid spread of the Novel Coronavirus has dominated recent news headlines and is causing a significant day-to-day impact in some parts of Asia. One of the most immediately visible effects is on travel activity, with entry restrictions being put in place across many countries, and discretionary travel curtailed. And, of course, there’s a bit of carnage evident in stock markets.

If the past provides an accurate guide to the future, we think this will pass relatively quickly. While previous health outbreaks like SARS, MERS, etc certainly had a sharply negative impact on key industry players like airlines and travel agents, the effect ultimately proved to be short-lived, with activity rapidly returning to trend.

North Ridge Partners has a long track record of investment in and advisory services to the online travel sector. We take a quick look below at the historical impact of these types of health outbreaks and extrapolate the likely outcome.

The Coronavirus versus other outbreaks

We aren’t health professionals or scientists, so we won’t step outside of our field. What we do know is that the Coronavirus has spread more rapidly than previous outbreaks and is impacting greater numbers of people, but (based on currently available data) it is causing far fewer fatalities (as a percentage of cases) than SARS: 

As you’d expect, pandemics influence consumption patterns, with travel being amongst the most acutely affected.

Impact on airline passenger volumes

The International Air Transport Association (IATA) has recently provided data on the impact of health outbreaks on air travel.

As IATA outlines in its report:

• SARS was the most serious of the prior epidemics, impacting traffic volumes with monthly revenue passenger kilometres (RPKs) of Asia-Pacific airlines down ~35% on pre-crisis levels.

• The 2005 and 2013 episodes of avian flu had no significant sustained impact, while there was a more notable, but very localised impact from the most recent episode of MERS (which impacted South Korea).

• However, in all cases, air travel volumes began to recover after two to three months and had returned to pre-outbreak levels within ~six months.

Impact on Share Prices

We take this analysis further by looking at the impact on the share prices of listed OTAs and regional airlines.

The table below compares the average share price performance of a basket of OTAs (Expedia, Booking, Ctrip and Webjet) and of Asia Pacific regional airlines (Qantas, Singapore Airlines, Cathay Pacific, China Southern, China Eastern and Air China) for the weeks following a health outbreak.

• The equity market impact from SARS broadly aligns with the IATA data, with share prices dropping ~25% from pre-outbreak levels, but then rebounding and returning to previous levels within ~seven months.

• The MERS outbreak was significantly shorter in duration and appears to have had only a minor impact on airlines, and little effect on the global OTAs.

• The Coronavirus remains in its early weeks; however, the impact of travel restrictions can already be seen clearly on airlines and OTAs.

• The basket of regional airlines is down 10-15%, with a higher impact on the Chinese carriers.

• The more diversified OTAs have seen only a very modest impact to date, of <5%

• This time around, stocks seem to have fallen quicker and harder and bounced back a little earlier (this assumes, of course, there isn’t another large fall coming).

Some conclusions

It’s early days.

Previous health outbreaks have led to only temporary drops in travel activity, with passenger movements and travel company share prices recovering rapidly to previous levels once outbreaks are contained.

The coronavirus has now exceeded the impact of SARS, so the scale and length of the outbreak remain the big question. Based on historical data, it should be over in a matter of months and will be followed by a surge in pent-up demand.

Peter Hynd - Co-founder and Partner - North Ridge Partners