Coronavirus/default risk: travel is the weakest link

The impact of coronavirus is illustrated by the Grand Princess, seen here in February, now moored off San Francisco with 2,000 quarantined passengers © AP

Lex COMMENT

A cruise liner you cannot leave is a floating prison, however well-appointed. The impact of coronavirus is illustrated by the Grand Princess, moored off San Francisco with 2,000 quarantined passengers. Travel is at the epicentre of the epidemic's blow to business.
Companies in the sector are sprouting red flags, pointing to financial vulnerabilities created by the outbreak.

The main warning signals emanate from balance sheets. High indebtedness is one. For most big airlines, March to June bookings build a cash war chest for the leaner winter season. Operators with high ratios of net debt to ebitda (a cash earnings measure) will look much riskier if ticket prices and volumes fall 5 per cent, notes Redburn analyst Alex Brignall. Air France-KLM's multiple of two times would more than double if its operating earnings halved.

Flag carriers could hope for financial support from their governments in a cash crisis. Long-haul, low-cost operator Norwegian Air Shuttle has no such sponsor. For its lenders, the critical measure is how much shareholder equity it has. Its covenant requires a minimum of NKr1.5 billion ($NZ253m), a third of that in cash. Norwegian already makes post-tax losses. Any worsening could mean a covenant breach later this year, thinks Lex. It is debatable whether Norwegian could raise fresh equity, as it twice did in 2019.

German package holiday specialist Tui would suffer a near halving of its earnings in the same scenario, pushing up its net debt ratio by half to over 4 times ebitda. It should still have ample profits to cover interest charges, the key to avoiding default. For the moment, a tripling in the cost of default insurance looks precautionary, rather than predictive. The same applies to those owners of floating Petri dishes, the cruise companies.

All of this assumes the epidemic dies down before summer. If it does not, viral expansion will be matched by financial contagion well beyond the travel industry.

Lex is a premium daily commentary service from the Financial Times

© Financial Times