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.
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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.
