Returning to the UK yesterday, it came as no surprise to find the biometric scanners at Gatwick Airport were down, and immigration staff shuffling all arriving passengers into a single queue at passport control. When questioned, they said this was a “nationwide problem.”
UK air travellers are becoming increasingly used to an airport infrastructure which seems to be gradually slipping back to the 1970s. The issue for shareholders of airline stocks is that this could impact on revenues over the key summer earning months.
The other big problem for the sector is the decline in business travel post-Covid, with fewer companies feeling the need or prepared to embrace the expense of regular business travel. For companies like Heathrow Airport and others in the travel sector, this could quickly become an issue.
A challenging picture for Heathrow Airport
Research firm Third Bridge has been talking to senior management in the air travel sector and finding an increasingly challenging picture for Heathrow Airport. Business travel is not expected to return to pre-pandemic levels due to remote work options. This will impact Heathrow Airport’s profitability given its reliance on long-haul business travel.
Additionally, leisure passengers are increasingly preferring “staycations” within the UK over international travel, driven by concerns about the environment and affordability exacerbated by the cost of living crisis.
“Staff shortages, mainly experienced ground handlers, will continue to challenge Heathrow Airport in 2024,” said Olly Anibaba, an analyst with Third Bridge.
Air travel experts expect a 20-30% increase in staff cost for H1 2024 at Heathrow Airport. Key consideration will be air traffic controller shortages, in particular in the London airspace. This will cause more flight delays and potential shutdowns at Heathrow Airport.
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Heathrow Airport’s ownership structure and a shareholder reshuffle will be the major news to watch out for in 2024, as Saudi Arabia’s Public Investment Fund (PIF) has entered into an agreement to purchase a 10% stake in London’s Heathrow airport contingent on regulatory approval.
Investors will recall that Spain’s Ferrovial has been the main owner of Heathrow Airport for the last 17 years. Saudi’s PIF teamed up with private equity investor Ardian to pick up a 25% stake in the airport at the end of last year. They are believed to be also canvassing other bigger investors like pension funds to also part with their stock as they build a controlling position in the airport. The offer price is considered to be generous. Note that Qatar’s own sovereign wealth fund holds 20% of the stock and is considered unlikely to sell to the Saudis.
Given the potentially volatile summer in UK air travel, selling to the Saudis could be a still be a sensible move for bigger investors in Heathrow.
Keep an eye on WH Smith shares
UK news agent WH Smith LON:SMWH is expected to benefit from increased footfall, particularly in the airports. The company is an unlikely beneficiary of any increase in air travel, but Third Bridge anticipates small like-for-like increases in the UK travel segment over the next 12 months, with modest growth in air and hospital travel offsetting a slight decline in rail.
Historically, air and hospital travel have shown more resilience to changes in disposable income compared to rail.
“The struggle on the high street is likely to persist, with our experts forecasting continued decreases in like-for-like sales,” said Yanmei Tang at Third Bridge. “Collaborations with third-party companies such as M&S and Wilko should assist in regaining some margin growth.”
The US market is crucial for WHSmith’s growth. While the company’s market share is forecast to remain stable in the UK, significant growth is anticipated in the US. Third Bridge predicts a 2-3% increase in sales in the latter half of 2024, primarily driven by a greater emphasis on convenience categories.
WHSmith’s EBIT margin in the US market remains lower than that in the UK, but there is potential for significant improvement over the next five years through enhanced cost management. To boost profitability, they should expand into high-margin categories like gifts, health and beauty, and food and drink, while also scaling back less profitable areas such as news and magazines.
