Why IAG and Whitbread have long-term potential

Robert Stephens, CFA, discusses the prospects for two FTSE 100 travel and leisure stocks – IAG and Whitbread. 

The outlook for travel and leisure shares IAG (LON:IAG) and Whitbread (LON:WTB) remains precarious. A third wave of Covid-19 in Europe and an uncertain economic outlook for the UK are just two risks that could negatively impact their future performance.

Despite this, both companies have financial positions that suggest they have the means to survive further short-term disruption. Meanwhile, their market positions and growth strategies could catalyse their performances over the long run.

Financial strength to overcome short-term challenges

IAG and Whitbread have taken a number of steps to improve their financial standing since the start of the pandemic. For example, IAG raised €2.7bn from shareholders in September 2020 alongside various loans that have increased its total liquidity position to €8.1 billion.

In addition, the company has reduced non-essential discretionary spend wherever possible. It has also cut staff costs through furloughing employees and reducing hours, while slashing capital expenditure and supplier costs. These measures mean that it could be in a relatively strong position to overcome further disruption for the sector, and to benefit from an eventual recovery.

Whitbread undertook a £1bn rights issue last year that significantly improved its financial position. It has a net cash position of £40m, with access to cash and credit lines that amount to around £2.1bn.

It has also cut costs through measures such as a slashing capital expenditure and reducing headcount. In fact, around 1,500 staff members have been made redundant as it seeks to use technology to an increasing extent to improve labour scheduling. These changes, as well as the company’s size and scale, may provide it with a competitive advantage in what remains a fragmented budget hotel industry.

Future growth prospects

Both companies face very uncertain futures. The reopening of the economy following Covid-19 remains subject to a wide range of factors that are impossible to accurately predict. Therefore, forecasting their financial prospects remains highly challenging while the extent of their operational activities is unclear. This could mean that their share prices are highly volatile.

However, their capacity to survive further difficulties could allow them to capitalise on a return to more favourable trading conditions. In Whitbread’s case, a reopening of the UK economy could lead to a significant rise in demand. Record savings levels during lockdown may mean there is pent-up demand that is directed towards the UK hotels sector due to its novelty after the current lockdown. 

Moreover, with international travel likely to be severely restricted for much of 2021, Whitbread could experience a sales boom. Holidaymakers are likely to have more limited options than would normally be the case, which could lead to rising demand for UK destinations.

IAG’s future is arguably more challenging than that of its sector peer. Much depends on the speed of vaccine rollout across Europe and other locations, as well as the likelihood of ongoing travel restrictions caused by new Covid-19 strains. 

However, the company has a relatively diverse business model that includes a variety of price points, as well as a mix of short-haul and long-haul destinations. Therefore, it could be in a strong position to capitalise on an eventual recovery for the wider industry.