Daedalus or Icarus? Fliers and Fallers in Travel and Leisure

Why investors may want to look at enterprise value rather than market cap in travel and leisure stocks as the sector recovers from the pandemic.


Grounded aircraft. Anchored cruise ships. Shuttered hotels. Closed borders.

Covid-19 is probably the most significant challenge the travel and leisure sector has faced in recent years. As the sector ground to a halt in 2020, investors first questioned the immediate balance sheet strength and liquidity headroom, and subsequently, the level of cash burn. Then, towards the end of 2020, as vaccine news restored hope to a beleaguered sector, we saw share price gains across the board, regardless of fundamentals.

From a valuation perspective, we believe that it is important to look at enterprise value rather than market cap, as that takes into account cash burn in the debt number, and compare this to fundamental changes in business positions and differing speeds of recovery.

The market is assuming that airlines have exited the crisis in a stronger structural position than when it came in. Is this justified by fundamentals?

Intra-Sector Anomalies

Take into account, for example, airlines versus airports. While the equity of airlines is still c.15% lower than pre-Covid, the enterprise value on average is 30% higher. In comparison, the equity for airports is around 20% lower, with the enterprise value around 5% higher than pre-Covid levels. The market is therefore assuming that airlines have exited the crisis in a stronger structural position than when it came in.

Is this justified by fundamentals?

Figure 1 shows the equity share prices of three European travel and leisure companies: UK/German tour operator TUI, German airport operator Fraport and Italian travel food and beverage concession operator Autogrill. All three have significantly underperformed the MSCI Europe Mid Cap Index over the past 15 months, by a similar magnitude. Given this pattern, one could reasonably assume they all have priced in a similar impact from the pandemic due to lost earnings and a more volatile future.

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Source: Bloomberg; as of 8 April 2020. Normalised to 100 as of 1 January 2020. The organisations and/or financial instruments mentioned are for reference purposes only. The content of this material should not be construed as a recommendation for their purchase or sale.

However, if we dig beneath the surface, we find that:

  • Autogrill is seeing a faster recovery due to its exposure to North American airports, which makes up half of its business and where traffic is already back to 50% of pre-Covid levels. Structurally, this company should be able to take significant market share as smaller operators exit the market due to the challenges faced during the pandemic;
  • Fraport should see a slower recovery and longer-term headwinds as it is disproportionately exposed to business travel, which we believe will be slower to recover and face longer-term pressures;
  • TUI’s market should see a rapid recovery as leisure travel is likely to recover faster than business travel. However, we believe that TUI will not recover to pre-Covid levels of activity as the pandemic caused it to substantially shrink its operations: closing 40% of its UK high street shops, exiting 30% of German airports and all but abandoning their French operations. TUI also continues to face competitive pressures from online booking platforms.

So, looking at the share price alone, one would assume that all three firms have fared similarly. However, digging into the cash burn shows us that the TUI has spent more than half their original market cap whereas Autogrill has spent around 20%.

Just because Mr Market is saying that companies are the same doesn’t make it so.

In terms of balance sheets, both TUI and Autogrill, are raising additional equity: Autogrill is raising EUR600 million, EUR150 million more than the cash it has burned as it sees opportunities to invest for growth. TUI has raised EUR500 million from shareholders and EU420 million from the German government. However, this is only a fraction of the more-than EUR3.5 billion of cash it has burned. Fraport remains over-levered.

As such, we see Autogrill exiting the pandemic earlier than peers with a strong balance sheet and ready for growth for a discounted price. On the other hand, we see both Fraport and TUI with overleveraged balance sheets in need of fixing, significant structural challenges and at higher stock prices than before the pandemic.


The market is viewing the travel and leisure sector through a simple lens, mostly by focusing on share price moves since the start of the pandemic. However, we believe this ignores the challenges each company has faced, how they’ve managed through the pandemic and how bright their futures look in the long term. Just because Mr Market is saying that companies are the same doesn’t make it so.