Iceland's revenge
Who would have thought that in the midst of the most exciting election campaign for years that the foremost news story would centre around a volcano in Iceland? The eruption of the Eyjafjallajokull volcano had far reaching effects that few could have predicted and resulted in massive disruption for many people across Europe and indeed the world. The complete closure of European airspace for several days is unprecedented and the cost is still being totted up; lots of seemingly outrageous figures are being bandied about in terms of lost business as well as lost revenue for those on the front line (airlines being the most obvious). How long lasting will these effects be and have there also been opportunities arising from the situation?
The airlines bore the initial brunt of the disruption in terms of lost revenue: the International Air Transport Association estimated that the cost to the global industry would be $1.7 billion (£1.1 billion). British Airways has indicated that the cost to them has been about £15-£20 million a day, which includes passenger support. Other estimates have come from BAA of £5-£6 million per day and travel companies such as Thomas Cook (£40 million) and Tui Travel (in excess of £30 million). The impact on share prices has varied with British Airways seeing a drop of over 8% from the start to the low point, which was reached on Monday 19th, when it was unclear as to how long the crisis would last, but it has since recovered to pre-crisis levels indicating the transient nature of the problem. Easyjet fared a little better seeing a more modest fall in its share price of 5.6%, but Ryanair was hit hard, with its share price falling over 9%. This seems to indicate that there was a short term trading opportunity for those who were brave enough to take a risk at the darkest hour, but timing was certainly crucial with such fast-moving events. Extreme circumstances often lead to trading opportunities, with uncertainty resulting in a sharp surge in volatility, but it is only for the nimble investor.
The two FTSE 100 travel companies also saw a significant effect on their share prices, both Thomas Cook and Tui Travel saw a fall of over 7.5% over the few days of the ash cloud, but both have since recovered to levels seen before the eruption. More indirect effects may be felt by the oil companies (although there has not been a noticeable impact on the share prices) and travel insurance companies, where any impact may be lagged.
On a more positive note, hotels and alternative forms of transport may have stood to benefit from the whole episode. Intercontinental Hotels have seen a sharp rise in their shares since normal service being resumed, for example, and there were reports from bus and rail companies of a huge upsurge in use. From a longer term perspective there is speculation that people might be put off travelling abroad, a trend already started last year with the so-called “staycation”. There are also many rumblings as to who will bear the cost of the flight ban and this is not likely to be sorted out in the short term. It has been an interesting distraction from politics and may have made a lot of people think about travel in the future.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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