Trouble in paradise: travel and tourism face 30% credit downgrade risk
The probability of credit downgrades in the travel and tourism sector has increased by 7% in the second quarter of 2022.
That’s according to the Q2 credit upgrade and downgrade forecast from the fixed income technology provider BondIT.
This means there is now a 31% chance that a credit issuer in the travel and tourism industry will be hit by a ratings downgrade within the next 12 months, making it the sector with the highest downgrade risk, according to the forecast.
In second place is the airline industry, where the downgrade risk has increased by three percentage points and now sits at 29%.
This means the downgrade probability in these sectors is nearly twice as high as in the banking (14%), consumer goods (15%) and retail sectors (16%), reflecting the travel sector’s challenging summer of rising fuel costs, airport staff constraints and strike action.
Citywire + rated Fraser Lundie, who is head of public-market fixed income at Federated Hermes, said he remained cautious on the outlook for leisure and tourism, with minimal exposure to the sector.
He said the latest reports of the sector’s demand trajectory were disappointing.
The Barclaycard July report showed that spending on travel agents and airlines was up versus last year but down by 3-4% compared with last month because of airline disruptions.
The report’s survey also suggests around 20% of British people will not take summer holidays this year due to the cost-of-living crisis – giving little indication that demand will pick up in the future.
‘Recent commentary for the airlines suggests demand has already noticeably softened,’ said Lundie. ‘Q2 looks like the peak in terms of earnings, as costs of jet fuel plus travel chaos cost for some airlines will hit in Q3, combined with the thinning discretionary income.’
Adding to Lundie’s concerns is that the tourism and leisure sector can’t raise prices as easily as other industries.
‘Both airlines and travel and leisure companies don’t have significant pricing power, with high fixed costs.
‘At the end of the day, you need to fill a plane to make money, so you can’t charge too much for flights – or else people won’t travel, as they need to pay their electricity bill.’