The impact of the ongoing tension in West Asia is no longer limited to politics only, but its impact is clearly visible on the travel and tourism sector as well. Global brokerage Jefferies has now adopted a more cautious stance regarding India’s travel sector. They believe that due to this tension, international traffic may decrease, fuel is becoming expensive and the number of foreign tourists may also decrease.
According to Jefferies, this entire situation will have the biggest impact on airline companies. The reason is clear, most of the international flights pass through the airspace of the Middle East. If tension increases there, routes of flights have to be changed, due to which both distance and cost increase. Apart from this, the increase in the prices of Aviation Turbine Fuel (ATF) has a direct impact on the earnings of airlines. Companies try to compensate for this by increasing fares, but higher fares can reduce the number of passengers.
Big impact on IndiGo
India’s largest airline IndiGo is considered to be the most affected by this situation. Many of its flights are connected to the Middle East, making the company vulnerable to any disruption in the region. Jefferies estimates that about 45% of the company’s international capacity is in the Middle East. In such a situation, if flights there are canceled or routes are changed, it will have a direct impact on the company’s earnings. Apart from this, fluctuations in rupee-dollar can also increase the loss. However, despite these challenges, the brokerage has maintained a Buy rating on IndiGo, but has reduced its target price. That means there is confidence in the long term, but at the moment the risk is high.
Hotel sector is also not untouched
Hotel industry is also not spared from this crisis. Jefferies says that the decline in the number of foreign tourists (FTA) may affect the earnings of hotel companies. Especially in luxury hotels of big cities, where more foreign guests come, the impact may be more visible. Along with this, there may also be a decline in international MICE bookings. This will put pressure on both the occupancy and room rates of hotels. However, it is a matter of relief that domestic tourism can balance this decline to some extent. People can now prefer short trips within the country instead of expensive international travel, which will benefit the city and surrounding tourist destinations.
Airport companies became the first choice
Interestingly, Jefferies has placed airport companies at the top of its portfolio. The brokerage believes that airport operators like GMR Airports can withstand this crisis better. The reason for this is their diversified business model. Airports not only depend on flights but also generate non-aero revenues like retail, food, parking and duty free. Apart from this, new projects and tariff increase can also support their earnings. However, the impact of decline in international traffic will be visible here too, but the impact will be less as compared to airlines and hotels.
cut in target price
Jefferies has cut the target prices of many companies. Like the targets of Indian Hotels Company Limited, ITC Hotels and Chalet Hotels have been reduced. Apart from this, travel-tech company TBO Tek is also considered to be affected by this crisis, because its major business comes from the Gulf region. Booking cancellations and low demand may affect its growth plans. Jefferies believes that the times ahead may be a bit challenging for the travel sector. Especially airlines and hotels will have to face pressure. However, if the situation improves then the recovery in the sector can also be faster.
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