Swine Flu Affects Travel Stocks

Swine Flu concerns drove travel industry stocks lower yesterday, as the Street fears this recent development will only add to the challenges already facing the sector.

These fears were amplified when the European Union’s health commissioner warned that Europeans "should avoid traveling to Mexico or the United States of America unless it is very urgent for them."

The Centers for Disease Control and Prevention in Atlanta has stated that this proclamation was unwarranted, as there have only been 20 cases confirmed in the United States, only one of which even required hospitalization.

With travel demand already at extremely weak levels, any additional adversity could make the operating environment in the travel industry even more challenging.

We would expect concerns over the Swine Flue outbreak to impact the cruise line stocks, including Carnival (CCL/CUK) and Royal Caribbean (RCL) -- more than those of the hotel companies. With their close quarters and itineraries that include ports in Mexico, we expect that the perceived risk among travelers would be highest in this sector.

While the direct risk to hotel companies such as Marriott (MAR) and Starwood (HOT) is lower, in our opinion, the operating environment in the hotel industry is already so weak that any additional deterioration in demand could delay the eventual stabilization of the industry.

We believe that it is important to note that information regarding this outbreak of swine flu is in its very early stages. As more details become known, the impact on the travel industry could change substantially. In the near-term, however, the news simply adds new problems to an industry that was already struggling with the impact of the global economic recession. This development does nothing to improve that picture.

--Sean P. Smith