Recession Watch: The Debt Load of the Travel Industry's Public Companies

Skift Research is looking to a solid growth year for the travel industry, but what if something unexpected occurs, and things get nasty?

We thought it would be interesting to look at nearly three dozen publicly traded companies, including airlines, hotels, booking sites, global distribution systems, cruise lines, and major platforms like Google and Facebook, to see which companies have the most and least debt, and which ones, in theory, are the best-positioned to deal with it in the event of a recession or big downturn.

We concede that this is an imperfect forecast of how various companies might handle their debt in a potential recession, but these debt burdens are worth noting because they would certainly be factors in companies' maneuverings.

Consider Norwegian Cruise Line Holdings CEO Frank Del Rio's take on the issue of debt and maneuverability in the event of the economy heading downward.

"I think that in a capital-intensive, somewhat cyclical business, that having less leverage is better than having more leverage," said Del Rio said at the company's investor day in May.

In our analysis below, Norwegian Cruise Line had a 3.1x ratio of net debt to forward EBITDA (earnings before interest, taxes, depreciation and amortization) at the end of the third quarter.

Del Rio said at the investor day that he thinks "for the most part, the broad investment community is comfortable at 3 and below," referring to leverage. "When you look at our peers, they are below 3, and we think we ought to be in that area. Is there any hard reason why? No. Do I have flexibility? Yes."

We looked at each company's net debt in their most-recently released financials (the vast majority are for the quarter that ended September 30). And to get a more-well-rounded look, we ranked their net debt versus forward EBITDA ; their total debt versus total equity, and we blended those into an overall rank. [We elaborate on how to read the chart in the latter portion of this story.]

Before we go any further, here are the numbers. Be advised that you can manipulate the chart by scrolling to the left or right to view all of the columns.

Ranking Travel Brands Debt Load and Liquidity Against Their Peers

Note: These debt numbers are for each companies' most-recently reported quarterly results. Most are for the quarter that ended September 30, 2018.

Pro Trip: When considering both net debt to forward EBITDA and total debt to total equity, the lower the number, the better it is. 

Source: CapitalIQ, public filings

Low-Cost Carriers Versus Network Airlines

Within the airline sector, it is interesting to see that easyJet (1), Southwest (2), JetBlue (3) and Ryanair (4) lead the pack as a measure of their liquidity positions over the likes of United (5), Delta (tied with United), and American (7).  However, the fact that most of the low-cost carriers had more advantageous liquidity positions than the network airlines speaks to a large extent to their different business models and fleet structures. Meanwhile, while we ranked United and Delta, with their net debts of $10.7 billion and $15.8 billion, respectively, in a virtual tie, American Airlines' overall liquidity ranking trailed its peers.

We ranked Norwegian Air Shuttle (8) at the bottom of the pack among the airlines we considered. Its long-haul low-cost business has been under pressure, and we found, for example, that it had 9.4 times net debt to forward EBITDA.

"Look at Norwegian," said Skift Airline Weekly Publisher Jay Shabat, pointing to its bottom position in the chart among airlines. "One thing airlines have going for them right now is that the aircraft market is hot. So even Norwegian has some cushion with all the B737s and A320s they can sell off if need be. In fact, that’s exactly what they’re doing."

European Hotels Are Positioned Nicely

On the hotel front, Accor (1) is in a strong position, which might seem surprising since it has probably been one of the most acquisitive travel brands on the planet over the last couple of years.  On the other hand, in the second quarter of 2018, Accor sold an interest in its real estate business for $5.6 billion, which may account for its surplus of cash, and help fund even more future acquisitions.

London-based InterContinental Hotels Group (2) and Choice Hotels (2) rounded out the top three hotels with the most advantageous liquidity positions, among the brands we considered, although IHG is a much larger brand than Choice with a lot more net debt, namely $1.8 billion versus $752 million.

Online Travel Agencies Pack Lightly

You can also see that some sectors — such as airlines — that have to order all those planes, carry much higher debt loads than online travel agencies, for example, which generally don’t own planes, hotels or cars. For example, consider TripAdvisor (1 among the booking sites in terms of liquidity positions), which has a revolving credit line and accrued basically no debt as of the third quarter of 2018. On the other hand, American Airlines racked up $19.9 billion in net debt and ranked 7th among the publicly traded airlines we considered. So it is evident that there really is no valid comparison between the two companies or sectors — booking sites versus airlines — since their businesses are so different.

Among the major online travel agencies, we ranked Expedia's (tied for 4th) liquidity position well ahead of those of Booking Holdings and Ctrip (tied for 7th).

Travel Distribution

Amadeus (1), Travelport (2) and Sabre (3) are the three largest providers of distribution software and reservation services in the travel industry. Their businesses carry considerable debt as a matter of course. Developing global tech platforms requires a lot of upfront spending, and it takes time for the companies to recover their capital investment with what are essentially subscription or booking fees from airlines, hotels, and travel agencies.

They also use debt to bankroll acquisitions. For example, in August Amadeus announced a debt-financed acquisition of TravelClick, a provider of software services to hotels, for $1.52 billion. S&P Global, a rating agency, believes that the company's adjusted debt leverage will rise as a result. Before the deal, the company owed $1.40 for every $1 of shareholders' equity. After the deal, it wouldl owe closer to $2 for every $1 of shareholders' equity, the agency predicted, depending partly on potential cost savings by uniting the tech companies.

One potential problem is the type of debt. In the past four years, Amadeus has raised some money by issuing corporate bonds, and agencies rated Amadeus BBB or Baa2, meaning that these bonds are relatively high-risk. By itself, triple-B bonds aren't suspect. Many quality companies have issued billions of dollars' worth of triple-B bonds. The problem is what happens if demand for the bonds dries up for reasons that are unrelated to the underlying quality of the companies.

Regulations have recently encouraged banks, often the biggest buyers of riskier types of debt, to trim their holdings. That means that if demand for the bonds falls because investors seek more liquidity during a recession, Amadeus may not have many interested buyers, which could accelerate a downturn in the value of the bonds. The risk is that the company would have to offer more generous rates to lure buyers for future bonds.

Travelport and Sabre have less outstanding bond volume than Amadeus. Nevertheless, they have similarly capital-intensive businesses that require taking on debt. Any disturbance to the bond markets and to the availability of credit would impact them. Plus, because they are smaller than Amadeus, market troubles might, at least theoretically, affect them more significantly.

Travelport is on track to be acquired by private equity firm Siris in conjunction with activist investor Elliott Management in 2019. While it is common practice for private equity owners to load up businesses with debt, the heirs apparent haven't yet revealed their plans.

Cruise Lines

As Del Rio of Norwegian Cruise Line referred to, his company's peers, Carnival Corp. (1) and Royal Caribbean Cruises (2) carried less leverage than Norwegian (3).

An investor note from Wedbush said Norwegian Cruise Line was following its target of keeping its net debt leverage in the low-3x vicinity. But that could be a problem if a recession unfolds, Wedbush argued, pointing to Norwegian's performance during the 2007-2009 downturn relative to Carnival Corp.'s. During that period, Norwegian's share price fell 85 percent to $6 while Carnival's dipped less — 60 percent — to $20.

Oh, the Platforms

When you consider major platforms and how they might navigate a potential recession, don't fret for Alphabet (1), parent of Google, and Facebook (1), which came in at a dead heat among the four big-name platforms we considered. These major advertising platforms are rolling in cash, and had no net debt. In other words, they'll be fine.

Understanding the Chart

Here's an explanation for some of the chart's metrics.

Net Debt to Forward EBITDA

Net debt is total debt, less cash. It is effectively the total corporate debt obligation, if all cash on hand went to paying off debt today. EBITDA is is a closely followed earnings metric that attempts to proxy cash generated by the operating business.

What it means: Net debt to EBITDA compares the companies' expected earnings power to its debt load. A ratio of 2x means that the company holds twice as much debt as it earns. Or said another way, if all available earnings went towards paying down debt, it would take two years.

How to read net to forward EBITDA: Lower is better

Total Debt to Total Equity

Total debt is the absolute value of all loans outstanding (not offset by cash). Equity is a measure of the amount of capital raised from shareholders.

What it means: This ratio looks at how the company funds itself. Does it tend to borrow money from lenders or raise capital from shareholders? This is a way of measuring the companies' leverage. A ratio of 1x means that it raised an equal amount from bondholders and equity holders.

How to read: Lower is better

Skift Senior Research Analyst Seth Borko, Skift Travel Tech Editor Sean O'Neill, and Senior Enterprise Editor Hannah Sampson contributed to this report.