Unbroken desire to travel
This is how short sellers at travel companies gamble
By Jannik Tillar
08/12/2023, 5:40 p.m
In view of the interest rate environment and gloomy economic prospects, hedge funds are betting on falling prices for Royal Caribbean or Carnival. The fact that people still travel and that companies achieve results almost back to the pre-corona level costs them billions.
The chain of logic was long but simple: interest rates are rising, the economy is collapsing, people are losing their jobs, have to save and therefore travel less. Some hedge funds imagined this or something similar last year, and therefore shorted travel groups such as Royal Caribbean and Carnival.
Now, almost a year later, it is clear that the assumptions were probably too simple: the economy remains stable and people compensate for the lower real income elsewhere – but not when travelling. Travel stocks are booming – and short sellers have apparently suffered losses of almost 6.4 billion US dollars this year. This is shown by data from S3 Partners and Breakout Point, which the Financial Times (FT) first reported on.
Hedge funds, often referred to as short sellers, bet on falling prices with short sales. To do this, they borrow shares for a fee, sell them directly, and hope to be able to buy them back at a lower price before the agreed return date. The lower the purchase price, the greater the difference and the greater your profit.
High debt after Corona
According to the FT, hedge funds such as Qube Research and Technologies and Tellworth Investments made exactly the same deal. They borrowed positions worth millions, for example from the cruise lines Carnival, Royal Caribbean or Norwegian, and sold them on. Because prices then rose, hedge funds had to successively close their bets. According to S3 Partners, the loss is almost 6.4 billion US dollars. The three shipping companies mentioned alone caused hedge funds to lose $2.9 billion. They wrote other big losses at Airbnb or Booking.com, which grew 70 and 44 percent respectively on the stock exchange this year.
The bare numbers of the shipping companies, which had accumulated high debts due to the Corona crisis, also gave the hedge funds hope. At Carnival alone, debt rose from $10 billion to $35 billion between 2019 and 2023, while interest rates rose from 1.75 percent to 5.5 percent, making debt increasingly expensive for companies.
Nevertheless, the shipping companies finally managed to reduce their debts. Carnival’s debt ratio was even 78 percent below the previous year. The main reason for this is people’s desire to travel, some of whom still have reserves from the Corona period or compensate for their lower real income in other places – for example with energy, alcohol or sweets.
Lufthansa and Tui with good figures
Carnival CEO Josh Weinstein said in June the company was enjoying a “phenomenal season,” while last month Royal Caribbean raised its guidance for the second time in three months, saying “the North American consumer remains incredibly strong.”
Not only the shipping companies and individual regions are feeling the consumers’ desire to travel. German airlines such as Lufthansa or tourism groups such as Tui have already presented solid figures this year. The absolute numbers are almost back to the pre-corona level, while share prices are still lagging behind. The Lufthansa share is still 20 percent under water, Tui even almost 75 percent.
The article first appeared at Capital.de.