The ash cloud hanging over European airspace has weighed on the prices of airline and other travel-related shares in the past few trading sessions, and the ETFs that track the sector. As of March 31, the STOXX 600 Travel & Leisure Index had a 21% allocation to airline shares--the largest airline component being Ryanair, with an 8% weighting. Ryanair's shares fell about 7.2% between April 14 and April 19.
On April 19, travel company TUI Travel--another component of the STOXX index--quantified the economic impact of the ash-related disruptions to its business stating: "Currently, the estimated cumulative cost to the Group, up to and including 18 April 2010, is circa £20 million. Estimated daily costs thereafter will run at approximately £5 million-£6 million" TUI's shares shed about 3.7% of their value between the close of trading on April 14 and April 19. Over this same span, iShares STOXX Europe 600 Travel & Leisure ETF has slipped about 1.9% on the Xetra exchange.
The muted effects of even this horrific of an event for the travel industry on the sector tracker is a useful exhibit of the diversification benefits afforded by industry or sector ETFs. However, this also shows that even a fairly narrow industry ETF such as Travel & Leisure can include very different companies and economic exposures than one would expect. This index is composed of the shares of 22 different industry participants that cover everything from travel packages to catering services to operating airlines. By virtue of their relatively small market capitalisations, airline shares represent just a fraction (again, about 21%) of the total index, which is capitalisation-weighted. This leaves the funds that track it least exposed to the hardest hit sub-industry in the index.
The timing of the ash-related freeze on air traffic could not have been much worse for many European airlines that had already been struggling with a general slowdown in air travel in the wake of the global recession. The crucial question for the airlines, travel companies, hotels, and others is now just how long the effects of these delays--which appear to be over--might last. The cost to these industries and the broader economy has been substantial, with some estimates pegging the bill for Europe at around $200 million (£130 million) per day in lost revenue.
The effects have not been limited by geography or industry. The US Travel Association has estimated the total cost of flight cancellations to the US travel industry to be in the neighbourhood of $650 million (£420 million). The lockdown on air traffic has also delayed shipments of crucial components and forced the temporary closure of three BMW plants in Germany. These are just a few line items on a bill that will likely continue to mount in the coming weeks.
Here's a look at the ETFs that track the STOXX 600 Travel & Leisure Index:
