Comic: Spreading the Play - Will Delta Overwhelm Europe?

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Comic: Spreading the Play - Will Delta Overwhelm Europe?

By Geoffrey Smith -- As any soccer defender knows, the penalties for fouling are more serious if you spoil a particularly promising position for the other team.

Holders of travel and leisure stocks, in particular, must feel like they’ve been denied a clear goal-scoring opportunity in recent weeks by the Delta variant of the Covid-19 virus. If only there were a referee for whom they could roll around on the grass, exaggerating their pain…

It had all looked so good until a month ago, when the insidious Delta (first identified in India) started to become the dominant strain of the virus in the U.K. Over 40% more transmissible than previous strains, Delta has driven new case numbers in the U.K. from only 2,000 a day at the end of May to over 22,000 daily as of last week. The government accordingly postponed the full reopening of the hospitality and entertainment sectors by a month, but is still hoping to lift remaining restrictions on July 19.

But developments in the U.K. have rung alarm bells on a continent that was preparing to welcome millions of British tourists over the coming summer. In the last week alone, Portugal, Spain and Germany have all issued new restrictions on arrivals from Britain, harsh enough to deter significant numbers from travelling. Moreover, negative news flow about the strain is also likely to give those in other countries second thoughts about traveling to places where they may rub shoulders with Brits.

As a result, the ‘reopening trade’ in Europe has gone increasingly sour: International Airlines Group (LON: ICAG ), the owner of British Airways, Iberia and Vueling, has fallen 15% in the last month, while Tui (LON: TUIT ), the continent’s biggest tour operator, is down by a similar amount. Tui stock fell 4.8% on Tuesday alone after the company was forced to increase the size of a recent convertible note issue by 190 million euros ($226 million), the latest in a series of emergency capital increases since the pandemic began.

Spain’s Melia Hotels (MC: MEL ) has fallen over 10% this week after Madrid tightened its rules for arriving Brits, while Dufry (SIX: DUFN ), the Swiss-based owner of duty-free shops, fell nearly 12%.

And yet, things could be far worse for the sector. German Chancellor Angela Merkel had pushed at an EU summit last week for a blanket EU-wide tightening of restrictions on U.K. arrivals. That was successfully resisted by southern European countries who are a) more exposed to tourism revenues and b) inherently wary of German power grabs.

There are justifications for a more lenient and nuanced approach: almost everyone over 50 in the U.K. is now fully vaccinated, which greatly reduces the risk of them transmitting the disease. Vaccination rates among the younger cohort have also increased as it has become clear that this is going to be a precondition for that yearned-for summer break. This is particularly important, given the large role played by the crowded clubs of Ibiza and Mallorca in reviving the virus across all of Europe last summer.

But there are reasons, too, why the continent should be scared. The U.K. has managed to avoid a parallel increase in hospital admissions due to Delta because of its relatively advanced vaccination campaign. Some 50% of all British adults are fully vaccinated, and vaccination has lived up to its promise of greatly reducing severe illness. But in Germany, the comparable number is only 36%. In France and Italy, it’s only 30%. The risk of hospital capacity coming under pressure again in those countries is, accordingly, more pronounced.

Either way. the Delta variant is coming to the continent sooner or later. It already accounts for 20% of cases in France, up from 10% a week ago. Lothar Wieler, president of Germany’s Robert Koch Institute (RKI), said on Tuesday that the variant now already represents more than 50% of registered cases in Europe’s largest economy.

In other words, if the previous pattern of the Covid-19 pandemic is any guide, those reopening trades don’t look like regaining their momentum any time soon.

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