Underweight Travel & Leisure - Airlines in structural decline: our European Airlines analyst thinks overcapacity (networks set to grow 7% yoy to 2020) and competition from low cost/ ME carriers is driving prices and passenger yields lower across the board. - Negatively correlated to Oil: the sector is negatively correlated to the Oil price and despite recent weakness, our Commodity Strategist expects OPEC to cut by 500k b/d or 1 million b/d. Should OPEC cut with firm quotas and a tight control mechanism, they see WTI prices averaging $59/bbI. * Watch UK consumer confidence closely: the combined effect of the challenges we identified earlier starting to mount for the UK consumer and the drop in the value of the pound could reduce demand for and expenditure on overseas holidays. This would weigh on the travel operator part of the sector. If the bulk of sterling move is over the boost for dollar earnings like Compass will also likely fade. ¢ Peak returns: unlike Retail, T&L margins (98%ile since 2004) and RoEs (85%ile) are close to all-time highs. We think returns may well have peaked therefore given the backdrop of rising oil, weakening consumer confidence in the UK and structural overcapacity in airlines. This is reflected in the fact that PBV are on 2.8x for the sector, which is top quintile for the sector since 2004. Chart 70: Competition & overcapacity pushing airline yields down Chart 71: Rising oil would weigh on Travel earnings " 140 6 wf 120 8 1% | aN A 100 10 3. \\ \ 80 12 7 « NL | a i \ VK \ 60 14 rN OM \ WN . VW s " As b= a0 =———— Brent Oil 16 es \ 20 ones BofAML WTI forecasts 48 ~ 4) ex Stoxx Travel & Leisure EPS (RHS - inverted) ifs 0 20 Be Ses FSF SBSBSCTAVSeTeEe Sse PT TELELCLCLECE CELT ATTECEELEEESSLELL SS SS SRB EEE EE BE BSSESSSSESS SES ESSE SESS ESSER SERRE ES 6 66565 656 652585 8682 6 842842 82 84 6 = z= z= ze z= ze ze z= z= == Zs ze = = = = =z = za = = = = = = =z Arran ———Luthersa ——=—AIAG ——cuiye| —Ayanar Witz Ar Source: Company data Source: Bof