Will Travel & Tourism Return to Pre-Pandemic Levels?

By Duncan Ferris

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Our 'Key Themes For 2022' is designed to help you identify and capitalise on the areas to watch out for. Here we have travel & tourism.

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The travel and tourism sector has been through the ringer since the start of the pandemic, but that doesn’t mean it’s beyond hope. The sector looked to be staging a strong recovery just weeks ago, but could now be on course to struggle well into the new year.

So where does the sector stand at the moment and which companies have best dealt with the trials of COVID-19?

Has travel recovered?

It’s quite clear that before the emergence of Omicron, travel and tourism companies had largely been recovering. For example, Marriott International’s (NYSE: MAR) third quarter earnings demonstrated that occupancy rates had almost returned to pre-pandemic levels.

However, there are some areas where the recovery has been slower than expected.

The going has been tough for airlines over the last two years. One of the big issues is that business travel has not recovered at the same pace as personal travel. This is hugely important for airlines, as business travel accounts for 75% of airlines’ travel profit, according to Condor Ferries.

Indeed, some analysts think business travel will never recover to pre-pandemic levels. The Global Business Travel Association’s forecasts indicate that 2021 will see just a 14% increase in business travel spending compared to 2020, well below the 21% recovery that the organisation predicted back in February.

The organisation blamed COVID surges, new variants, uneven vaccination rates and supply chain problems for the underwhelming recovery, but this ignores a very important factor.

The pandemic forced most of us to get used to things like home-working and video-calls. The simple fact is that many people and businesses find these alternatives more convenient or simply cheaper than flying halfway around the world for a meeting.

But let’s look at the wider picture.

Even before the emergence of Omicron, the IATA, which represents carriers responsible for around 80% of the planet’s air traffic, said global airlines will continue to lose money in 2022. That loss was expected to drop by nearly 78% to $12bn, though this could now be a deeper loss given the impact of the new variant.

So, in short, the travel sector has not yet fully recovered.

Different sectors’ pandemic performance and outlook

We’re still poring over travel stocks’ pandemic performance and are still unsure of what the full effects of the Omicron variant will be. There is a chance that the mutation won’t be as disruptive as Delta or previous COVID waves, but right now nations around the world are battening down the hatches.

Of course, this is terrible news for travel stocks. Share prices have plummeted across the sector since news of the variant broke in late November.

Airlines

Between February and October 2020, which is the period containing just the initial wave of COVID-19, 43 commercial airlines went out of business. A lot of companies will be battered and bruised from almost two years of unpredictability and so the Omicron variant could see a lot more firms going out of business 

IATA director general, Willie Walsh, has railed against this reaction, stating that travel restrictions are “not a long-term solution to control COVID variants” but so far it looks like his words will fall on deaf ears.

So, what kind of effect can we actually expect?

Fitch Ratings revised its global revenue per kilometre forecasts downwards at the end of November following the emergence of Omicron. For 2022, they are expected to sit 30% lower than before the pandemic. However, the agency is still projecting an accelerating pace of recovery through next year and 2023 until a return to pre-pandemic levels in 2024.

It added that most airlines had adequate liquidity to deal with the continued uncertainty, though airlines with more exposure to international travel will suffer the most.

Carriers like American Airlines (NASDAQ: AAL) and United Airlines (NASDAQ: UAL) are among those with the most international exposure, while the likes of Southwest Airlines (NYSE: LUV) are more focused on domestic travel.

Hotels 

Hotels have also been restricted by COVID-19 and face further issues if tighter restrictions return. They rely on travellers, both foreign and domestic, to fill their rooms, diners to eat at their restaurants and organisations to use their conference spaces.

With these sources of revenue being largely unavailable for much of the last year, many hotels have failed to turn a profit. However, as noted previously, some hotel operators have been reporting levels of business approaching pre-pandemic levels over the latter portion of 2021.

That could all be about to change though. The recovery of hotel stocks is largely dependent on limited travel restrictions and growth of business travel.

Already, we are seeing European nations locking down or issuing advice to avoid essential travel. In the US, President Biden has not gone this far yet, but has not ruled out returning to some sort of lockdown. Such a move would greatly delay the recovery of hotel stocks.

However, we’ll see later on that some hotel chains are likely to be more resistant to further waves of the pandemic.

Cruises

Cruise companies have been another major sufferer of the COVID-19 pandemic. News stories about liners full of sick and quarantined patients abounded in the early months of the pandemic. At least 40 ships had confirmed cases on board in the first months of the pandemic.

Cruises only recommenced in May 2021 in the UK and June 2021 in the US, though some foreign operators restarted operations beforehand. In the intervening period, many companies faced great financial difficulties.

This was exacerbated by many cruise companies not being eligible to take advantage of the $2trn relief package passed by congress in March 2020, as the legislation was only applicable to businesses incorporated in the US. As such, shares of major operators like Royal Caribbean Cruises (NYSE: RCL) and Carnival Cruises (NYSE: CCL) plummeted and have since failed to recover.

The outlook for these companies is pretty poor amid the emergence of Omicron. Their fortunes are highly dependent on the disruption wrought by the new variant as the businesses are almost entirely reliant on the viability of international tourism.

However, there is still a bright side for cruises. Despite the negative optics of ships full of COVID infected travellers in the opening months of the pandemic, it appears demand is still rife for cruise holidays.

Earlier this year, Oceania Cruises and Viking Ocean Cruises, a subsidiary of Norwegian Cruise Line Holdings (NYSE: NCLH), reported that tickets sold out rapidly for their first ventures out into the blue since 2020. If cruise liners can make it through another period of uncertainty, it looks like they will still be able to survive.

How can travel companies adapt?

While travel and tourism stocks have largely taken a beating throughout the pandemic, there are a few which have fared better than most. Let’s take a look at these stocks and see why they did so well.

Airbnb (NASDAQ: ABNB)

Short term rental marketplace Airbnb was not entirely unscathed by the crisis, but has come through it better than most. In November, the company’s third quarter results showed it had achieved its highest-ever revenue and net income, even as urban and cross-border travel remained below pre-pandemic levels.

The company appears to be taking advantage of the lifestyle changes brought on by the pandemic. With working from home now an option to many people, employees now also have the option of working while travelling.

Airbnb has innovated to accommodate this change, with the introduction of its ‘I’m Flexible’ search option. The company has also enjoyed increasing numbers of travellers and hosts in rural areas, with holidays to these destinations having been spurred higher by the increasing popularity of the so-called ‘staycation’.

Choice Hotels International (NYSE: CHH)

Choice Hotels is rare among travel and tourism stocks. Though its stocks dropped alongside its peers at the outset of the pandemic, the hospitality outfit’s share price now greatly exceeds pre-pandemic levels. In February 2020 its stock stood at its highest ever level of around $107, yet its share price is now over $140. 

So how did the company weather the storm so well?

The first thing to note is that Choice franchises its hotels, of which there are over 7,000. This meant the business was less exposed to costs during slow periods of the pandemic.

Secondly, the hotels are largely located in rural or suburban environments, rather than built-up areas. In other words, its locations are ideally catered to the ‘staycations’ that have become so popular in recent times.

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In this article:

Topics:
Travel
Travel Agencies
Tour Operators
Airlines
Industries:
Consumer Discretionary
Companies:
Marriott International
American Airlines Group
Airbnb
Royal Caribbean Cruises

Author: Duncan Ferris

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Duncan Ferris does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the above article.

Duncan Ferris has not been paid to produce this piece by the company or companies mentioned above.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.