Cashing In On The Post-pandemic Travel Boom
“The human condition of wanting to move, of wanting to travel, of wanting to get out of the house, it’s true for everyone and it’s universal.”
So said Uber CEO Dara Khosrowshahi last week and we couldn’t agree more. We’ve long been believers in the ability for the travel sector to bounce back after industry shocks … a matter of ‘when’, not ‘if’.
The winds were certainly blowing the right way for the travel industry this last week, with stronger earnings reported by a number of the majors and news of Pfizer’s COVID-19 antiviral pill providing some light at the end of the tunnel (…and, to use that old cliche, hopefully not an inbound freight train).
But as always, the shape of recovery in travel remains a complex story, with each of its constituent sub-sectors showing different recovery patterns.
18 months on - what does the recovery look like?
We’ve followed the recovery in travel stocks in previous articles and now that world borders look to be opening further, we update our analysis.
After travel stocks were smashed in late February 2020, the OTA sub-sector recovered back to pre-pandemic levels in just nine months and is now up 30% on January 2020 levels. Despite an initial drop of ~45% in the initial stages of the pandemic, OTAs are now up 137% on their COVID lows.
Hotel and Airline stocks dropped by similar levels to OTAs initially (~50%), but their recovery since then has looked very different.
Hotels were back at pre-pandemic levels after one year but have since stagnated for most of 2021.
The Airline sub-sector remains 25% underwater, with only 10% of airline stocks recovering to January 2020 levels so far.
As the chart below shows however, the spread of outcomes is significantly different between participants, with a majority sitting between 10% - 60% down on pre-pandemic levels.
Finally, Cruise & Resort stocks took the biggest hit in March last year, down ~80%. And while this sub-sector is taking the longest to regain that lost ground (remaining 38% down on pre-pandemic levels), that severe initial drop delivered significant upside opportunity – up ~240% on initial COVID lows. If you were brave enough to make that play, you’d have done very well indeed.
The pandemic’s devastating effect on the global travel sector was also amplified by the fact that everyone felt the impact at the same time, seemingly overnight. However, with vaccinations now seeming to be proving effective and economies reopening, the sector looks set to boom on the back of an almighty burst of revenge spending, with the different phasing of reopening likely to extend the length of the recovery.
After 18 months of flogging the credit card on ecommerce sites, consumers who have been locked up at home for months going on years, are now looking to spend up on experiences instead of things.
It’s worth noting that the recovery to date occurred in the first 12 months after COVID hit. The last six months, as the pandemic has worn on, has seen the value of the sector largely remain flat.
Analyst views
We sought out views from three key sources to better understand the opportunities and any limitations; Ord Minnett’s John O'Shea, Forsyth Barr’s Eagle Report, and the views of a host of industry leaders who spoke at the recent Skift Global Forum.
According to O’Shea, “Australia appears on the eve of a travel junket like no other, driven largely by domestic leisure followed by outbound over time.”
He says vaccination rates in Australia and New Zealand will likely end up leading the world, which will encourage Kiwis and Aussies to travel, as well as making both countries attractive destinations for international visitors.
Australia’s vaccination levels — currently sitting at around 70% of the total population, or 85% of those presently eligible to receive a vaccine — are much higher than the world average. “To use a horse racing analogy, the rest of the world (barring a couple of exceptions) is getting the staggers 100 metres from the post and we have gone past them hard held (plenty more in the tank),” says O’Shea.
With a handful of outliers, most regions in Australia and New Zealand appear likely to end up with at least 90% of their eligible populations fully vaccinated by Christmas/New Year.
Stronger for longer
O’Shea says the industry is anticipating a massive surge in domestic travel that will likely carry on for 12 to 18 months. “Hotels and other parts of the travel ecosystem are wondering how they will cope with the demand — not whether it will come.”
On the vexed question of the outbound recovery, O’Shea quotes Adam Schwab, CEO of Luxury Escapes, “We started to see international sales really starting to return in early September. The catalyst was [Australian Prime Minister Scott] Morrison announcing borders would open on 17 December followed quickly by Qantas starting flights. The gradual increase in sales became an avalanche … after [NSW Premier] Dominic Perrottet’s announcement to remove quarantine completely (which surprised everyone). We had a record day on Saturday, which was beaten on Sunday, then again Monday then another record on Tuesday. We’re trading now at 3x pre-pandemic levels (although we expect that to drop back in the next few weeks).”
Schwab also said that there appears to be significant demand for Australian outbound travel now confidence is returning. In fact, after 18 of the worst months imaginable, travel sector leaders are starting to worry about the potential drag on growth from things like capacity constraints and higher airfares, rather than any lingering hesitancy about travel.
Companies like Event Hospitality and Entertainment, Qantas and Webjet are all set to benefit, he believes.
To that list, according to Forsyth Barr’s Eagle Report, you can add Booking.com, Delta Airlines, Ryanair, and Tourism Holdings. Like Ord Minnett, Forsyth Barr includes Webjet in its winning circle.
Jab winners
While e-commerce companies raked in the dollars during the early days of COVID, travel and related stocks are set to benefit from a vaccination-led reopening of economies around the world, according to the Eagle Report.
Its thesis is that tourism-related stocks (airlines, online travel agents, cruise companies, rental car / motorhome operators, hotels, and airports) will see a rapid recovery as borders reopen. Likewise, cash-flush consumers will want to spend their savings more broadly than they did under lockdown — which is good news for global consumer brands.
On travel specifically the report notes, “The travel industry has been one of the most affected sectors over the past 18 months. The good news is that governments are outlining plans to reopen international borders, which we feel will accelerate demand for international travel from mid-2022 (in the northern hemisphere summer).”
The Eagle Report identifies several businesses set to benefit from post-pandemic consumer changes.
Booking.com should be a huge beneficiary from the anticipated rebound in international travel.
Delta Airlines will benefit from the survivorship bias towards airlines with the capital backing and the product/brand loyalty to emerge more profitable than pre-COVID.
Ryanair, which has been proactive with its fleet purchases, should be able to capitalize better than its peers on the rising travel demand profile as borders reopen and the northern winter eventually turns to spring.
Tourism Holdings, the largest provider of holiday campervans for rent and sale in Australia, New Zealand and the USA, strengthened its balance sheet by ‘de-fleeting’ during the pandemic.
Webjet will return to profitability faster than the market, as its B2B division is already benefitting from increasing domestic travel bookings across Europe and the Americas, while its main B2C business, webjet.com.au, has gained substantial market share through the pandemic. Plus, its overall capital position has it well placed to benefit from M&A opportunities. [Disclosure of interest – our founder Roger Sharp chairs Webjet].
CEO perspectives
The mood at this year’s Skift Global Forum reflects the optimism which is returning to the sector, but also the reality of having spent a year peering into the abyss (we are indebted to John O’Shea for the following observations):
Airbnb’s CEO Brian Chesky is bearish on business travel but believes that people are underestimating the upside of leisure travel. Chesky also flagged the strong domestic tourism boom seen during the pandemic in the USA and France, and he expects these to remain stronger for longer (consistent with Ord Minnett’s view on Australia).
Meanwhile, Hopper CEO Frederic Lalonde said, “There will be a western global superapp for travel — it may be owned by Google, Facebook or Alibaba, but it will be a superapp and we’re trying to become that.” And as a side note, Hopper claims to have surpassed Booking.com as the number-one travel booking app in the first half of 2021.
Booking.com CEO Glenn Fogel was questioned extensively about the company’s aim to provide the “Connected Trip” to customers, claiming that Booking is one of the few companies that can genuinely provide the “Connected Trip” given the nature of its offering. [Some of us in the industry have a slightly different view — which is that the ‘connected trip’ is a phrase concocted by the mega OTAs after they acquired too many disparate businesses, like Expedia did, then had to work out how to join them…]
On that note, Expedia CEO Peter Kern stressed his business’s focus on simplification — such as the process of combining its loyalty programs into one large overarching program and offloading Egencia to AMEX GBT. He also said its Vrbo vacation rental business has been the star performer during COVID, even though as we know it is still small relative to Airbnb.
Finally, there’s always one contrarian in the crowd. Certares CEO Greg O’Hara said he is not a big fan of technology-based businesses in the travel sector, as he questions the risk-adjusted return equation. The pandemic has resulted in his company being presented with a record number of investment opportunities in the travel sector and it has passed on most of them. O’Hara remains skeptical about online travel businesses as typically they are not well rewarded by airlines, and he still believes that consumers will pay for travel advice. Indeed, he expects this to become even more important post-pandemic. [Ahem, really? Are they putting something funny in the water in Planet Certares?]
Where to from here?
While industry executives are talking up a rapid resurgence, plenty of complications remain and the next stage of recovery will differ by geography.
Vaccination rates (at least one dose) are at or above 70% in high and middle-income countries, but only just now reaching 40% in lower middle-income countries and just 4% of people in low-income countries have received a single dose.(1)
Fifty-seven countries remain closed to international travel, while 165 countries have opened but with varying levels of restrictions including vaccination, negative COVID tests and/or quarantine.(2)
And even as borders become more open, the process of dealing with the ‘new rules’ is proving complicated. As The Economist noted in its recent examination of Vaccine Passports(3), urgency has trumped coordination and there is now a plethora of different approaches to verifying vaccine status across countries, and even within countries. This has meant that despite traveller numbers remaining low, the process of getting to the gate can be arduous.
And there is, or course, that great unknown ahead of us – will we see new and more virulent, or more dangerous, strains of COVID?
As we noted earlier, we’ve seen this recovery story play out numerous times in travel. And while the bounce back from COVID-19 has stayed true to the playbook at a macro level, the additional complications of an uneven global recovery mean there is both opportunity, and risk at an individual stock level.
(1) https://ourworldindata.org
(2) https://www.kayak.com/travel-restrictions
(3) https://www.economist.com/international/why-vaccine-passports-are-causing-chaos/21805939