One Year On...How Have Travel Stocks Weathered The COVID Storm?
Travel is a key sector focus at North Ridge Partners and we have previously examined the potential impact of COVID-19 and probable recovery profile in a number of articles across 2020.
It’s one year this week since the World Health Organisation (WHO) declared COVID-19 to be a pandemic and with the rollout of vaccines gathering pace and efficacy holding up in the real world, it’s time to revisit the sector and see how things have played out.
Looking Back
In the very early stages of COVID-19, we looked back on previous health outbreaks to make the case that while travel stocks can be rapidly and acutely impacted by such events, they also quickly return to trend once outbreaks are contained. And that fervent belief in the resilience of travel leads us to see these events as opportunities for the patient investor.
Like many (most?!) others we underestimated the scale of COVID-19 in those early days. Travel stocks were unsurprisingly amongst the hardest hit, with an average fall of nearly 60% across online travel agencies (OTAs), airlines, hotels and cruises & resorts.
The combination of both severe and broad-based movement restrictions, and subsequent economic shock drove the largest and most rapid share price declines in 20 years. But while the scale and timeframe of this pandemic extended beyond previous health crises, history suggested that once the outbreak was contained, the recovery would be similarly profound with domestic travel and leisure leading the charge.
As we noted at the time … “The experience will be different as we recover, but the fundamental thesis remains the same: people are social animals, they crave the company of family and friends, and exploring is in their nature. It may take longer than we thought, but demand will return.”
12 months on, how have things played out?
In simple terms, the headline is that travel stock prices have almost fully recovered from that initial shock 12 months on (even if their earnings haven’t). The NRP travel index has returned 104% since 31 March 2020 levels and now sits just 13% down on pre-COVID levels.
But the story is a little more complex than that.
While we have seen a strong bounce back from the lows across all subsectors of travel, relative exposure to international travel and strength and size of domestic markets is producing some early outperformers … and leaving some sub-sectors with further recovery potential.
As we noted last year, domestic travel was likely to lead the pre-vaccine recovery while international borders remained largely shut. This drove the earlier recovery in OTAs with good exposure to large domestic markets, hotels and domestic or regionally focused airlines. This was further enhanced by initial news of vaccine success in November 2020 and commencement of vaccine rollouts in early 2021.
Notably, forward revenue multiples across these subsectors have remained largely stable since mid-2020, with subsequent share price appreciation being driven by improving consensus outlook … while broader ‘sentiment’ is no doubt helping, the markets are now convinced of, and pricing in, short term recovery in underlying financial performance.
Conversely, stock price recovery for airlines with a larger international footprint and cruises & resorts lagged in the early period of COVID, with the announcement of vaccines the primary catalyst for the more recent recovery.
Further into these trends, we see key travel stocks across our home markets in Asia Pacific generally lagging in the recovery … with relatively small domestic markets, internal border closures and a greater reliance on international travel, timeframes to operating improvements remain longer. Exact timing of the pickup in operating performance for these ‘home stocks’ is likely to remain subject to ongoing efficacy and speed of rollout of vaccines, establishment of travel bubbles and domestic government support measures. We also note that significant capacity has been taken out of international airline routes and it will take considerable time to reactivate wide-bodied aircraft – there is evidence of a potential travel supercycle coming but ironically supply may become a constraint!
How has this compared to prior travel ‘shocks’?
If we overlay the performance of regional airlines impacted by SARS, we can see that while COVID-19 has driven a deeper and longer impact, the thesis around relatively rapid recovery and the ultimate resilience of travel remains unchanged.
SARS saw a more moderate impact on the affected airline stocks, down around 25% and posting a full recovery in ~30 weeks. The broad-based nature of COVID and impact on international markets drove a more rapid and deeper initial decline, but hotels, OTAs and domestic airlines have achieved a near full stock price recovery within ~60 weeks. And of course, the deeper initial impact provided greater subsequent upside opportunity.
Summary | Where the Opportunity Lies
We remain as convinced as ever in the resiliency of the travel sector. While COVID-19 has been a profound shock to the industry, the opportunity to benefit from the high demand elasticity of travel remains consistent. Exposures to well-funded, market-leading companies that can weather the storm and deliver on a recovery profile that is now well established, will deliver excellent investment opportunities.
Is there still medium-term upside in the listed travel sector? Potentially yes on a case-by-case basis, but we are seeing that the more significant value opportunities remain in private companies that are yet to recapitalise.
Peter Hynd - Partner - North Ridge Partners
Sydney, March 2021