Travel, Technology, and COVID-19
North Ridge Partners’ technology know-how is built around six core sectors: Travel technology, e-Learning, Fintech/ Payments, SaaS/ Software, eCommerce, and IoT/ Logistics.
Reflecting our multi-decade experience in advising, building, financing, and selling travel tech businesses, in May we held a webinar on the impact of COVID-19 on the online travel sector. The webinar is summarised below, and the pack is available here.
The Travel Sector | Some Basic Statistics
Accounting for more than 10% of global GDP and one in every ten jobs, travel is one of the world’s great industries.
Capping off more than 10 consecutive years of growth, there were more than 1.5 billion tourists in 2019, growing ~50% since 2012. APAC remains the fastest-growing region.
Pre-COVID-19, the sector accounted for 120 million direct jobs and 330 million indirect jobs globally.
The Industry’s Black Swan Event
The industry experiences frequent storms, which it tends to weather and bounce back from quickly. Trough to recovery in previous epidemics has usually occurred within 12 months, with leisure and domestic travel typically the first to recover.
COVID-19 has driven the largest and most rapid decline in 20 years. In January 2020, we wrote that by mid-year, things would be returning to normal. Clearly that was optimistic, with travel sector share prices bottoming at 2005 levels in March, and with 45% of countries closing their borders by May, resulting in a 70% reduction in daily commercial flights.
It is nonetheless a very resilient sector. Industry consensus is that we should see 80-100% of June 2019 volumes return by June 2022. The recovery will start in domestic and regional travel bubbles, as we have seen initially between Latvia, Lithuania, and Estonia, with Australia and New Zealand soon to follow.
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. And therein lies the opportunity for investors.
Share Price Performance During COVID-19
Travel is a high beta sector and outperforms the index during an economic expansion, then underperforms during contraction. By definition, economic contraction plus a pandemic constitutes the perfect storm.
Stocks in the sector fell ~50% from peak to trough during COVID-19. Agencies, cruises, and cars were the worst performers, with travel tech and OTAs faring comparatively better. Airline stocks were artificially buoyed by Government bailouts.
In April, Airbnb, Expedia, and Booking Holdings raised US$8.2 bn and Webjet and Flight Centre raised $1.046bn. With bankruptcy risk averted, the share prices of the recapitalised travel companies have bounced back strongly, even if their revenues haven’t yet.
By contrast, non-travel stocks have stayed up due to economic stimulus. Travel has underperformed by 40-50%.
Market Capitalisation Pre And Post Epidemic
The top 10 global companies (all sectors) by market capitalisation at the time of analysis were Apple, Microsoft, Amazon, Google, Facebook, Berkshire Hathaway, Alibaba, JP Morgan Chase, Tencent, and Visa. The beneficiaries of massive Government stimulus, their aggregate market capitalisation increased 5% to $7.4 bn during the pandemic.
How differently the top 10 global travel companies fared. The aggregate market cap of Booking Holdings, Marriott, Delta Airlines, Amadeus, Carnival, Southwest Airlines, Hilton, Royal Caribbean, Ryanair, and Air China decreased 43% to $198.9bn over the same period (Dec-19 to May-20).
Measured on a relative basis, the aggregate market capitalisation of the Top 10 global travel companies fell from 4.9% of the world’s top 10 companies to a mere 2.7%.
Summary | Where the Opportunity Lies
The travel sector has weathered multiple catastrophic events in the past 20 years. It has always demonstrated resilience, with high demand elasticity. COVID-19 is the biggest shock to the system yet, with pain being felt across most industries as tourism’s supply chain involves all sectors.
The system will rebound. Domestic travel will recover first, then regional bubbles will form. Industry CEO consensus is that volumes will return to 80-100% of June 2019 peak levels by June 2022.
Our preferred investment exposure is travel technology. Travel tech typically leads the sector in growth, with investors prepared to pay a valuation premium for high recurring revenues and scalability. With capital intensity relatively low, if you can achieve a leading market position, the sector can deliver extremely high ROI.
As a consequence of this dislocation, we are seeing a record number of financing opportunities in the private markets. There’s a huge opportunity that exists for investors with risk appetite. Now is the time to get set, but you have to know what to look for.
Credentials | Travel Technology is in our DNA
At North Ridge Partners, we’ve built and sold an Internet travel booking platform, we built and sold lastminute.com.au and travel.com.au, and have advised travel tech companies across the Asia Pacific region. Our co-founder Roger Sharp chairs ASX-200 company Webjet, which is Australasia’s largest OTA and the world’s second-largest B2B hotel business. He’s also Deputy Chair of Tourism New Zealand, the national custodian of www.newzealand.com, and in a previous life led several flagship airline deals.
Roger Sharp - Founder - North Ridge Partners