The tourism industry has struggled over the past few years due to travel restrictions and geopolitical tensions, but there are some travel stocks to buy that are benefiting from its rebound.
Initially the travel sector was affected by the pandemic, and later on by Russia’s invasion of Ukraine. Tensions in the Middle East may also cause concern but despite rising prices and an uncertain economic environment, it looks as if demand remains steady.
And if travel companies’ latest numbers are anything to go by, this is likely to be the case.
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Of course, economic uncertainty could prove to be a headwind for these companies in the months ahead - consumers are being squeezed by inflation, particularly in the UK, and rising interest rates.
But if the recovery continues, the following stocks could provide investors with a way to benefit from the sector’s comeback.
Affordable flights fuel easyJet rebound
Like all airlines, easyJet (LSE: EZJ) suffered throughout the pandemic, and after that from the Russian invasion of Ukraine. However, the company’s latest results show it is flying above expectations.
Its pre-tax earnings for its financial year to the end of September 2023 was above analyst forecasts at £476 million, while passenger revenue rose from £3.8 billion to £5.2 billion.
The airline has also proposed paying a 4.5p per share dividend.
While higher fuel prices increased operating costs, the company was able to offset this by increasing ancillary revenue (or selling more extras to customers such as extra legroom and more baggage space).
The company is known for its affordable flights, especially to Europe, which consumers are more likely to choose over more expensive transatlantic holidays as the cost of living crisis bites.
Its balance sheet is in a stronger position than it was in 2019, and holidaymakers are still making up for lost time throughout the pandemic.
"The return to dividend payments will mean it shows up on income investors’ radars once more, providing hope of more inflows to boost the share price," says Chris Beauchamp, chief market analyst at IG Group.
"But until global investors rediscover a love for UK stocks, easyJet may continue to struggle despite the improved outlook."
There are other downsides.
Julie Palmer, partner at Begbies Traynor, adds that the geopolitical uncertainty in the Middle East will impact growth in the first quarter, making it far harder for the group to reduce winter losses during the quieter months.
“Currently, forward bookings are ahead of where they were last year which shows just how robust this air travel boom really is, but a lot can change between now and the next travel peak over the Easter break," she says.
"Fuel prices have spiked once again and the disruption to its primary hub, Gatwick, only adds to the airline’s list of worries.
“Ultimately, while the results were solid, there’s a vast amount still to do if easyJet is going to deliver its fabled £1bn in profit by 2029 target."
Package holidays boost Tui
Shares in Tui (LSE: TUI), another airline known for its affordable flights, fell after it launched a discounted rights issue at the end of March.
The firm issued stock at a 40% discount to help it raise money to pay the debts it accrued throughout the pandemic. It borrowed heavily from the German government during the pandemic to keep the lights on, and the borrowing came with strict conditions such as limits on bonuses and dividends.
With the rights issue, Tui was able to raise €1.8bn to repay its debts.
A lower debt burden will help the group in the long term, especially in a high interest-rate environment. So, while the rights issue might have been a disappointment for investors at the time, it should pay off in the medium term.
The trends that are boosting easyJet are also in place for Tui. The airline reported strong bookings throughout the summer, up 5% annually and close to pre-pandemic levels at 96%.
TUI also said winter bookings are up 15% and it expects its pre-tax profits to increase for both the fourth quarter and full year.
Staycation boom bodes well for Whitbread
Whitbread (LSE: WTB) owns Premier Inn – a budget option for staycations.
Demand for its rooms is booming as customers seek out more affordable options as costs rise. Its 2023 results showed profit has grown to above pre-pandemic levels, thanks to its UK brand.
It’s also expanding in Germany, where it has opened 51 hotels. Additionally total accommodation sales for the seven weeks to April were 140% ahead of the same period the year before.
In the UK accommodation sales were 55% ahead of 2022 and 37% ahead of 2020.
Underlying profits reached £375m in 2023, which means previous expectations of £384m for 2024 have increased given demand is expected to continue growing.
The group has warned its expansion in the UK and Germany will weigh on earnings, but it remains confident profit will continue to grow.
A one-stop-shop poised for growth
WH Smith (LSE: WHS) offers a slightly different way to play the travel rebound. It has hundreds of shops mainly in airports and stations, frequented by travellers on their way to exotic destinations and a high street portfolio in high footfall locations, which should see a benefit from more domestic travellers.
Over the 12 months to the end of August 2023, revenue was up 36% year-on-year, while trading profits in its travel division were up 84%.
An expanding store footprint will also help growth. WH Smith said in November that it has a new store pipeline of more than 110 stores yet to open in travel, including more than 60 in North America
Don’t forget the boom for buses
The ongoing train strikes over the last few months have benefited coach operator Mobico Group (LSE:MCG) previously known as National Express.
Consumers have also been looking for cheaper alternatives to rail travel as prices increase (both travelling for staycations and to airports to travel further afield), boosting the company’s top and bottom lines.
The company posted strong third-quarter results, with revenues rising 10% annually thanks to the strong performance of its UK arm and in North America School Bus as a result of investment in a strong operational school year startup.
It operates in several other countries including Germany and Spain and has been operating a cost-cutting scheme to cope with higher staff operating costs and economic uncertainty.
The company’s annual revenue surpassed pre-pandemic levels for the first time back in March and it expects its full-year earnings to be in the range of £175m to £185m for 2023.
As the travel sector continues to recover, National Express is in a prime position to benefit from further growth.
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