The travel sector is taking off
Two years after the global economy gradually began to reopen, the travel industry is in rude health – and the long-term outlook remains compelling, says Matthew Partridge
The real success story in global equity markets so far this year has been the travel sector.
The industry is certainly doing much better than it was during the Covid pandemic, when most travel ground to a halt. But it still hasn’t quite recovered from Covid, especially in Asia, where the volume of passengers is still 40% below its 2019 level owing to the region’s relatively late reopening.
Increasing demand isn’t the only reason to be positive about the travel sector. During the pandemic the industry survived by slashing capacity to the bone and selling assets. Even when economies started to reopen, most companies remained cautious.
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This imbalance created shortages in areas ranging from accommodation to flights, resulting in soaring prices.
The travel sector rebound
That’s bad news for travellers, but good news for companies, especially those who took a gamble on increasing capacity.
Perhaps the most obvious sign that the travel industry is doing well comes from the performance of the airlines, says Frank Holmes, CEO of US Global Investors.
Even before the vaccines that bought the pandemic to an end arrived, the sector started to rally: the market began to realise “that the world wasn’t going to come to an end”.
Of course, once travel bans were relaxed and then scrapped completely, the industry enjoyed robust demand for flights, with the result that airlines’ shares remain “on a tear”, says Holmes.
Hotels are also bullish about the pace of the recovery and future growth. This is particularly the case at the luxury end of the market.
Dino Michael, senior vice president and global head of Hilton’s luxury brands, thinks that demand for hotels remains “unstoppable”, with people around the world “continuing to seek travel experiences they put on hold” during the pandemic.
Michael thinks that the pandemic has in fact stimulated demand at the top end. He has seen a rise in customers “wanting to be really taken care of”, with expectations “higher than ever before”.
As a result, far from cutting back, Hilton is expanding its luxury offerings and is “on track to open up to 20 luxury properties” within the next five years in Europe, the Middle East and Africa.
Along with booming demand for hotels and flights, the Cruise Lines International Association recently revealed that the number of cruises taken by UK and Irish passengers in 2022 was more than 3.5 times the number taken in 2021.
Combined with the reduced capacity, this allowed cruise lines to increase prices aggressively. The industry’s incomplete rebound presents an opportunity for investors.
What to buy now
The broadest way to invest in the recovery of the travel industry is through HANetf’s The Travel ETF (LSE: TRYP).
This exchange-traded fund (ETF) invests in a range of shares, including airlines, cruise ships, hotels and even travel agencies (which account for 18% of the portfolio).
Although just over half the holdings are in US shares, it also invests in Chinese, British, Japanese and European stocks. The largest holdings include Airbnb, Delta Airlines and Royal Caribbean Cruises.
The ETF has a reasonable total expense ratio of 0.69% and the shares in the ETF are on an average price/earnings (p/e) ratio of 13.2.
The shift from business to leisure travel is set to benefit budget operators such as easyJet (LSE: EZJ).
While its decision to defer the purchase of several new aeroplanes may mean that it missed out on the opportunity to benefit from this year’s surge in travel, it still came close to reaching 2019 revenues last year and is expected to eclipse them significantly this year.
Sales are expected to grow by around 10% a year over the next few years, which makes a 2024 p/e of 7.5 seem a bargain – especially as it is expected to begin paying a dividend again next year.
One hotel chain doing particularly well is Marriott International (Nasdaq: MAR), the world’s largest hotelier, with over 8,500 properties in 138 countries.
Ben Laidler of eToro notes that it is recording double-digit increases in both occupancy (now at 65%) and room rates (to an average $345 a night) in its premium segment.
Last year its revenues were nearly back to 2019 levels, with its earnings per share 75% higher. Encouraging future prospect more than justify the fact that it is on a 2024 p/e of 21.
One cruise line that should benefit from the continued recovery in the sector is Norwegian Cruise Line Holdings (NYSE: NCLH), which operates 30 ships with over 60,000 berths.
While last year’s revenue was down a quarter compared with levels in 2019, the company expects to reach a record high this year, with annual growth of around 10% thereafter.
Indeed, the firm is so confident that it already has seven ships on order. With the shares having fallen by nearly half from historic peaks, and trading at just 11 times 2024 earnings, this is a compelling value investment.
A final way to bet on the resurgence of travel is with Booking Holdings (Nasdaq: BKNG), which runs various travel bookings and price-comparison websites, such as Booking, Agoda, Priceline and Kayak.
With more people turning to such websites, it’s not surprising that revenue surpassed 2019 levels last year and is expected to be a third higher than pre-pandemic levels this year.
With revenue growing strongly, and the company benefiting from economies of scale and high returns on capital, the fact that it trades on a 2024 p/e of 18 makes it look a bargain.
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Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
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