That the international travel sector is, thanks to the Covid-19 pandemic, in a bit of a crisis is not really news. When you have a business with significant fixed overheads from staff costs to expensive airport slots, rented hangers and all the other non-elastic bills that come in every month it tends to be a bit of a problem when the world unexpectedly stops travelling almost overnight. And doesn’t start again for a year and a half. Or at least not to anywhere near the levels all those overheads were built up to be able to handle.
In 2019, after nearly two decades of consistent annual growth fuelled by the world’s developing economies and growing middle class, over 4.5 billion passengers were carried by the world’s airlines. Data from the early part of 2020 indicated that figure would rise to over 4.7 billion passengers by the end of the year. A rate of growth consistent with what the airline industry had become accustomed to.
Number of scheduled passengers boarded by the global airline industry from 2004 to 2022(in millions)
Then Covid-19 appeared on the scene. News reports covering a concerning new virus that had appeared in a huge Chinese city most of us had never heard of before were watched with interest. Perhaps a little apprehension clouded some minds as the reports grew in frequency.
But it wasn’t the first time a scary sounding new virus had reared its head in southeast Asia. There was SARS in 2002 and MERS a decade later. Both were an issue but a relatively localised one. They certainly didn’t rip through the world economy and bring international travel to a practical halt. But Covid-19 did.
In an effort to control the new coronavirus’s spread, governments around the world brought in restrictions on people’s movements and interactions. They varied in their level of strictness with island nations like Australia and New Zealand shutting their borders relatively quickly and Italy barely allowing anyone to leave home for weeks as the virus ripped through especially the country’s northern towns and cities.
Elsewhere, with Sweden the prime example, a more laissez-faire approach was taken and life went on much as it had with very few obligatory restrictions imposed on people. In the UK and U.S. politicians attempted to find a middle ground that balanced keeping the spread of the virus under enough control that health services wouldn’t be overwhelmed. But that involved asking everyone who possible could to work from home for well over a year. And local and international travel restrictions.
For the international aviation industry, the impact was drastic. An expected 4.7 billion airline passengers throughout the year was actually 1.8 billion by the time the bells chimed for New Year 2021. This year isn’t looking much better with just 2.28 passengers expected on international flights, well under half of the numbers that would have been anticipated before March 2020.
International vaccine programmes mean borders have now re-opened and the recovery is underway. But the industry expects it to take at least another couple of years, some think more, before passenger numbers return to 2019 levels. The extra expense and hassle of mandatory testing on most international trips involve, the need to wear masks for hours on end, health concerns many still have, and other inconveniences that have reduced enthusiasm for personal travel.
Domestic travel is returning as we return, at least part-time to office environments, visiting family and friends and taking day trips, weekends and staycations. But passenger numbers on trains, buses and internal flights are still significantly down on pre-pandemic levels and will take some time to recover.
Share of the total gross domestic product (GDP) generated by the travel and tourism industry worldwide from 2000 to 2020
The impact on the global travel sector, and the individual companies that it is comprised of, has been devastating. In 2019, the travel and tourism sector accounted for over 10% of global GDP. In 2020 that halved to a little over 5% meaning the equivalent of the value of 5% of the world’s economic output was lost by a single sector.
It’s not the first crisis the travel sector, and especially aviation, has faced. 9/11 was a major blow but the industry largely struggled through the drop-off in air passenger numbers that followed the horrifying scenes of hijacked passenger jets crashing into the Twin Towers in New York. Until the Covid-19 pandemic, what followed was almost two decades of solid growth in international travel.
But this time is different. Passenger numbers fell much more drastically for much longer and the recovery will take place over years, not months. And the impact has been sector-wide and not restricted to aviation. To survive, travel companies have had to take on huge debts while slashing costs by downscaling.
Europe’s largest tour operator, the German company Tui, was bailed out by €4.3 billion in loans provided by Germany’s state bank. The company is worth around 60% less than it was two years ago.
U.S. airlines have been kept afloat by over $60 billion in government aid. British Airways owner IAG has seen its net debt rise from €7.6 billion at the end of 2019 to €12.1 billion by this summer. An almost €8 billion loss was booked last year and another of over €3 billion is expected this year. Shareholders have also seen their equity stakes diluted by rights issues which raised billions.
The company should now have more than enough cash to see out the pandemic and most of its debt is not repayable before 2026, though some is and likely to be re-financed. But that debt will have to be eventually serviced and reduced through future revenues. That is likely to mean no dividends for the next few years at least and a delicate balance will have to be maintained between growth and keeping a lid on overheads.
Short-haul carriers like Easyjet, Ryanair and Wizz Air haven’t been hit quite as hard with European travel less affected than long-haul routes. But they have still seen passenger numbers plunge and the number of flight routes they maintain slashed. They’ve all also been forced into raising billions through a combination of rights issues and debt that will have to be repaid. In total, the travel sector has lost an estimated $6 trillion to the pandemic, according to the World Travel and Tourism Council.
As it attempts to inch towards recovery, the travel sector faces additional headwinds. Inflation, supply chain chaos and staff shortages are driving up overheads quickly meaning returning business is less profitable before still lower passenger numbers are factored in.
Over the next few decades the sector, especially the aviation sub-sector, will also come under enormous pressure from shareholders, passengers and government to reduce emissions. That will require huge investment in new technologies on top of servicing the massive increase in debts taken on over the past two years.
Is the travel sector doomed and it’s time for investors still holding on to equity to bail out?
In every crisis, there is, however, always opportunity. Rights and debt issues from travel and tourism sector companies over the past year and a half have unanimously been accompanied by optimistic statements of intent that the cash raised will not only cover losses until the sector gets back on its feet. The money will also allow the companies to gain market share over less liquid competitors over the next few years.
The obvious caveat to that optimism is that most major competitors have been doing and saying the exact same thing. They won’t all gain market share from each other over the months and years ahead. Of course, many smaller companies unable to raise liquidity in the same way will fall prey to heavily capitalised public companies or those backed by private equity. A lot of those that survive will be hamstrung by the need to pay back emergency loans underwritten by governments, which calls their continued mid to long-term survival into question.
Among smaller and mid-sized travel companies, some will be innovative enough to pull through. Many won’t. The impact of the past couple of years will also almost certainly mean many big names won’t either, even among those who have raised billions. A decade of sector consolidations is likely with M&A deals reshaping the industry.
Which travel companies will survive and eventually prosper post-pandemic?
The travel sector appears split between those executives and investors convinced history shows things will return to normal even if it takes another 2-3 years. That faith is underpinned by the argument we humans have short memories and regardless of the scale of a catastrophe we eventually return to previously ingrained patterns of behaviour.
One is the outspoken Ryanair chief executive Michael O’Leary. He sees neither the pandemic nor the need to reduce harmful emissions as having a long term effect on his industry:
“The idea that post-Covid people will never travel again, or post-COP people will stop flying or flight shaming? [It’s] never going to happen.”
Flight and accommodation booking platform Expedia’s chief executive Peter Kern has a similar view. He thinks there may be some changes such as business travellers no longer taking flights for one-day meetings but that otherwise business travel is “largely going to come back”.
Hilton chief executive Chris Nassetta echos that opinion with
“it’s all well and good not travelling . . . until Goldman Sachs loses three IPO deals to Morgan Stanley because their bankers were on Zoom calls and Morgan Stanley was out [there].”
Airbnb’s Brian Chesky sees things differently and is convinced the travel sector has changed for good and that evolution will continue over coming years:
“In our mind, the world is totally different because of the pandemic…..one of the biggest changes to daily living since World War Two . . . This to me is a revolution, I don’t think travel is going back to where it was because I don’t think the world is going back to where it was. We believe in a world where people have new found flexibility they haven’t had before.”
Chesky thinks the future is longer trips that will see people take advantage of work-location flexibility to take extended visits to places or perhaps combine business travel with tourism by staying for a holiday after a work trip. Airbnb says its biggest growth area is stays of over 28 days and that it expects to evolve from a short-term rentals business to a “travel and living” company.
Tony Capuano of the hotel giant Marriott also thinks longer trips combining work and leisure will become more common and international trips purely for in-person meetings much rarer. His group’s strategy over the next several years will presumably reflect that belief.
Depressed valuations in the travel sector of course offer investors an opportunity to ride the recovery. But there is also an argument many valuations are not depressed enough, given the economic realities companies face and the sector’s unclear future. The winners will be those that not only raised enough money to not only survive but to acquire less liquid competitors.
But that in itself won’t be enough to guarantee future returns for investors who guess M&A activity over the next several years most accurately. Companies can grow but remain frail or inert in their expanded size.
Investors will also have to choose the companies that have gotten their predictions of the sector’s future evolution right and adapted their strategies to take advantage. Investing in the travel sector will be a minefield for years and highly risky. There will inevitably be heavy losses for some and major gains for others. That’s the reality of volatility and uncertainty. As an investor, you’ll have to decide if you are willing to take on the considerable risk of chasing the prospect of attractive gains through exposure to travel companies.
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