The great travel industry rebound

We’re fast approaching our destination, and there could be more to come

The travel industry is one of the largest service industries in the world.

In 2023, it is estimated that 8.7 billion passengers took to the skies to travel by airplane, 31.5 million set sail on cruises, and 554.5 million visited Booking.com to choose hotels and vacation packages.

These numbers are impressive, but those who are keeping an eye on the travel sector will know that they are not as high as they could be. Back in 2019, COVID-19 shocked the world, and saw most countries close their borders and cease international travel.

Some of the largest countries in the world, such as China, would not reopen their borders until 2023.

Now, the lockdowns and quarantines that defined the COVID era seem to be behind us, but some parts of the travel sector have not yet recovered to pre-2019 levels. 2023 was the closest we came to a full recovery, but it is widely expected that 2024 will see record numbers for the travel sector.

So, as the summer travel season approaches, let’s take a look at some of the key elements that comprise the travel sector.

Airlines

The global airline industry revenue was estimated at just under $841.5 billion in 2023. As it stands, it is only 3% below its pre-COVID figure, which means it may be poised to make a full recovery in 2024.

Airlines have faced weathered numerous storms in the past couple of decades – between 2005 and 2008, around 70% of U.S. airline carriers were operating under Chapter 11 bankruptcy protection.[1] This situation forced airlines to restructure and consolidate in the period following the financial crisis. As demonstrated by the chart below, this included major airline mergers.

Major airline mergers following the financial crisis

[1] Source: U.S. Global Investors; Company Filings.

Travel Industry

Source: U.S. Global Investors. For illustrative purposes only.

Carriers have improved their balance sheets by streamlining operations, as well as implementing stricter fuel efficiency standards. Part of this growth in profits has come from the introduction of more ancillary fees – such as purchasable baggage allowance, in-flight WiFi, and priority boarding.

Post-pandemic, airlines have evolved once more. Limiting the spread of COVID meant introducing better ventilation systems, introducing contactless check-ins, and even remote working.

Moreover, the recovery period allowed for time and resources to be invested in making airlines more sustainable, including more fuel-efficient aircraft and exploration of alternative fuels. As Doug Parker, CEO of American Airlines, explains:

“As a result of COVID-19, we are retiring older, less fuel-efficient aircraft even more quickly. Accelerating the commercial availability and use of SAF, which can reduce life cycle GHG emissions by up to 80% compared to conventional jet fuel, is another critical part of our long-term carbon-reduction pathway. We’ve committed to purchase nine million gallons of SAF over three years and, in parallel, are working to make our operations more fuel efficient.”

While strides in sustainability have been made, there is still a way to go – global fuel consumption by commercial airlines in 2023 stood at around 94 billion gallons, and it is expected to rise to 99 billion gallons by the end of 2024. Sustainable aviation fuels and carbon credits are helping to offset the associated emissions, with the former projected to comprise 0.53% of total fuel consumption in 2024.

Overall, it is evident that airlines have faced numerous challenges. Despite this, they have demonstrated resiliency and endeavoured to emerge from these crises stronger than before. Looking forward, it seems likely that airlines will achieve their full recovery and beyond.

Cruise Lines

At the end of 2023, Carnival Corp. announced all-time high revenues of $21.6 billion, Norwegian Cruise Line generated a record revenue of $2.4 billion (up 33% compared to 2019), and Royal Caribbean Group generated $13.9 billion – with a net income of $1.7 billion, compared to a loss the previous year.

Those companies represent the so-called “big three” of cruise operators, and their positive results are to some extent representative of a comeback story for the cruise sector.

The industry was hit badly by COVID, not least as various cruise ships saw the virus spread rapidly among its passengers, leading to governments and ports denying them docking.

This sentiment now seems to have largely subsided, with two million more people embarking on cruises in 2023 compared to 2019, and demand expected to surpass 34 million in 2024.

Travel Industry

Source: CLIA, 2024.

Cruise lines now operate in every major world region, but still only make up 2% of the travel and tourism sector, suggesting there is room for growth.

They are also readying vessels for the future, and to meet the target of net-zero emissions by 2050. This entails investment in new technology such as low to zero greenhouse gas fuels, battery storage, and renewable energy generation on ships via solar and wind.

As with airlines, the sector has proved resilient and has largely bounced back. If this trajectory continues, the sector could be poised to experience significant growth in the coming years.

Hotels

Hotels are inextricably connected to the other elements of the travel sector. Much of their revenues rely on the success of airlines, for example – whether it’s airlines bringing in tourists from abroad, or airport hotels accommodating passengers before and after their flights.

At the start of this year, global hotels’ revenue per available room (RevPAR) exceeded 2019 levels by 12%. The rebound has been seen not just in terms of tourism, i.e. resorts and leisure facilities, but also in business, with urban hotels seeing increased interest.

As mentioned above, China was one of the last countries to reopen following COVID, and outbound travel has only reached 50% of 2019 levels. So, while the recovery is well and truly underway, and even complete in some cases, it has been uneven – a large portion of potential tourists have yet to be readded to the equation. This could be a potential tailwind for the hotel sector.

Another element to consider is the surging popularity of online booking – easy price comparisons and readily accessible information has seen smaller hotel companies gain traction on sites such as Booking.com. This will be explored in more detail below.

Online Travel Agencies (OTAs)

The online travel market is the most recent addition to the travel industry compared to what we’ve examined so far. It comprises key market players such as Booking Holdings Inc., Expedia Group, and Airbnb Inc.

Its market value was approximately $546.3 billion in 2023, and is expected to grow at a compound annual growth rate (CAGR) of 12.6% through to 2032, reaching $1.58 trillion.

The sector is being driven by increasing global internet penetration, especially when it comes to smartphones in developing markets. Online booking companies have found favour for their ease of use, display of real-time availability, reviews and recommendations, and more diverse travel offerings – it is becoming easier to book holidays in locations that are “off the beaten track”.

Technological innovation is also playing a key role, offering virtual tours, AI chatbots for customer support, and automatic price comparisons between different packages.

Online travel agencies are also credited in “spreading out” the travel sector. Offering consumers more choice means tourists are increasingly looking at hotels beyond urban population centres, which can lead to localised growth and job creation.

The Travel UCITS ETF (TRIP) provides exposure to the travel industry via airlines, hotels, cruise lines, and online booking companies.

The ETF is classifed as Article 8 under the Sustainable Finance Disclosure Regulation.

RISKS:

Thematic ETFs are exposed to a limited number of sectors and thus the investment will be concentrated and may experience high volatility. Investors’ capital is fully at risk and may not get back the amount originally invested.

Exchange rates can have a positive or negative effect on returns. The value of equities and equity-related securities can be affected by daily stock and currency market movements.

When you invest in ETFs, your capital is at risk.  

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