Investing in the travel industry in 2021

At the beginning of the pandemic in February 2020, uncertainty reigned and countries began closing their borders, leading to hesitant travellers, the cancellation of regularly-scheduled routes, and vast numbers of staff being stood down. More than a year has passed since then, and airline stocks have rebounded somewhat. A recent report by Deloitte however, estimates that international travel won’t be back to “normal” for Australians until 2024. But the question remains, what’s on the itinerary for air travel? Will its demand bounce back to pre-pandemic levels?

What’s the status of the airline industry?

From expats returning home on nearly-empty air crafts to weather the COVID-19 storm with their families, to surging costs of sterilising aircrafts, the $1.7 trillion air travel industry has been battered. Government-imposed travel bans saw air passenger volumes collapse from March 2020, both in Australia and around the world. According to BITRE, passengers carried on Australian domestic commercial flights in April 2020 were down 93.6%, compared to April 2019. By December 2020, domestic passenger volumes were still down 54.9%, compared to the year prior.

With Australian citizens and permanent residents only able to leave the country with an exemption, scheduled traffic to and from Australia dropped 98%. In the US, potential relief isn’t expected until at least the second half of 2021. US carriers’ 2020 net losses topped $35 billion including Southwest Airlines’ first annual loss in more than four decades. In 2020 airline stocks dropped the most in years. American Airlines’ share price lost 45, its biggest decline since the carrier’s 2013 merger with US Airways. Delta Airlines’ stock dropped 31%, while United Airlines fell 51%.

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Will we be able to travel in 2021?

With optimism continuing to rise as a result of more citizens around the world getting vaccinated, the air travel industry has experienced a stronger start to 2021. Leisure travellers are taking to the skies again as pandemic cases decline in some countries. In March 2021, US domestic flights got snatched up by leisure travellers at United Airlines, Southwest Airlines, JetBlue, and Delta Air Lines.

Despite reporting a loss in its recent earnings report, United Airlines confirmed that they have a clear path for profitability as travel demand picks back up, especially with plans to offer new flights to key travel markets where vaccinated travellers are welcome, including Croatia, Greece, and Iceland. In Australia, domestic airlines are gradually recovering from historically low passenger numbers, as state borders remain open and Australians take the opportunity to see the local sights that their true blue nation has to offer.

Australia also recently opened up its trans-Tasman bubble with New Zealand in April 2021, as a stepping stone for its international revival.

Should you invest in the travel industry?

Looking at the stock market, Australia’s national carrier, Qantas, has regained some ground since the start of the pandemic. While overseas,  there has been a significant resurgence with airline stocks. As of April 2021, American Airlines stock skyrocketed by 52.1%, Delta Air Lines’ stock increased by 23%, and United Airlines’ stock rose 33.6%. US Global Jets ETF tracks the largest airlines in the US and has already returned 24% year-to-date.

Travel services stocks such as Airbnb, Expedia Group, and Booking Holdings are also in the spotlight. Expedia is now closing in on its recording high after gaining more than 183% in the last year, as savvy investors picked up bargains in early 2020.

Airbnb only listed on the Nasdaq in December 2020, and was initially a hit amongst investors. However, since the beginning of May 2021 it has fallen below it’s initial listing price and at the time of writing is trading at US$135.

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What is the future of the travel industry?

An OECD report points to two categorical uncertainties facing airlines in the future: cost of health-related measures and the shape of recovery for commercial flights. The pandemic has forced airlines to implement extra health and safety requirements, which will raise operating costs, at least in the short run. If social distancing becomes a permanent fixture in air travel, the number of seats per aircraft may decrease by up to 50%. Ticket sales, though revenue-generating, are a gateway for other revenues.

Another chunk of revenue comes from ancillary services that airlines provide to passengers, such as seat selection, luggage, meals, class, and more. In this case, even if the price of the tickets was doubled, it wouldn’t cover the revenue being lost as a result of fewer people per aircraft. The second uncertainty is the shape of recovery for airlines. The pandemic has made more people wary of confining themselves to an enclosed area for hours with the potential of catching the coronavirus. Differing restrictions on air travel per country also creates a challenge for airlines returning to a full schedule.

No one could envision the pandemic and the destruction that it wrought on the world in 2020, therefore, how airlines will fare coming out of the pandemic is still unknown and who will be the winners remains to be seen.

Cover image source: BABAROGA (Shutterstock.com)