Canadians who booked last-minute March Break holidays quickly learned that airplanes, hotels and resorts are full again and prices are on the rise.
With the Omicron wave receding, people want to get moving after two years of pandemic restrictions. That pent up demand is good news for the travel industry, but the question for investors is whether now is a good time to jump in. Those who did that last year haven’t been rewarded: The Dow Jones Travel & Leisure Index which tracks U.S.-based hotels, airlines and restaurants is down 10 per cent year-to-date and 9 per cent in the last 12 months.
Russia’s invasion of the Ukraine has created a new uncertainty. Oil prices have jumped which is increasing the cost of fuel for airlines, which in turn is flowing through to the price of airline tickets.
“Through January and mid-February, all the travel indicators started to click and trend higher getting closer to pre-pandemic 2019 levels,” says Paul MacDonald, Chief Investment Officer at Harvest Portfolios Group in Oakville, Ont.
“Things changed when Russia invaded the Ukraine. Now we have inflation and commodity price spikes. How long do they last? It has yet to be determined. But I think everybody would agree we’re starting to feel those pressures.”
The Harvest Travel & Leisure Index ETF (TSX:TRVL) was launched last year and tracks the 30 largest global travel-related companies by market capitalization. Hotels and resorts are the largest component, followed by airlines, casinos and gaming. The ETF also holds booking sites and cruise lines.
A more focused ETF that hopes to cash in on a travel rebound is the US Global Jets ETF (NYSE: JETS- A), the only North American-traded airline ETF. About 40 per cent of the holdings are in four U.S. airlines – Southwest, United Airlines, Delta and American – who carry 65 per cent of U.S. passenger traffic. Air Canada and Cargojet are components and the ETF includes publicly-traded airports, aircraft support and services and booking companies.
Both JETS and the Harvest ETF have followed the broader travel selloff. The Harvest ETF has fared better, falling 10 per cent in the past 12 months. JETS is down 22 per cent.
Frank Holmes, CEO and Chief Investment Officer at US Global Investors Inc. based in San Antonio, Tx, which manages JETS, said the industry was hopeful in 2021 as conditions improved.
The April 2020 low of 90,000 people a month moving through U.S. airports increased to 2.2 million this February. Mr. MacDonald sees it rising to 2.3 million in March which is closing in on the pre-pandemic peak of 2.7 million..
Mr. Holmes says even before the Russian invasion, higher demand was pushing up the price of an American airline ticket. He says the average rose 18 per cent between January and early March from US $406 to $480.
For airlines, this is good news. Less good is that most of the increase is in leisure travel. This is less profitable and more price sensitive than business travel. So, even with price increases for holidaymakers, the overall average airfare is still less than 2019.
Mr. MacDonald believes the pandemic has changed travel economics because the business traveler can do a lot more with technology and less travel. Leisure travelers recognize how much they missed it and want to travel more.
He business travel is showing signs of reawakening with bookings via corporate travel agencies through the end of February at the highest levels since the start of the pandemic.
“We’re starting to see more conferences,” he says. “We’re seeing a return to the office, which directly correlates to in-person client meetings. That would be the next leg up.”
Mr. Holmes is as optimistic. He is executive Chair of Hive Blockchain Technologies, a TSX venture-listed company that is a crypto miner. He is attending the Bitcoin 2022 conference in Miami in early April which has 35,000 people coming in person.
“Everyone wants to get out,” he says.
Mr. MacDonald says it is hard to tell which area of the travel industry is best positioned in the short run.
“Airlines are more exposed to commodity prices than cruise lines,” he says. “On the flip side, hotels and resorts are well positioned to benefit from pent up leisure demand and an uptick in the corporate travelers.
Both analysts agree that consumers are feeling better as high vaccination rates have proved effective against the Omicron variant. In Canada, mask restrictions have eased and PCR testing for air travel is no longer required.
“Covid hasn’t gone away but it is no longer dominating our day to day lives,” says Mr. MacDonald.
In the meantime, longer term trends favour the industry. An aging developed world demographic means more leisure travel. Rising incomes in developing markets mean greater demand there. Technology is making it easier to book online.
The wild card is the conflict in the Ukraine.
“The longer this war persists the greater the impact,” Mr. MacDonald says. “But in the long term the bigger trends are absolutely intact.”