Banking on Tourism: Is it Finally Time to Reinvest in Travel Stocks?

Travel stocks have had a torrid time over recent years. The Covid-19 pandemic has led to widespread disruption across the industry on a global scale, leading to bankruptcies and government bailouts. As Covid-19’s Omicron variant swept across the world, panic once again struck travel stocks, but as early indications suggest the new variant is less severe than its predecessors, could now be the time to reinvest in travel? 

Before we explore how much potential the travel and tourism industry has in the wake of Covid-19, it’s important to recognize just how hard the pandemic hit travel. In the US, travel spending fell by 42% year-over-year in 2020 - which is a sharp downturn when historically, growth of between 2% and 4% is common. 

International travel suffered a more profound collapse during the same period, falling some 76% year-over-year. Even with citizens all around the world eager to have a restriction-free holiday, this is a vast chasm to recover. 

Travel’s Rocky 2021

Let’s take a deeper look into how 2021 impacted travel on a broader scale. Stock relating to air carriers fell by around 8% across the year, whilst the hotel sector with companies like Marriott International (MAR), Hilton Worldwide (HLT) and Wyndham Hotels & Resorts (WH) reporting 24% gains on average. 

These variations show that the fortunes of the travel industry can fluctuate wildly. Furthermore, travel booking firms like Airbnb (ABNB) and Expedia (EXPE) have seen share prices become highly volatile over the past year. 

(Image: Statista)

As we can see from the chart above, when the announcement of a highly contagious Omicron variant of Covid-19 broke in November 2021, a range of travel stocks went into freefall, with cruise operators like Royal Caribbean and Norwegian Cruise Line heavily impacted.

However, as early signs suggest that Omicron is a far milder variant of Covid-19, optimism has returned that 2022 could be the year in which the travel and tourism industry stages a recovery. 

Helane Becker, senior research analyst at Cowen, believes that demand for travel is set to be ‘very strong’ in 2022, “with peaks and valleys based on Covid variants."

"People will hear there's a variant. They'll assess where they're going and what they're doing and probably insist on going anyway," she said. "I think at this point, people think that this is endemic and we have to figure out a way to live with it."

Signs of a Recovery?

Market optimism and positive sentiment can often sweep through stocks at a rapid pace, and we only have to look to the stock of Ryanair (NASDAQ: RYAY) to see evidence of a more positive outlook for 2022. 

It’s been a tumultuous end to 2021 for Ryanair as the company opted to delist from the London Stock Exchange in December, citing a loss of viability in the wake of the UK’s departure from the European Union. Between November 8th and December 1st 2021, Ryanair’s stock tumbled 24.37%, as fresh Covid-19 fears mounted. 

However, the stock has undergone a rapid recovery and is up more than 15% in 2022 at the time of writing - indicating that we may yet see a return to form for travel stocks. 

Although Ryanair has shown us that there’s plenty of cause for optimism across the industry, the stock’s rate of recovery means that it’s already trading close to an all-time high. For investors looking for stocks with great growth potential, the cruise liner stocks like Royal Caribbean that were hardest hit as news broke about Omicron may offer the largest open margin for growth. 

As we can see from Royal Caribbean’s LSE listing, the stock is currently trading some 38% below its pre-pandemic highs and as much as 90.42% below its 2015 all-time high price of $861. 

Could Travel Become a Strong Inflation Hedge?

Naturally, it’s important to factor in the record-breaking global inflation rates that investors are hoping to outperform throughout 2022, and this will carry a significant impact on the travel industry. 

As travel and tourism recovers, could it act as a strong inflation hedge? The answer may be down to how heavily would-be passengers are impacted by rising living costs. If Omicron offers us a glimpse into a future of far milder iterations of Covid-19, it’s likely to lead to more lenient travel restrictions between countries and far greater sentiment for travelling. But, if there’s less money for individuals to book holidays, it may hamper the recovery of travel stocks throughout 2022. 

Although it’s likely that the past two years of life without consistent holidaying will cause more holidaymakers to travel in the coming months and years, Maxim Manturov, head of investment advice at Freedom Finance Europe still believes “Travel demand, in general, is expected to be high in 2022, but one important factor is the course of the pandemic, omicron and other variants. But, as many experts argue, the rapid spread of Omicron, while dangerous, could endow enough people with so-called 'natural immunity’ to help move a Covid pandemic into a much less serious 'endemic' phase. If this thesis proves to be correct, it is not impossible to see recovery and growth in the tourism sector, given the rather attractive estimates. Many remain cautiously optimistic, however, noting the pent-up consumer demand for travel.”

As the outlook for travel and tourism looks promising for 2022, we’re likely to see good progress made in the recovery of travel stocks throughout the year. Though, the emergence of future Covid-19 variants and rising inflation still pose a threat to the recovery of the industry. For the immediate future, as ever, FAANG favourites may be the safest option for investors looking to successfully hedge their investments against inflation.