When the Covid-19 pandemic hit the world economy in full force, the leisure travel industry was among the most affected. Hotels stood empty, planes were grounded, and tour operators experienced waves of cancellations. The data was grim: Airlines operated 16.8 million flights in 2020, compared to 33.2 million in 2019.1 Globally, leisure travel spending fell off a cliff, plummeting from US$4.6 billion in 2019 to $2.3 billion in 2020.2
Now, however, there is meaningful hope for recovery on the horizon. As more and more people are vaccinated, economies are increasingly opening up. Millions of restless consumers who have been cooped up at home cannot wait to travel again, whether it's across the country or around the world.
Opening economies and flush bank accounts
In addition to showing a clear desire to travel, people have an increased financial capacity to do so. Take the United States, for example. The nation's average personal saving rate briefly reached a record high of 33.7% in April 2020, according to the Bureau of Economic Analysis — more than double the 12.9% recorded the previous month. March of 2021 saw another savings spike of 27.7%. With government benefits being paid to keep some consumers afloat, and others having no place to spend their disposable income, savings accounts have blossomed. The combination of opening economies and opening wallets is wonderful news for the leisure travel sector.
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There are tangible signs that leisure travel is returning. Industry data shows that air travel volumes continue to recover. Meanwhile, according to Adobe's Digital Economy Index, Christmas flight bookings are up 17% and Thanksgiving flight bookings are up 9% compared to March 2019 levels. These figures imply a strong domestic travel sector by Q4 2021.
A rising tide won't lift all boats equally
While the leisure travel industry should experience a rising tide in the next few years, different sectors will benefit to varying degrees. Domestically focused airlines, for instance, seem particularly well-placed to thrive. So, too, are companies involved in recreational camping, as the popularity of road trips may continue even after the pandemic is over. On the other hand, the cruise sector could suffer due to heightened skepticism that operators are fully transparent about health and safety issues.
Leisure travel investing opportunities require skilled evaluation
Investors looking for exposure to a post-Covid-19 leisure travel resurgence should first take note of which sectors are likely to outperform within the overall industry. It's also crucial, though, to keep in mind that some companies are in a far better position to profit from the expected growth.
The airlines are a good case study in this regard: Globally, the sector's debt levels rose by a staggering $180 billion in 2020 according to a McKinsey study. Southwest Airlines (LUV), meanwhile, does not carry nearly the same degree of leverage as its peers, and has actually been able to add routes during the pandemic. It could be an attractive stock for active managers drawn to the reopening theme.
For active value investors looking at leisure travel stocks, it's also important to take a look at relative multiples, as well as projected future cash flows before deciding which businesses to own. A company trading at a much lower price/earnings ratio could offer more upside than a stock in the same sector trading at a significantly higher valuation, but it is important to analyze and compare their relative growth trajectories. Active managers are skilled at avoiding value traps — stocks that have low multiples for solid reasons, such as a flawed business model or inability to execute.
The value of active management
Active management can be key to reaping the greatest rewards from the bullish trend in leisure travel. There is pent-up demand, but the spoils will not be split equally. Simply buying a broad basket or index of the industry's constituents may seem like a safe bet, but it means owning companies that will struggle post-pandemic, largely because they were not in good shape before the Covid-19 shutdown. The better approach is to identify those stocks that should do the best and own them instead.
1 Cirium, Airline Insights Review 2020.
2 Worldwide; WTTC; Oxford Economics; 2000 to 2020.
As of 6/25/2021, LUV represented a 1.79% weighting of the portfolio’s tracking basket, which is composed of select recently disclosed portfolio holdings, liquid U.S. ETFs that convey information about the types of instruments in which the fund invests, and cash and cash equivalents. This Tracking Basket is disclosed daily and is used to facilitate the creation and redemption process with Authorized Participants (APs). Actual portfolio holdings for the Putnam ETFs will be disclosed on Putnam.com within eight business days following calendar quarter-end.
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