For a brief moment, the holidays began to look merry and bright for travel stocks such as consumers started booking more airline tickets, hotel rooms and cruises. But doubts rose when Austria returned to full lockdown status, with Germany set to follow suit, as Europe battled a resurgence of coronavirus infections.
Then, just as the Thanksgiving weekend got underway, a new Covid-19 variant emerged.
Outlooks that had begun to clear have once again turned sharply mixed and punctuated with warnings, as companies and analysts struggle to forecast what’s just around the next bend. Many remain cautiously optimistic, noting pent-up consumer demand for travel. But closed borders and travel restrictions, combined with Covid-related staffing issues, have raised uncertainties for a sector seen as a leading gauge for consumer spending.
Travel has been one of the earliest and most harshly affected sectors in the coronavirus pandemic. Vaccinations fueled a modest recovery in U.S. domestic travel this year. But the stocks have been wildly uneven.
Travel Stocks’ Bumpy Year
As a group, carriers such as American Airlines (AAL) have slipped about 1% since Jan. 1. Hotels have a 24% gain, with Marriott International (MAR), Hilton Worldwide (HLT) and Wyndham Hotels & Resorts (WH) leading the charge. Travel booking, the industry segment with by far the largest market capitalization, is effectively flat in 2021, but with some wild swings for Airbnb (ABNB) and Expedia (EXPE). Carnival (CCL), Royal Caribbean Group (RCL) and other cruise lines have lagged.
It’s still too early to tell the impact the omicron variant could have on travel stocks in 2022. Even with uncertainty around omicron, however, people are ready to travel again after over 20 months of staying close to home during the pandemic. And that’s good news for travel stocks.
“Our view is the demand is going to be very strong … with peaks and valleys based on Covid variants,” said Helane Becker, a senior research analyst at Cowen.
“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.”
Dialing In Omicron
Medical researchers say the omicron strain could be highly transmissible, but reported infections were mostly mild. Scientists are still unsure how effective current Covid-19 vaccines will prove against the new variant.
To combat the new variant, the U.S. has banned non-U.S. citizens arriving from eight nations in southern Africa. The U.S. also implemented strict testing requirements for travel, while Japan barred all foreign visitors. White House chief medical adviser Anthony Fauci said in early December that he hopes the ban will be lifted soon.
The Transportation Security Administration extended the federal mask mandate until mid-March amid concerns about the omicron variant. On Dec. 9, the Supreme Court rejected an emergency request from a Florida resident attempting to block the federal mask mandate for air travel. That means, for now, passengers on airplanes, trains and other public transportation will continue wearing masks.
Travel Stocks Vs. Inflation
Another factor affecting travel demand: inflation. Late in November, the U.S. Travel Association’s travel price index showed prices in October were up 14.4% from a year earlier. Much of that increase was due to motor fuel (up nearly 50%) and hotel and motel prices (more than 25% higher). That put travel prices 6.2% above where they were at the same time in 2019.
Still, inflation does not currently appear to be affecting travel demand, according to Jamie Katz, a senior equity analyst at Morningstar. Travelers have been able to tap into some of the savings achieved during the early stages of the pandemic.
“So far, inflation is having little impact on holiday travel. But if it remains sticky, it could hit summer travel,” she said.
Travel Stocks: Airlines Take Off With New Routes
American Airlines, which expanded capacity on domestic routes earlier this year, has done well during the pandemic as travel shifted toward the domestic side. President Biden on Dec. 3 said there were no plans for a vaccine mandate for domestic travel.
American stock fell 45% in 2020, but has rebounded 90% off its May 2020 low. Shares are up less than 5% so far this year. Looking ahead, Cowen has a market-perform rating on the stock. Its 12-month price target is set at 23 — more than 39% above where the stock traded Thursday.
Becker expects United Airlines (UAL), with its 50% exposure to international routes, to do well in 2022 as international flights come back. The analyst forecasts airline activity to be “mixed, with a bias toward international travel” as borders open up again. Cowen has an outperform rating on United and the airline is a “Best Idea for 2022.”
All major air carriers are expanding international routes on expectations for a major rebound in international travel.
United will start flying to Amman, Jordan, from Washington, D.C., next spring. It will also take vacationers to popular Spanish destinations from New York in 2022. American opened 10 new international routes this year, and in November, Delta Air Lines (DAL) announced it would relaunch 12 trans-Atlantic routes as the travel ban for EU visitors was lifted.
At its investors day Dec. 8, Southwest Airlines (LUV) said it expects 2022 to be a “transition year” with little capacity growth but a return to profits.
‘The Pilot Shortage Is Real’
With routes expanding, staffing remains a major issue for air carriers. Thousands of pilots and flight attendants took early retirement as airlines looked to conserve money during the pandemic. Now airlines are searching for new personnel.
Major U.S. carriers are expected to hire 9,000 pilots in 2022, according to a November report from FAPA.aero, cited by the Wall Street Journal. Becker said that Cowen estimates the airline industry will need to hire 35,000 to 40,000 pilots in this decade.
She called staffing the “gating factor” for the industry in 2022, especially for smaller airlines that can’t offer the incentives that larger carriers can.
“The pilot shortage is now real,” United CEO Scott Kirby said at the Skift Aviation Forum in November. “We don’t have enough pilots to fly all the airplanes. So the 50-seaters are at the bottom of that pile, and markets that rely on 50-seaters are the ones that are going to lose service.”
Fight Or Flight Attendants
As for flight attendants, they have faced increased levels of passenger hostility since routes began reopening. The spike in unruly passenger incidents ran to more than 5,000 since the start of 2021, according to the Federal Aviation Administration. But even with the uptick in conflict, flight attendant classes remain full. Becker said Delta received 35,000 applications for 1,500 positions. United had 20,000 applicants for just 2,000 spots.
Still, American was forced to cancel nearly 2,000 flights over the Halloween weekend due in part to staffing shortages. The airline has reportedly offered flight attendants triple pay during peak periods in the Thanksgiving-to-New Year holiday season, according to CNBC. The Association of Professional Flight Attendants, representing about 23,000 American Airlines cabin crew members, helped to negotiate the incentives.
The most acute shortage is in trained mechanics, who are being lured away by private aviation and equipment manufacturers, according to Becker. She said the industry is working with aviation schools like Embry-Riddle Aeronautical University to try to attract mechanics as well as pilots.
And like almost every industry, supply chain shortages have hit airlines.
Airlines “can’t necessarily get the parts to do the maintenance for aircraft sitting on the ground. Instead of taking 30 days to do maintenance, it’s taking 45 days or 60 days,” she said.
Cruise Lines Poised For Relaunch
On the seas, cruise ships turned deadly in the early days of the pandemic. The grim details of at least 14 people dead and more than 700 infected on the Diamond Princess in February 2020 gave the world a peek at just how transmissible and deadly Covid-19 was.
More recently, as vaccine distribution rates increased, fans of cruises have been eager to get back out to sea. Carnival said in late September that bookings for the second half of 2022 outpaced pre-pandemic levels.
But omicron has already likely surfaced aboard ships.
A Norwegian Cruise Line (NCLH) ship docked in New Orleans on Dec. 5 with at least 17 passengers and crew members infected with Covid-19. That included one crew member with a possible omicron infection.
How the new variant might affect bookings is still uncertain. Royal Caribbean said during its Q3 analyst call in October that the delta variant hit 2021 and 2022 bookings, but didn’t affect 2023 bookings.
While the industry grapples with the new Covid variant, the labor shortage hitting other travel stocks is having less of an impact on cruises lines. Operators draw from a global workforce. Carnival’s CFO David Bernstein told analysts during its Q2 call that the company has workers from nearly 150 countries.
“Fortunately, our shipboard jobs are seen as very attractive by crew members around the world. (So staffing) has not been a serious problem as we restart, and we do not expect that it will become one,” Royal Caribbean CEO Richard Fain said during the Q3 analyst call.
J.P. Morgan has an overweight rating on Royal Caribbean stock and a neutral rating on Carnival stock.
Hotels Rally, Despite Staffing Challenges
Meanwhile, on dry land, hotel and motel stocks have seen the travel industry’s strongest recovery. Hilton Worldwide Holdings has scored a 25% gain for the year through Thursday. Choice Hotels (CHH), which owns the Comfort, Quality, Clarion and Rodeway Inn brands, has a 34% gain. Wyndam Hotels & Resorts (WH) is up 35%.
Travelers will still likely opt for more outdoorsy vacations in 2022, a trend that has been growing during the pandemic, according to Katz. But with the return of Broadway shows in New York and museum reopenings in Washington, cities are likely to see more visitors.
But U.S. hotels face major staffing shortages. Some 94% of respondents to an American Hotel & Lodging Association survey in October said their hotels were understaffed. The most critical staffing need: housekeepers.
The staffing shortage comes as demand for hotel rooms picks up. Katz said Morningstar analysts expect hotel demand to rebound to pre-Covid levels by the end of 2022 domestically and in 2023 for hotels exposed to European markets.
Katz continues to be bullish on Choice and Wyndham in 2022 as they are more focused on family and leisure travel.
But when might business travel return? That’s a big question mark. Omicron uncertainties have companies pushing back plans to return to the office.
Investment banker Jefferies reverted to a work-from-home policy after reporting nearly 40 new Covid cases since the start of December. Google’s parent company Alphabet (GOOGL) is indefinitely pushing back its return-to-office plan. In addition, Ford (F) announced in the first week of December it would delay its implementation of a hybrid work model with employees working from home and the office in different schedules.
Travel Stocks Focused On Bookings
Leading travel booking operators all reported recovering demand and travel trends in the third quarter. But outlooks remained cautious, and volatility is expected.
Expedia CEO Peter Kern told analysts at the UBS Global TMT conference Dec. 6 that he felt confident in the future. But he said “there will still be bumps in the road” when asked about omicron.
“We’re not going to run our company as if the next 100-year plague is coming within two years of the last 100-year plague,” he said.
Instead, the travel booking site is working to streamline operations. That will make it easier for customers to book hotel and air travel together in one cart. It is also focused on becoming a mobile app-first company.
Expedia is the top-ranked stock in IBD’s Leisure-Travel Booking group. The stock is forming a cup base with a 188.03 entry point. Competitors such as TripAdvisor (TRIP) and Booking Holdings (BKNG) have trended lower in recent weeks.
J.P. Morgan analysts have a neutral rating on Expedia with a 181 price target. They wrote in a Nov. 5 note that the company is still in the “early days of operating as a leaner” organization.
During the company’s Q3 earnings call, Expedia management signaled promising signs of recovery coming out of the third and fourth quarters. Goldman sees Expedia in a good position to sustain its U.S. growth, while benefiting from rising international travel — particularly as it invests to increase its competitive stance in Europe and Asia.
Airbnb A Segment Leader And Expedia Rated A Buy
Also in the travel bookings group is Airbnb, which offers vacation home rentals. It has done well during the pandemic. Katz said the company’s bookings are already back to pre-pandemic levels. Airbnb stock is up less than 14% this year. But the December 2020 IPO has tumbled far below a 212.68 buy point in a cup-with-handle base. It is currently listed as a one-half position on IBD’s Leaderboard stock roster.
Goldman Sachs points to Airbnb as the leader in the alternative accommodation travel segment, and an emerging leader in global online travel. It has a sell rating on the stock, due to “potential for a volatile travel environment ahead.” The bank’s 12-month price target on the travel stock is 140.
Booking Holdings has pointed to a volatile travel environment, subject to vaccination levels and cross border travel restrictions, among other factors. Goldman cites the company’s strong management team, its focus on its “connected trip” concept and investment aimed at increasing market share as well as alternative accommodation supply.
Goldman has a neutral rating on Bookings Holdings, with a 2,430 price target. Expedia is a buy, with a price target at 200.
Kern is bullish on the return of business travel, even if companies remain in a hybrid work mode and a one-day business trip is gone forever.
“We may have equally new occasions to bring employees together, which will drive business travel in a new way.”
Follow Gillian Rich on Twitter for investing news and more.
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