While January travel metrics were still impacted by the Omicron strain, 1Q22 earnings reports for travel stocks were broadly positive with a pickup in demand toward the end of the first quarter continuing into April. Many companies are now forecasting record travel demand this summer with implications that the long-awaited “reopening trade” has arrived—but travel stocks have not yet reflected this sentiment, even as many companies reported earnings beats this quarter. The S-Network Global Travel Index (TRAVEL)—which consists of stocks within the airline, lodging, booking/rental agencies, and other consumer leisure beneficiaries—was down 14.1% YTD through May 6, which was slightly below the S&P 500 Index (down 13.0% YTD). This note addresses some of the uncertainties underlying recent price movements, while reiterating long-term supportive trends that are particularly relevant to TRAVEL versus other peer indexes.
Consensus indicates strong demand this summer, but macro headwinds still weigh on full-year outlooks. Travel companies are emphasizing record travel demand this summer now that travel restrictions and mask mandates have diminished. If pent-up demand materializes, the industry should be well-positioned to execute pricing power to offset inflationary costs. Hotels, for instance, can price hotel rooms continuously in response to occupancy levels. As an example, Marriott (MAR, 5.0% index weight) was able to raise its average daily rate from +3% in January 2022 to +12% in March 2022 (compared to the same month in 2019) to partially offset weakness in demand from business travel.(1)(2) Similarly, airlines were able to price fares in response to higher fuel costs and material costs with domestic airline fares 34% higher this summer compared to 2019, according to Hopper.(3)
But beyond this summer, the demand environment seems more uncertain, which is likely contributing to some of the unexplained market movements. Data from the Bureau of Economic Analysis suggests that personal savings is much lower than pre-pandemic levels. In 2019, savings as a percentage of disposable income averaged 7.6% for the year, while reaching as much as 33.8% during April 2020. But 2022 levels have all landed below 7.0%, with the latest figures for March 2022 at 6.2%.(4) Savings stockpiled during the pandemic may have supported consumer spending longer than expected, but dwindling savings along with lingering inflation and rising interest rates may eventually leave consumers with less spending power. While consumers may make sacrifices to take long-awaited vacations this summer, shorter booking windows provide less insight into the latter part of the year. There is concern that consumers could eventually be priced out of higher hotel rates and airfares if current trends continue past this summer. With existing market uncertainty already weighing on investors’ minds, the market may be looking for more confident outlooks that extend beyond the summer of 2022, along with more certainty in cash flows and profitability.
Tech-related equities are getting hit the hardest, but longer-term themes are still supportive to travel. Broader market movements have been difficult to ignore, and investors have widely become weary of growth stocks and tech-oriented equities. Like many other sectors within the economy, travel and leisure has become increasingly “tech-oriented” despite not being pure technology stocks. Companies like Booking Holdings (BKNG, 5.1% index weight), Airbnb (ABNB, 4.2% index weight), Uber Technologies (UBER, 2.8% index weight), and Expedia Group (EXPE, 2.0% index weight), for example, are internet and app-based constituents with strong correlations to the technology sector.
But increasing innovation should not be seen as a disadvantage for the sector longer-term, especially since underlying trends still remain despite current macro headwinds. The prevalence of electronic devices and growing interest in the gig economy are still supportive of digital innovation within travel—exemplified by UBER and ABNB mentioned above (see more here). Additionally, the shift from goods to services is not limited to a post-pandemic rebound. Younger generations (e.g., Millennials and Generation X) are increasingly more likely to spend on experiences rather than goods. According to data by Microsoft Insights, click-through-rates for events and experiences, including travel, have increased past 2019 levels.(5)
The TRAVEL Index uniquely represents both the traditional travel and “new” travel industry. Compared to peer indexes, TRAVEL broadly represents the current travel industry, while also embracing companies that support digital travel innovation. Since the TRAVEL index’s inception, it has outperformed its peers but has pulled back YTD partially due to its exposure to tech-oriented stocks (see charts below). Its closest peers include Solactive Airlines, Hotels, Cruise Lines Index (SOLAHCLN) and BlueStar Hotels, Airlines, and Cruises Index (BCRUZ), which both limit constituents to more traditional areas of travel—airlines, hotels, and cruise lines. Other peer indexes are more concentrated to a certain subsector. For example, the U.S. Global Jets Index (JETSX) is focused on airline-related sectors. On the other end of the spectrum, the Prime Travel Technology Index (PTRAVEL) focuses solely on the travel technology sector. Despite some weakness YTD, TRAVEL’s unique sector exposure relative to its peers could position TRAVEL in the long-term to potentially take advantage of themes in both shifting consumer spending habits along with broader digital innovation.
A strong forecasted travel season in 2022 has largely been overshadowed by current macro concerns. But for those investors who believe the travel and leisure industry will benefit from key thematic themes well past 2022, TRAVEL may be well-positioned among its peers to take advantage of leisure experiences in combination with a widely digitizing economy—trends that should persist despite the current market environment.
The S-Network Global Travel Index (TRAVEL) is the underlying index for the ALPS Global Travel Beneficiaries ETF (JRNY).
 All index weights as of May 6, 2022